You might think you have a fantastic idea for a business, but how can you tell whether it will work before you invest your time and money? There’s always going to be an element of risk involved in setting up a business, but here are some steps that you can follow to make sure you’ve done enough testing to at least convince yourself that it will work…which is the first step towards convincing anyone else that it will.
1) Who else is doing it? Check out your competition.
You might think that you’ve invented a completely novel solution to a problem, but are you sure? Once you’ve got an idea, the first thing to do is to see whether it exists already, and/or whether it exists already in the specific market/location you’re targeting. If it does exist, you might still want to push ahead with your own version, but you need to make sure that yours will offer something different and/or better to what’s out there already. In the Google era it’s easy to check out your competition as soon as you have an idea (and you should keep checking, as new businesses start all the time). If your business has a more local rather than internet base, you can research your competition by doing something as basic as walking around the area you want to operate in noting down what services or shops are there currently, and what footfall they get at different times of day.
2) Investigate your customers.
Find out everything you can about your target customer (and never define your customer as ‘everyone’ – make sure you have a target group in mind to help you to focus your idea). Narrow down your customer in relation to age, gender, interests, location, profession, salary, family status, travel preferences, etc. Once you’ve worked out who they are, you can start to investigate key bits of information that you need to know about them, such as how much disposable income they have, and how they’re spending it at the moment. There are different ways that you can find out this information depending on who your customer is, but here are a few ideas:
– Ask people. Do a survey. You can do it online using surveymonkey.com and offer incentives to encourage people to complete it, or stop people in the street/in the library/in a café and see what you can find out.
– Observe people. Where are they spending their money at the moment? E.g. if you were setting up a market stall you could visit markets and count the number of customers at different stalls to see which are doing well, what their prices are, and how many people shop there at core times. If you’ve invented a product that solves a problem, try and find out how people are dealing with that problem at the moment. Use the internet; look at online forums that your target customer might use and see what you can find out.
– Use Companies House http://www.companieshouse.gov.uk/ to access your competitors’ accounts to get an idea of how much customers spend with them.
– Look at industry reports. The City Business Library and The British Library in London have free resources that provide detailed, up-to-date reports on different industries in the UK.
3) Test the market.
Some ideas are easier to test than others, but there’s usually a way to test a prototype of your product or service before you spend time and money developing it fully. A prototype is an early version of a product – it might be an example page of a website, or a basic first model of an invention. Show the prototype to family/friends/tutors and see how they react to it. Do they like it? Does it work? What would they change? If you want to set up a shop or service, think about ways to test it out on a smaller scale first, e.g via an online marketplace, or via a pop-up shop before you commit to a lengthy lease. Another great way of market testing is to use crowdfunding – if you can persuade people to pledge money towards your project before it’s on the market you’ll have a very good indication that there’s demand for it.
4) Price it up.
This is a step that might be tempting to leave until later, but you need to start thinking about the profit and loss of your business idearight at the start. If your wonderful new product or service is going to cost so much in manufacturing or operational costs that it will never be affordable to your target customer, it’s unlikely to be a success. You don’t need to do extremely detailed forecasts right away, but you need to get enough information down on paper to get a good indication of what the figures would look like if you achieved your target sales. Research your costs (e.g. how much your stock will cost/your postage/your premises/labour). Next, think about a ballpark price you’re going to charge your customers (you might want to look at how much competitors are charging to work this out), and take a stab at working out how many customers you might be able to sell to over a set time period (e.g. one week/one month). This will allow you to work out your revenue. Deduct your costs from your revenue, and see whether you’re in plus or minus figures. Don’t forget to think about labour time and include this – e.g. if you’re making dresses, and can charge £50 for each one and buy material for only £5, it might be tempting to think you’ve got a profitable business going on. But if it’s going to take 6 hours to make each dress, and you need to pay for postage and marketing too, you could suddenly find yourself operating at a loss even if you’re only paying minimum wage.
QMUL Careers & Enterprise Centre