Compliments of the new year to existing readers and new ones. With 2020 behind us I’m sure many have been inspired by some of the success stories that emerged in the midst of the pandemic. Perhaps you’ve had your idea a little longer and want to finally put it into practice. Perhaps you got your idea last night. Whatever the case is this is for those who have a business idea they want to launch in 2021 and want to have a gauge of how good the business idea is. These are 5 things that you want to see in a good business idea. You don’t need all five to be present but you rather have them present than absent in your business idea.
I feel like I have said this too many times but surely one more won’t hurt; a business is a customer. No customer, no business. Unless you are doing something totally new customers already exist for your product. However, here I’m referring to your customers. So that is people are ready to buy or have bought the product from you. While the lack of customers is not a reason to give up on an idea it is a signal that your resources, financial or otherwise, should be focused on finding customers and fast. Hypothetical customers of the “just build it and they will come” variety don’t count either. You need people who have or are sure to exchange money for your goods or services.
High Profit Margin
This one only matters if you already have customers for hopefully obvious reasons. The importance of a high profit margin, which you can learn more about in this article, comes down to two things; customer acquisition cost and keeping the doors open. Firstly there is a cost associated with attracting new customers. Advertising, referrals, onboarding, commissions and discounts are all costs to your business of some sort. The higher the profit margin the more money you have available to put towards these costs and therefore attract more customers. Secondly, ongoing business costs while generally low are measured in terms of time rather than amount. It’s not about whether or not you can pay the US$200 for rent but rather how long you can keep doing it. The higher the profit margin, the longer you can.
Low cost of customers
This one is a bit more tricky. We’ve already discussed the customer acquisition cost but as you exhaust existing customers it is going to get harder to reach new customers. So your customer acquisition cost will eventually go up, at least in the short run. So a new business with a low customer acquisition cost is a good business whereas one with a high customer acquisition cost is not so good an idea. While most people think of advertising and marketing costs let’s take a moment to think about the cost of providing the product at lower prices than the competition. Many business ideas are started with the idea of providing a product cheaper than existing providers. Say you enter the market offering 20% lower prices than existing solutions, while (in theory) this will attract more customers initially but leaves you with 20% less money than your competitors to attract more customers or keep the doors open.
This one is not an essential feature of a good business idea. Many businesses are not scalable yet very successful. Scalability in simple terms is the ability to grow the customer base without increasing operating costs proportionately. For example, an author needs only to write one book. Selling a million copies does not increase the costs of writing the book but increases the profit. A business that can increase profit without proportionately increasing makes the chances of financial success better. Growth in revenue without commensurate growth in expenses increases the profit margin further.
Barriers to entry
This one is a sword that cuts both ways but is still an advantage to a business. It is often the case that people will enter a business field easily, invest in customers and market creation then be muscled out of the market by other competitors. I recall a person who many years back (when Zimbabwe initially dollarised) started selling pots he acquired from South Africa for US$40. Things were great, he was making a killing. Then Indian owned shops in the Harare CBD started selling the same pots for US$30. Things were bad for him but not the end of his business. The death knell came when Chinese owned shops started selling the same items for US$20. It was over. Barriers to entry may make it hard for you to enter a business and require huge initial outlay but they protect from the fate my friend suffered. A defensible position is admirable in a business idea and can come from a financial, experience, knowledge or access advantage over others.
While all are not essential they are great to have. Number 1, the customer is the essential one. While the rest is commentary the strength of your position will depend on those factors. How does your business idea score?