Use a Marketing Study to Evaluate Your Business Idea
Entrepreneurs tend to have dozens of business ideas rolling around in their heads at any given time. The trick, of course, is selecting the right idea to start up at the right time. To evaluate the viability of an idea, especially a new or innovative product or service, conduct a limited marketing study. A comprehensive marketing study should be completed before launching any business, but the basic steps can be modified for a basic analysis of the potential of a business idea.
The first step in evaluating a business idea is determining your market. Consider who is most likely to benefit from your business idea and why. Jot down ideas regarding the demographics (age, gender, income range, job, hobbies, etc.) of your target group. Then, conduct some basic research to estimate the approximate size of your market. Once you determine that your business idea is logically viable, you will need to conduct more in-depth research into who your target is and how to reach them, but for now you just need a clear picture of whether there are enough potential customers to support your venture.
Once you are clear on who your target is, look into the alternatives they have for filling the need your product fills. That is, what are they buying now to get the same benefit? Your direct competition are those businesses that sell pretty much exactly what you sell, your indirect competition sells products that provide the same benefit, but in a different manner. For example, an organizational consultant has direct competitors in other org consultants, and indirect competition in organizational books, training videos, websites, and retail stores that specialize in organization.
It is important to look closely at the existing competition for several reasons. Knowing your competition will provide greater insight into the tried and true methods for running your type of business. It is also critical to know how crowded the market is. If there are 50 Mexican restaurants in a 5-mile radius, the market is probably too crowded to support another. To gain market share for a new product, it is important to distinguish your version in some significant way from the other options. Whether your unique selling proposition is based on quality, price, features, or some other factor, you can’t promote that difference without a clear understanding of the competing products available.
Knowing your industry is also important. Just about every industry has professional associations that keep their members up-to-date on the future and changes happening within the trade. A viable business idea should be in the early stages of the product life cycle — building a market base and increasing demand. These associations also generally compile averages for their industry, an excellent tool for developing reasonable estimates of profitability. Generally, new entrepreneurs grossly underestimate the cost of actually running the business and develop profitability estimates far beyond the realistic. Well-researched industry averages will generally help you develop a more accurate picture of the profit margins that can be expected in your specific industry.
Once the basic background information is gathered, test what you know. One of the best ways to determine whether a business idea is viable is to go to the source — your potential customers. Develop a survey to evaluate your idea that addresses the actual data you need to know. The questions you include should be relevant to the product only, not the demographics of the people you ask (segmenting your target market is a critical step, but should be done in detail later in the planning process). Avoid leading questions like “Do you like pepperoni pizza better than anchovy?” Instead, construct questions that illicit the respondents’ actual opinions or habits. Follow up yes and no questions with whys, how often, and the like. Keep each question limited to a single point — that is, do not ask if they like pizza and salad, rather make that two questions. Be sure the questions are easy to understand. Provide clear answer options, when possible, and be sure to include a space for “other” answers.
Keep the survey relatively short and to the point. Be sure the overall responses will tell you what you need to know about whether your idea will fly. Once you are satisfied with the questionnaire, select people from your expected target market to survey. Running the survey by your family and friends is good for quality purposes, but your moral support staff is not going to give you a realistic understanding of the viability of your idea. Be sure you are asking the right people the right questions.
Don’t be offended or defensive about negative responses. Instead, probe for more information about why they think your idea won’t work. It is very common for successful business ideas to change dramatically during the planning stages, so be alert for legitimate criticisms and look for ways to improve on your idea.
Performing a simple market analysis like this isn’t the end of your marketing research, but it can be very effective in weeding out those ideas that are not likely to succeed.