Steve Nielsen is the founder and CEO of PartnerUp, a site where entrepreneurs can find business partners, advisors and other business resources, like office space. Today he shares a post on how founders can vet their ideas for success potential. Steve’s says his market research recipe “should take no more than a week, in your spare time, and you’ll eventually appreciate every second that you spent on this.” Read the full post here. The highlights follow.
Everyday people come up with thousands of great business ideas that could have produced multi-million dollar companies. But these ideas go nowhere because people aren’t sure where to begin.
The biggest excuse people use for not turning an idea into a business is that they aren’t sure if it will be successful. Instead of immediately succumbing to those fears, follow these five steps to figure out if your idea is worth taking to the next level.
1) Decide if potential customers would be willing to buy your product/service.
Find five people or companies who could actually be potential customers….Ssk them: Would they buy your product/service? If so, why? If not, is there something that you could do that would make it more appealing? Make clear to them that you want their complete honesty… If at least one of the five people/companies previously mentioned had said they’d be willing to buy your product, … your idea is worth moving forward.
2) Perform some initial market research
Market research is not difficult. It is, however, a bit tedious. Your goal is to determine if someone else is already providing the product or service that you envision…. How many competitors are in the marketplace? What do you think is the total sales per year for your industry and how much marketshare does each competitor have? Does it look like the companies in this market are making money?
3) Accurately cost out how much it will cost you to create your product/service
Don’t skip this step. Calculate exactly how much money it will cost to provide your service. To come up with this number, add up direct labor costs, all of your overhead, and any other costs that you’ll incur providing your service. When calculating overhead, don’t skimp. … The biggest error that I see people make here is that, by not figuring for the expenses once they are in operation, they underestimate how much it will cost to offer their service.
4) Figure out who will sell your product/service and how much they’ll charge
If you plan to offer your product/service through a retail outfit, call the retailer and find out who the buyer for your product/service is. Ask for a 10-minute meeting [and] for some rough guidelines regarding what sort of margin they expect, whether they expect co-op marketing money, etc…..If you are going to go through a sales force, find one or two salespeople who are in a similar but non-competitive line of business. Offer to buy them lunch or coffee…If your product/services will be sold through direct marketing, call up a few smaller/mid-sized marketing firms who specialize in business(es) similar to yours. Setup a 30-minute meeting to hear about their qualifications. Ask about their company.
5) Add up the numbers and decide if you want to proceed
The total cost involved in producing/offering your product/service, the selling costs (or retailers margin expectation), and any other expenses that you’ll incur (on a per-unit basis). Now compare your costs to those of your competitors. Just because you may be more expensive doesn’t mean that your idea isn’t worth pursuing. If you have something that really differentiates your product/service from the competition, people may be more than willing to pay extra for your product. However, if you are offering the same widget as your competitors for a substantially higher price, then this is a red flag.
Steve Nielsen is the founder and CEO of PartnerUp, a site where entrepreneurs can find cofounders, business partners, advisors and other business resources. Steve wrote for Found|READ in August about tips for picking your cofounder.