You've had a brilliant idea, but is it viable? How do you know whether it will succeed or fail? Here are some ideas on how to research your business idea and develop it into a doable plan.
A guide to business model generation
Use this BizConnect guide to help you establish and refine your business model:
Choosing an Industry: Start with what you know
Launching a new business is tough. Don't make it even harder for yourself by going into an industry you don't know. Choose a sector that you are interested in and in which you also have some expertise or experience. That will give you the time to focus on the business itself rather than on educating yourself about a new industry. This will make your business model generation much easier.
Perform a personal SWOT analysis
Successful entrepreneurs have to work closely with all types of people - from employees to customers to suppliers and shareholders. Be honest about where your skills lie:
- Leadership and Motivation: Can you lead and motivate others to follow you and deliver your vision? And are you able to delegate? Remember, there's too much to do on your own.
- Communication Skills: Are you a good communicator? You need to be able to sell your vision of the business to investors, potential clients and staff.
- Listening: Do you hear what others are telling you? Your ability to listen can make or break you as an entrepreneur. Make sure you know how to be an active and empathetic listener.
- Personal Relations: Are you emotionally intelligent? If your ability to work with others is poor, you can do things to improve.
- Negotiation: Are you a good negotiator? Not only do you need to negotiate deals and prices, but you also have to be able to resolve differences between people in a positive, mutually beneficial way.
- Ethics: Are your dealings with people based on respect, integrity, fairness, and honesty? Can you lead ethically?
- Finances: Are you a skilled financial planner? Money is an essential commodity that needs to be managed and monitored constantly. If this is not where your skills lie, bring someone on board to assist you in this area.
Download a SWOT analysis worksheet here.
Avoid flooded market sectors
Barriers to entry are factors that prevent a company from entering a particular market. Barriers to entry act as a deterrent against new competitors. Start-ups need to understand that when barriers to entry are low, it means the market has lots of players and thus low profit margins.
Deciding on a business idea
Choosing a business idea is your first step. It's also a critical one because the quality and profitability of the idea is what will determine your success.
It's important to evaluate the idea thoroughly and objectively. Many people choose a business idea simply because it's something they already know. A great cook opens a restaurant. An estate agent launches her own agency. The problem is that they are focusing purely on their skills and what they can do, rather than on the business itself. Entrepreneurs need to know that there is market for what they want to offer. There is no point doing something you love if customers don't want to pay for it.
Four questions to ask before developing your business model and to make sure your business will turn a profit:
1. Does the products or service have a repeat buy element?
For a business to be successful in the long term, it has to offer a product or service that people will buy over and over again. It's also worth knowing that it's difficult to acquire customers, so it makes sense to keep them coming back once you have them.
2. Do you have a high profit margin?
It's seldom possible to compete on price alone in the long term. If your product's differentiator is that it's cheap, your profit margins will be low. You will then have to focus on selling high volumes and you'll need a lot of working capital to ensure that your cash flow remains positive. Having a higher profit margin is far more advisable as it means you can self-finance the growth of the business.
3. Do you have a strong support team?
So your business idea is great, but who is going to help you make it fly? If you want investors to come on board, you have to demonstrate that you have a solid team behind you of accountants, lawyers, bankers and others who will be able to influence and advise. No matter what business you are in, a quality team will make all the difference.
4. Is there a gap in the market?
Which industries are booming right now? Globally, health and leisure are hot industry segments. Technology demands continue to grow. Make sure that you move into a segment where there is a demand for your product or service. You may also want to think big, and start with the end in mind. An idea that has national or even global legs may be just the challenge you need.
Define the business model
Is your business model realistic, viable, sustainable and workable? If the answer is "yes", the chance of your business succeeding is radically enhanced.
The business model simply describes the way in which a company makes money. It's the plan implemented in order to generate revenue and make a profit from operations. The model includes the components and functions of the business, as well as the revenues it generates and the expenses it incurs.
A restaurant's business model is to make money by cooking and serving food to hungry customers. In the process of building a business, it is essential that you take the time and make the effort to clarify and understand your business model. It comprises these four key elements:
You have to understand exactly who the customer is, why they will be willing to pay for the product or service they receive, and what the timing of that payment will be. Payment may be once-off, form over-the-counter sales, for example, or on an annuity basis where customers sign a contract. It's advisable to keep revenue streams simple at first and grow them over time.
