How to start a business: 2 - Business idea: how it works

WHAT EXACTLY WILL YOUR BUSINESS BE?

This looks like the same question as ‘ What precisely is the idea ? ’ , but it isn ’ t. We now move on to describing what the business will do in order to fulﬁ ll the idea . You need to deﬁ ne a number of important parameters to work out how successful it could be. Ask yourself these questions:

· What category will the business operate in? This may not be as easy at it sounds. Starbucks could variously be described as a purveyor ofcoffee, a sandwich bar, an internet caf é , and so on. Work out which market you are operat-ing in.

· Is it a product or a service ? A product is sourced or manufactured and sold at a certain price. A service may have a life long after the initial purchase. Many businesses provide both.

· Does it offer multiple products or services ? Offering one thing is straightforward. A range is more complicated and requires careful designing.

· What does it cost to provide or produce these? If the cost of sourcing or production is too high, then your margin will prove insufﬁ cient.

· What price will you sell them at?Some companies can work well on low prices if they have high volume. Others rely on lower frequency of sale and higher margin . Work out which area your business will operate in.

· Is that proposed margin realistic? If the base price of an item or service is too well - known, there will be a limit to the mark - up that customers will tolerate.

· Is it sufﬁ cient for what you need? Yes/no.

· What is the projected income?

· And the projected proﬁ t?

We won ’ t do the full plan just yet, but you can imme-diately see that precise thinking leads to a clear state-ment. This in turn leads to an accurate plan and a clear understanding of the maths involved. Of course, you might go through this exercise and discover that the business is far too generic and so will not survive or make sufﬁ cient inroads into the competition in your area. Or you may ﬁ nd that the sums don ’ t work, leaving you either with too little income or an outright loss.

These are vital discoveries. Don ’ t get depressed about it. Throw out dreadful plans , and think harder about half - baked ones until they look as though they will be a success.

RESEARCH YOUR MARKET THOROUGHLY

It ’ s not wise to dive in and start a business without doing some proper research. You might have a hunch that a certain idea will be a success, but there may well be a lot that you don ’ t know. Information is power, and it enables you to make better, less random, decisions.

Research your market thoroughly by asking these sorts of questions:

· If your business is going to operate in a speciﬁ c area, will the market support it? For example, if you plan to open a restaurant, how many already exist, what type of service do they offer, and what are their prices like?

· How do you plan to position your business up market, mid - market, or down market?

· Will the area support another business such as yours or is the market already saturated?

· What kind of people will buy your product ?

· Can you reach all of your customers through affordable communication channels?

· Are there different buying circumstances, such as planned , impulse or special occasion?

This type of information shouldn ’ t be hard to come by. If you are planning a local business , then get out and about. Walk the streets. Get on the bus or the train. Get in the car. Work out journey times, catchment areas, and the presence of similar businesses . Obviously, if you are planning to start a ﬁ sh and chip shop and there are already three in the same street, you need to have an extremely good reason or an extraordinary angle to justify going ahead.

If you are planning an internet business , bear in mind that geography could be irrelevant. Instead your research could all be online, comparing similar services and product offerings, looking at speed of delivery and pricing as more likely indicators of competitiveness. If lots of other businesses can provide what you are propos-ing for a similar price and just as fast, then you may need to think again.

If you discover lots of businesses that offer the same as your idea , don ’ t panic straight away. Bear in mind that tiny alterations to the detail can still make your idea viable. For example, moving a location 1000 yards can make all the difference. So can altering the price by a few percent. Or reducing the rent. Or increasing product quality or brand image. Or speed of delivery. Or bulk delivery. Or the pres-ence or bsence of one member of staff. Keep analyzing these elements until the proposition and the maths slot into place. Equally, if your research overwhelmingly dem-onstrates that your idea is not going to be a success, then face facts and ditch it for a better one.

DO CUSTOMERS REALLY NEED YOU?

