So, you want to be an entrepreneur? Owning a business is incredibly rewarding and one of the most tried and true paths to wealth and financial independence. That said, this will not be an easy journey. You will face many hurdles and hardships along the way. The first challenge is one that most people never even get past; how to turn an idea into a business. I’ve gone over the many lessons I have learned with clients and my business ventures to develop a roadmap for developing your business ideas.
Finding the Right Business Idea
There are many trains of thought regarding finding the right business idea. One thing you have probably heard over and over again is that you should turn your hobby into a business. While this can work, I don’t agree with it as a blanket statement for two critical reasons.
First, there is a big difference between doing something as a hobby and doing it for a living. Let’s say you enjoy woodworking. Spending an hour working on a passion piece will not be the same experience as spending ten hours every day cranking out the same chair you’ve made a hundred times before. Even professional athletes get burned out playing the game they love. Passion is great, and I hope you develop a passion for your business and your product, but sometimes it’s better to let your hobby remain your hobby.
The other reason is that the more obscure your hobby is, the less likely you will be able to find customers. Don’t get me wrong, dominating a niche is a very good thing. But if your hobby is very obscure, like collecting fast food ketchup packets, then turning that into a profitable business will be… challenging.
“So, what sort of business should I start?”
That’s the million-dollar question. I hate to say it, but the answer depends on you. There are plenty of business models that can lead you to success. The problem is knowing how to pick the right one for your business. Consider this article a cheat sheet to help you with this process. To do this, we will look at three of the most important factors when choosing a business model: barriers to entry, value proposition, and profitability.
Barriers to Entry
The next big factor you need to consider is the barriers to entry in your business idea. Some businesses have more obstacles to overcome than others. The top three barriers you need to evaluate are the cost of starting the business, the complexity of the business, and how saturated the market is.
Cost of Starting the Business
Let’s be realistic here. Some businesses cost a lot more to start than others. For instance, starting a website or a services-based business will likely require a significantly lower amount of startup capital than manufacturing a new product. If you’re unsure of your startup costs, now is a good time to develop a rough idea of what you can expect. Some potential costs to be aware of:
- Tools and equipment;
- Website and domain hosting;
- Advertising and promotional costs;
- Hiring employees and contractors (if needed);
- Production, warehousing, and shipping costs as applicable;
- Software, computers, phones, and other electronics; and
- Cost to rent a workspace.
Of course, you can tactically lower these costs in the beginning. Running the business out of your home instead of renting an office, holding off on hiring employees until you have revenue, and building your own website are all ways to keep your initial costs down.
Complexity
Put simply, some businesses require more technical know-how than others. In some cases, such as a law firm or medical office, you may not even be permitted to own such a business if you do not have the proper certification. Other businesses may not require certification, but going into the business without having the right skillset would be difficult.
No matter what business you go into, it’s essential to do your research. For example, if you want to go into pest control, you should know about the chemicals used and how they can be safely applied. I’m not saying you have to know the science behind the substances you use for pest control, but it would be important to know if it’s safe to use them in a home with pets or young children.
If the business requires some technical expertise but does not require the owner themself to be licensed, then you may be able to hire or subcontract the work to someone who does. This, however, will be an additional cost you need to account for when planning your business.
Market Saturation
Let’s say the cost of starting a business is low, and you have the requisite skills or knowledge to start the business. You may still have difficulty finding your footing if the market is saturated. If a child were to open a lemonade stand on a street with ten other lemonade stands, how would they make money? They can only make it work if they bring something to the table that the other stands don’t.
A saturated market is one where the supply of a product outpaces the demand. In the above example, there are so many lemonade stands that a new stand is very unlikely to make a profit. You have to be realistic about supply when you open a new business. If countless other companies are providing the same product you are providing, how do you plan on standing out?
That’s where we get into the value proposition.
Value Proposition
Do you have a business idea that will answer a question, fix a problem, or otherwise fill a need in the marketplace? If not, I have some homework for you. I want you to take time over the next few days to note when something irritates you at work, home, shopping, or wherever. What flaws can you find in the products and services you regularly use? Ask your friends and family to do the same. Make a list and start thinking about solutions for those flaws.
…take time over the next few days and make a note when something irritates you at work, home, shopping, or wherever. What flaws can you find in the products and services you regularly use?
This is the key to finding a good business idea, by looking for a problem to solve. It sounds simple, but most people fail at this step. Many would-be entrepreneurs try to devise a solution for a problem nobody has. This is another reason to be careful about pursuing a passion. You’re not trying to sell something to yourself. You’re selling it to other people. Understand what they want. Your idea may be groundbreaking and innovative, but if it doesn’t somehow add value, who is going to buy it?
In the context of the street full of lemonade stands, how could that kid compete in the saturated market? Take a moment to think about it.
One possible solution is to use better ingredients. Let’s say every stand uses powder. Then the child could go with freshly squeezed lemonade. Or they could offer sugar-free lemonade for diabetics or those on a diet. Maybe they skip the lemonade and open a stand selling sodas or cookies. Saturated markets can be targeted, but you need a unique value proposition or superior marketing.
Marketing
So, I lied to you earlier. I said the child with a lemonade stand could only succeed if they “…bring something to the table that the other stands don’t.” There is one other way around a saturated market, having an outstanding marketing game.
Going back to the lemonade stand, let’s say our budding entrepreneur happens to know some popular influencers. If they can leverage this into the influencers promoting their stand, then they may still see success despite the market saturation. However, it’s still important to know your customer. If the influencers don’t have many fans on the street, their promotion won’t do much for the stand.
One problem with relying only on marketing is that it will have to be an ongoing cost for your business to reap the benefits. Once you stop paying for advertising and promotions, sales will soon dry up as customers look for cheaper and better products. For that reason, you still need a good value proposition that lets you stand out from the competition. A good value proposition coupled with good marketing is a combination that can serve as jet fuel for growth.
Profit Potential
The last factor we will examine is the profit potential of a business. You can have the best idea on Earth, but it won’t make a great business if it doesn’t make you money. What will your pricing model be? Are you charging a flat fee? Will customers pay for a subscription? What about pricing tiers? There is a surprising amount of pricing options for goods and services. Do your research to determine which ones would work with your concept.
Once you have your potential pricing models, you need to review your estimated costs. Think about the profit margin you want to target. What would you need to price your product at to hit that margin? Make sure you also build a buffer to account for unexpected costs.
Right now, you may be thinking, “It sounds like you’re just guessing,” You’re right. These initial stages will be filled with a lot of guesswork. All the navel-gazing in the world cannot predict how the market will play out for your product. Don’t let that deter you, though. This is part of the fun! Entrepreneurship is a lot like Yoga. To master it, you have to be flexible.
Your Business Should Be Agile
Growing an idea into a business is an incredible experience. To maximize your chances at success, consider the factors we discussed: barriers to entry, value proposition, and profit potential. Keep in mind that even the best-laid plans can fall apart. I said earlier that most businesses never get past the planning stage. For the ones that do, being too rigid can keep them from ever finding success.
Think of your business as a science experiment. The plan you develop based on the factors we discussed will serve as your hypothesis. Get your product (or service) out there and test your hypothesis. You will learn something about it along the way. Maybe you need to adjust your target market. Maybe you need to change something about the product or come up with a different pricing model. Don’t be afraid to pivot based on what you have learned. If you are willing to adjust, you are much more likely to find success.
This article is just the first of many to guide you on your journey to entrepreneurship. Along the way, we will discuss all the topics mentioned here in greater detail. We will also be going into topics like: what type of entity to use, hiring your first employee, and how to negotiate a contract, so stay tuned!