2. Cost drivers
Every business incurs costs to create revenue. What is the nature and extent of your costs? Which are fixed (a set amount incurred every month) and which are variable (an amount that fluctuates according to production and sales)? How will payment terms affect your cash flow? Can you extend payment terms with suppliers to help ease the cash flow strain, early on in the life cycle of the business?
3. Investment required
Once you understand revenue and costs and their impact on cash flow, you can calculate the level of investment that you need to sustain the business through its initial negative cash flow - this is during the start-up phase in which almost all businesses spend more money than they make. Much will depend on the nature of the business, but it's a good idea to add a bit extra to this amount for added protection.
4. Critical success factors
Qualitative factors such as your research and intuition may have a significant influence on the success or otherwise of your new business. Location, partnerships, big contracts, creating a powerful brand or scaling up may all form part of this.
Put revenue, costs, investment and critical success factors into a single spreadsheet or diagram and you will have a clear business model. To make it workable and flexible, you must understand how the different components relate to each other and what the impact of a change in one component will mean for the others.
Play with the model. Learn to answer tough questions such as: "If I only get 85% of the required investment what will the impact on costs and sales be?"; "If I don't achieve one of the critical success factors what will the impact on cost, sales and overall investment be?"
Develop the business model
Generate a successful business model by identifying what will help the business succeed.
1. Service offering: What do you provide?
Offer significant value to customers and create competitive advantage by including the following:
- Unique advantages in features and benefits
- Better distribution through retail or other channels
- Faster delivery, broader product line or more customisation options
- More complete customer solutions through alliances with other companies
- Lower pricing due to manufacturing efficiencies or pricing options
2. Value capture: How will you make money?
Value capture is the process of retaining some percentage of the value provided in every business transaction. If you sell R1 million of product to a customer and you make R100 000 profit, you are capturing 10% of the value you created. Create as much value as you can, so your captured value is worthwhile.
3. Target market: Who will buy from you?
The target market is a specific group of consumers at which a company aims its products and services. Don't be too general in defining it. Describe your customers with as much detail as you can. Today's consumers are more marketing-savvy than ever before and don't like to be "lumped" with others - so be sure you understand your target market. While pinpointing your market so narrowly takes a little extra effort, entrepreneurs who aim at a small target market are far more likely to make a direct hit.
4. Questions to ask during your business model generation:
- Are your target customers male or female?
- How old are they?
- Where do they live? Is geography a limiting factor for any reason?
- What do they do for a living?
- How much money do they make? This is most significant if you're selling relatively expensive or luxury goods or services..
- What other aspects of their lives matter? If you're launching a kitchen renovation business, your target customers probably own their homes.
5. Differentiation: What makes you different?
Here are some examples of how to differentiate your business:
- Using an efficient distribution channel
- Requiring less sales support and sales effort
- Lean manufacturing processes
- Offering more auxiliary products or other opportunities for revenue without increasing cost
Find out more about the different types of business models that your business can potentially adopt.
Test and refine the business model
1. Invite criticism
Your business model is how you position yourself in your market. Ask friends, family, trusted sources, ex-colleagues, mentors and people who are in the industry. It's important to get fresh eyes to look at what you are proposing and to tell you where the shortcomings may be. It is very important to stress-test your idea dispassionately, rather than falling in love with the concept and rationalising why it will work.
2. Assess your idea
Ultimately, only three factors make up your value proposition:
- Production cost: What will it cost you to develop and produce your product or service?
- Customer utility: What rand amount can you use to represent the degree to which your customer will value the product?
- Price: How much will your customer be willing to pay?
3. Sources of research and information:
- Refer to trade journals, market reports and industry associations
- Interview experts in the industry
- Interview, observe or survey potential customers
- Become a customer of the competition
- Visit competitor websites and stores and read their promotional material
- Interview your competitor's customers
- Visit suppliers, talk to them and talk to their customers
- Discuss funding options with other entrepreneurs
- Make an appointment with the bank manager
- Identify all venture capitalists who offer funding for your type of business
- Search the Web for entrepreneurial financing options
- Attend networking events to find local business partners
d) Company model
- Consider different revenue models, including subscriptions, unit- or time-based models, advertising models, licensing, or transaction fees
- Evaluate the costs and the cost drivers. Distinguish between fixed, variable and semi-variable costs
- Do cash flow projections to calculate the necessary capital funding
- Speak to industry experts and other entrepreneurs to identify the critical success factors