As with so many start - up questions, this one seems so simple, but it is extraordinary how many businesses

launch without answering this satisfactorily. Think it through. Most markets are now oversupplied, so custom-ers can get pretty much anything they want, from any-where. Competition is ﬁerce. It might be local. Or your most signiﬁ cant competitor could be in China or India, and capable of delivering just as fast. And possibly cheaper. Or with higher quality.

Against this backdrop, you really do need to ask: do cus-tomers really need you? If you can ’ t answer with a con-vincing ‘ yes ’ , then you may not have a viable business . We will examine the appeal of your proposition in the next chapter, but at this stage you need at the very least the inklings of some reason that supports an afﬁ rmative answer. It may only be a small point of differentiation, but it must be there. It will most likely come from an area such as unique product or service , better quality, more competitive price, speed of delivery, convenience, relia-bility, or even being more pleasant to deal with.

If you have very little to claim in any of these areas, then there may well be no customer need. If that ’ s true, then you should not start your business . There must be some relationship between the appeal of what you offer and potential customer demand. If you cannot identify this link, then you are unlikely to have much success. If that ’ s an obvious ﬂ aw straight away, then don ’ t waste time.

Change the idea and think of something better. If it ’ s unclear one way or the other, then probe deeper with questions like these:

· What kind of people will buy your product ?

· What sort of age, social class, sex, or disposable income deﬁ nes them?

· What will your best customers tend to have in common?

· Do your potential customers fall into different groups?

· What other types of products and services do they buy?

· How many of them are there?

· What is a realistic frequency of purchase for your product or service ?

· How often will you communicate with your existing customers ?

· How will you attract new ones?

Here you begin to develop a pen picture of your ideal customer . There may be many different types, or an ideal proﬁ le that perfectly ﬁ ts what you have in mind. Once you have deﬁ ned this, you can match the proﬁ le with the number of people in your catchment area or online com-munity that ﬁ t the description. Match this to your pricing and frequency of purchase, and you begin to get a feel for income and proﬁ t.

TEST - DRIVING YOUR IDEA

As soon as you can, it ’ s a good idea to test - drive your idea. By this time you will certainly have written it down, been through several redrafts, looked at the numbers, and explained it to anyone who will listen. However, all of that remains theoretical, and doesn ’ t completely prove or disprove whether your business idea has long - term merit.

This is when you need to invent a way of testing what you have come up with, in a way that limits the damage as much as possible. The internet provides a brilliant new way of doing this, effectively for free. In the same way that it could help you to research your market in the ﬁ rst place, it can provide a forum for testing whether it will work in reality. You may know the old joke about academ-ics: it works in practice, but does it work in theory? Here we want to know whether it is going to work in practice, but without going to the expense of setting everything up before we know.

Try this online:

Identify a community who you believe will be interested in your product or service
Find them online
Explain your business proposition in the sim-plest terms possible
Include everything that enables them to com-ment, such as pricing, delivery time, and so on
Design a short questionnaire
Ask whether they would buy your product or service
If necessary, offer an incentive to make them reply
Choose a sample size that is large enough to be representative
If your business idea allows it, consider offering a trial of your product or service
Analyze the results and make changes based on what you discover.

If your business idea is physical, such as setting up a shop, then try to replicate the circumstances of early trading but without going to the full expense. So, instead of renting premises, hiring staff, and getting involved in all the normal start - up costs, set up a stall somewhere and try selling what you can for some trial days. Ask for comment. Experiment with pricing and use what you ﬁ nd as a test market.

So, to sweep up the themes of this chapter, start by thinking very carefully about what you want to do, and take the time to articulate precisely what the idea is. Then do some methodical research and test your idea on others to gauge customer reaction. Sketch out an initial shape, and test - drive it in a way that gives you a feel for its validity without exposing yourself to heavy expense or too much delay. If the response is disappointing, then face facts and make some changes before trying again.