Occasionally, as a small business author and business coach, people approach me with ideas that they have. They just want to bounce the ideas off me. For instance, in 1999, someone told me about this great idea they had for online movies and TV, taking it all and putting it online so that we could watch it. Someone else came to me and approached me with the idea for a teddy bear. The idea is that it’s a teddy bear that holds beer. Well, what do these ideas have in common? It’s that they may have been great ideas, but they weren’t necessarily opportunities.
Just because you have an idea for a business, doesn’t necessarily mean that you can follow through with that idea and make money on it.
Understand the difference between idea and opportunity
A long time ago, I was having a conversation with a friend and he was excited because he had this great business idea. It was, to stream video, movies and TV online. The problem was, it was just that, an idea and nothing more. What was the difference between what my friend said to me, and people actually creating services like Netflix and Amazon? The difference comes down to what I call the opportunity factors. These are the principles that combine together that lead to an actually successful business.
First, demand. How much does the market actually want this product or service? Next, expertise. We actually have to have the know-how in the industry that we’re trying to get into. That’s what we need to make it happen in that business. Third, resources. Your resources as an entrepreneur are money, equipment, materials, we have to have the things necessary to create that product or service. Fourth, profitability.
We actually have to make money in the business. This means we want to look at the price, and cost differential and make sure.
The first opportunity that we want to access is demand. Simply we want to ask, how many people can buy this product or service. This is sometimes referred to as a market size. There are four areas that we want to look at. First, who are they? We want to be focused on this. Are we looking at people or are we selling to businesses? For instance, an example might be we’re targeting women between the ages of 35 and 54 who have an MBA. Second, we want to ask a question about geography.
Where are they? What city or what geographic region do they reside in? For instance, we might say, Los Angeles. Now just a caution about this, many people who are excited about their new business say, our market is the entire world because they put it up on the internet. However, you will be much more successful if you’re focused in terms of your geography. Third, now we want to get an idea of how many of these people exist. The good thing is, there are tools on social media that will give us a little bit of a clue.
For instance, you can use Linkedin itself.
Gauge your expertise
No matter how wonderful your idea is, if you don’t know how to do it, it’s not an opportunity. In the worksheet that we provided you with, there are a series of questions that you can go through to explore whether or not you have the necessary expertise. First of all, what are the technical abilities or skills required for this business? You want to list everything that comes to mind. Don’t forget essential skills like sales, or web design or legal. Second, access yourself on each of these skills on a scale of zero to 10.
Zero being, you have absolutely no clue how to do it and 10 being you’re a master at it. Be honest in your assessment. And this leads us to step three, which is were any of those skills below seven? If so, we want to highlight those and bring them out because there’s a potential problem here. You don’t have the capability that you need in order to make this business work in that skill. So it doesn’t mean that the idea is dead, it just means that we’re going to need to hire someone or outsource it.
Assess your resources
Imagine for a moment that you wanted to be a carpenter and you set out to build a house, however, you don’t have any wood, you don’t have any tools. Now, the idea of that is silly, right? Yet so many would-be entrepreneurs start out in exactly that situation. They have an idea for a business, yet lack the necessary resources to succeed. In the worksheet that we provided, I’m going to give you some questions to access whether or not you’ve got the resources to make this idea an opportunity.
First of all, do you have enough money to start this business? How much money do you think you need? Just give it your best guess and then multiply that guess by two. Why? Because everything is more expensive than you think it will be. Do you have that money? And if not, how would you get it? Would you get a loan? Would you ask a friend for it? Where’s that money going to come from to start the business? Second, the related question is for the first six months, how much money would you need to run this business, assuming no profit is coming in?
A for-profit business must make money. Why? Well, money is the lifeblood of business. Without it, no matter how wonderful your idea is, it isn’t an opportunity. The word for money in business is profitability. At its most simple level, profitability is sales minus expenses. But we need to dive a little bit deeper than that. Now, first of all, ask yourself whether you’re selling a product or service. How much do you think you can sell that for? In particular, per unit, if it’s a product or per hour if it’s a service.
