I keep getting approached by people with great business ideas. Some of the ideas have great potential. Some ideas, not so much…. How do *you* tell the difference? Having been in the tech industry during the dotcom bubble, here are some basic questions I have learned to ask before investing time or money:
- WHAT products or services do you want to sell, what problem are you solving?
- WHO are your customers?
- WHY should they buy from you — i.e. what’s your *unique* value to them?
- HOW MUCH will it cost them to buy, and how much does it cost you to produce?
- WHERE can they purchase the product or service?
These are pretty basic questions, but if you start answering them in detail, you’ll be surprised at what you learn. The trick is once you have answered one of the questions, evaluate your answer in relation to the other question to see if your answer is still true. Answering the questions also frames the thing most people fear: the DREADED “Business Plan.”
Let’s dig down a bit. Let’s say, for example, you have a dog who keeps getting into your garbage. The annoyance of cleaning up made you think about a design for a new type of garbage can that’s dog resistant. So when you think about the “WHAT” you are selling is a dog (or even animal, since it works for cats and raccoons as well) resistant garbage can. A similar thing is true if you have a service business. Cool! We have a start.
The next question is “WHO” are you selling to? In this case, your customers will likely be pet owners or people who live where there are raccoon, possums, etc. If you were just selling plain old garbage cans, your customers would be different, though anyone who buys a garbage can might want what you have developed. Which leads to the next question: “WHY?”
So “WHY” whould people want to buy your dog or animal resistant garbage can? What problem do you solve? In this instance, it saves your customers time by avoiding having to clean up messes, and it also saves money. Saves money?!? Yup. Depending on what garbage your dog ate, it may need to go to a veterinarian — which costs money. So the thing that differentiates your garbage can from others is that it saves people time and money – and that’s the reason they should buy it!
Hmmm. Saves time and money — how much should you charge for this? There are a couple of ways of looking at this: cost based pricing and value based pricing. Note that there are other ways of slicing this problem, and this could be a whole book in itself.
- Cost based pricing: look at your production, operating, sales and marketing cost, add a some profit, and mark your product up to reflect that price.
- Value based pricing: asks the question what is the value of this product to the customer? If you have to take your dog to the vet once a week on average because your dog got into the garbage, that’s pretty expensive…. So how much would someone pay to avoid that cost? Answering this question requires some market research — which can be as simple as calling up a bunch of friends, etc., and asking them.
If you are still with me, this gets to the last question. Where can will your customers be able to buy your products. Given this is a garbage can that’s pet proof, there are a couple of options — generally referred to as sales channels. There are essentially three channels you can use:
- Direct: Where you have a store and/or sales people and you sell directly to your customers
- Indirect: Where you sell through a resller or wholesaler, or some such
- Web: which is really a variation of direct sales but I decided to break it out since it has a different cost structure
In the case of our dog resistant garbage can, direct direct sales would be out of your own store. Indirect would be through places like Hardware stores or Pet Supply stores — so Home Depot or Petco, for example. Web-based sales, off course, would be off your website at www.dogsafegarbage.com, for example.
Now that you have sense for how to answer the basic question, it’s useful to go back to the very beginning and evaluate each of the answers against the others to ensure that your answers are consistent. So for example, could/would you be able to sell your product through Victoria’s Secret (the girly-gear store)? Not very likely.
If you’ve actually got this far, you might notice that you have a bunch of answers but you still have a lot of questions — like how much will your_favourite_retail_chain charge me to sell my product? This is great! These questions begin to give you the basis for your next majour step in a developing a sucessful business: the much dreaded business plan.
To make this process a little clearer, I’ve taken a closer look at how these questions might be answered for 3 different types of businesses in a different set of articles: a product, a service, and a web-based information business — and how to evolves this into a business plan.