This number is S in the worksheet. Now we want to calculate or estimate your expense per unit. In other words, how much is it going to cost us to provide this product or to provide this one hour of service? We want to overestimate here because everything costs more than what we think it’s going to cost. This number is E. Now using these two numbers, we can calculate the contribution margin which is sales minus expenses.
Take a moment, pause the video, and calculate that right now. Now we need to take a look at your overhead. This is sometimes called the fixed expense. These are things that you’re always going to have to pay a month in and month out. These are things like rent and utilities or subscriptions or insurance or administrative costs. Again, overestimate how much things are going to cost because things always cost more. Then we can calculate the breakeven number.
At its most basic level, this is overhead divided by the contribution margin. In other words, the breakeven are the number of units that we must sell in order to break even, hit zero every single month. This is a critical number because it lets you know how much you need to sell so that you’re not losing money. But we’re not done yet. The most important question is how likely are we, in this business idea, to double the breakeven every single month? Why double? Because it’s not enough to start a business and just make back the money you’re putting in.
We want it to be highly profitable. And by trying to get two times what we’re putting in, we’re creating a business idea that has a lot of cushion behind it. So how likely is that? Not very likely? Very likely? Maybe? Just put your best guess. By taking a look at these numbers, it will help you understand whether or not this is a business opportunity or just a great idea.
You’ve got this amazing product or service. Now we need to get into the hands of your potential customers. Distribution answers that question. How are we going to do that? You might have the best ice cream on the entire planet, You might have the best ice cream on the entire planet, but if it’s not on the shelves and the stores where people buy it, you have an uphill battle with your business. So in the worksheet that we provided, there are some questions that you can consider about the opportunity factor of distribution.
First of all, how will your most likely buyer need First of all how will your most likely buyer need to get this product or service? Are you going to sell it face to face? Are you going to sell it over the Internet? Or does it need to be in the stores? Be honest with yourself about what the distribution model really needs to be. Second, do you already have established connections Second, do you already have established connections to these distribution channels? Provide a brutal self-assessment of yourself.
Determine proprietary advantage
The last opportunity factor is a proprietary advantage. What does that term mean, proprietary advantage? Essentially it’s something that you own or is exclusive to you, something that gives you something that no one else, no other business can have. It’s not necessary to have a proprietary advantage, but it can add a tremendous amount of value to a business idea. Let’s take the example of ice cream that I’ve been talking a lot about and consider a few ways in which you could have a proprietary advantage.
The first would be a patent. This would be an invention, a way of building something that no one else has the right to do. For instance, I have the machine that I’ve invented that creates ice cream in a particular way or I invented a heated scoop for ice cream. If I own the patent, I own that thing and can sell that to others. Second, there is a trademark. This usually deals with a brand name, for instance, Ben and Jerry’s.
That’s a very powerful trademark, and they’ve used that trademark to create franchises.
Finalize your single best business idea
Now that you have a basic understanding of the opportunity factors, it’s time to put them to work. We want to print out a worksheet for each of your top five business ideas, or how many you had, and then take each of those ideas through one of these opportunity factor worksheets. At the end of the worksheet, you’ll notice a question. It asks you to assess subjectively how much of an opportunity this idea is, either answering A, B, C, or D.
We want to focus on the ideas that only get the A answer. These are very likely to be opportunities. I don’t recommend that you try to do a business with any of the other answers. If you only have one idea that gets an A answer, well, then it’s easy, that’s probably the idea that you should test. But, if you have multiple ideas that turn out to be good opportunities, we have an extra step. Let’s go back through the worksheets and rate each of the factors on a scale of zero to 10.
For instance, how strong is a distribution on a scale of zero to 10? If it’s great, then let’s rate it an eight.