Source: What Matters Now by Seth Godin
Over the last few weeks, I have spoken to a lot of you one-on-one and for you guys who I have not been able to reach out to; look out for my email shortly.
Since the beginning of My Breakout Year, we have covered a number of topics, including getting in the right mindset, modeling great entrepreneurs and generating ideas. I thought I would give you guys an additional week to generate and explore some ideas and get caught up on the assignments. Plus, it gave me a good reason to take a step back and evaluate where the course is going and also get some of my own work done.
This week, I would like to focus on evaluating the ideas that you generated over the past couple of weeks. It’s important to start to properly evaluate your ideas before you jump in and throw all of your effort at any one idea. Now, I am not a big fan of doing a bunch of analysis; a lot of the businesses owners will tell you that they started just trying to fill a need that they identified or they just started by marketing products and services they knew well or were able to perform on their own. You can spend a bunch of time evaluating your idea but more often than not you wind up talking yourself out of good ideas in the name of doing your homework. The best strategy, I have seen thus far, is to: 1) start with an idea; 2) do some high level analysis with friends, family and some potential clients; 3) pick a business model; 4) mapout a SIMPLE financial model; 5) test the market with a limited set of clients; 6) evaluate your findings; 7) survey; and 
make adjustments. You should repeat steps 5-8 until you find something that works well for you, keeping in mind that you may have to revisit/revise/change/eliminate/reevaluate some assumptions you developed in steps 1-4. Sounds complicated? It’s not.
STEP 1: STARTING WITH AN IDEA
For the most part we have done step 1 which was generate the ideas. The following addresses steps 2 – 5, the key here is to get to a place where you are actually offering a product and or service. The cycle of testing, evaluating, surveying and adjusting will come a little later and will require us to spend some time testing the market with a small group of clients.
STEP 2: HIGH LEVEL ANALYSIS
Ask Your Friends & Family and Some Strangers
Source: What Matters Now by Seth Godin
The quickest, easiest – and for some people – the safest form of initial research is surveying friends and family. You should start here but do not worry if you don’t get initial traction with this group of folks. For a lot of entrepreneurs their family and friends probably don’t even know what they do, never mind actually buying a particular product or service from them. This form of research may not be available to you. If, however, you have this resource at your disposal, ask them as many questions as you can about why they would buy your product or service, why they would not buy it, what price they would be willing to pay, what product or service they use now to fulfill the need or gap that your product or service is addressing, etc.
Also, if you are in your twenties you should have a good sense of how your friends and family see you. If you know that they view you as the goofball baby brother or sister take their advice with a grain of salt. Their reaction or their feedback may have nothing at all to do with your product or service. DO NOT BE DISCOURAGED, if they refuse to buy your service or product or if they put down your ideas.
Go out to the market, ask people on the street, conduct surveys online with Survey Monkey, if you have a blog or a website or a following on facebook or Twitter get some feedback in whatever form you can. If you find that you have some positive feedback, then you can move forward. Make sure you are targeting folks who have experienced the problem that you are trying to solve; they are all potential clients / customers.
Take A Look At What Investors Are Investing In
A few months ago I wrote a post on Pitching to People with Money and what you needed to communicate to potential investors.
I have included the video from that post (above) to give you a better sense of what investors may be looking for when investing. Do not be discouraged by any of this but I do think that you should definitely heed the advice of the Dragons.
For a simple exercise write down word for word the questions that they ask and try to answer them yourself. If you feel that you are able to answer those questions you may be a in position to really take your idea to the next level.
Get Some Concrete Answers On Whether There Is Actually A Need For Your Product or Service
If you did not generate your idea by looking at trends – even if you did originally – run some analysis to see if people are talking about or searching for a solution that you are thinking about providing. There are many ways to look at trends, you can revisit Week 3 and take a look at the What’s Important Now section. To summarize here are a few bullet points on places to look for trends
- Google trends
- Google alerts (enter search terms to have Google email you alerts on the topics that are most important to you)
- Twitter search
- Keyword search example
- Digg (search your keywords and see how many people are “digging” your topic)
Are people talking about your problem or issue? Take a look at this talk from Seth Godin
STEP 3: DETERMINE THE BUSINESS MODEL
Below is a pretty good map of how you should approach the development of your business model. This can be a bit confusing but if you take the time to fill in the buckets you will get a better understanding of how you can/should deliver your services, establish and manage your relationship with your customer and pricing your services.
If you would like me to explain, please do not hesitate to send me an email and we can setup a time to walk through this - jarel@jarelcockburn: PLEASE PUT THE FOLLOWING IN THE SUBJECT FIELD OF THE EMAIL – “MBY 4: BUSINESS MODEL EXPLANATION”
Source: Wikipedia
Here are some great examples of business models ( in some if not all cases they give you real life cases where these models are implemented):
Auction business model
Bricks and clicks business model
Collective business models
Cutting out the middleman model
Direct sales model
Distribution business models, various
Franchise
Freemium business model
Industrialization of services business model
Low-cost carrier business model
Loyalty business models
Monopolistic business model
Multi-level marketing business model
Network effects business model
Online auction business model
Online content business model
Premium business model
Professional open-source model
Pyramid scheme business model
Razor and blades business model (bait and hook)
Reseller business model
Servitization of products business model
Subscription business model
Value Added Reseller model
Source: Wikipedia
If none of the examples above fit for your business ask yourself the following questions, also let me know if you need help with this, this is the most critical part of your business so you should take care to understand this:
- What infrastructure will you need in place to deliver your service or develop and sell your product?
- How are you reaching their customer?
- Who are your customers?
- Can you get to them?
- How much will it cost you to acquire a client/customer?
- How much can you charge each client/customer?
- What is the typical sales cycle?
- Can you compete with some of the other players in the market?If not how do you differentiate yourself from them?
STEP 4: BUILDING A SIMPLE FINANCIAL MODEL
I know this can sound like a daunting task but a model can be as simple as estimates the revenue (how much money you get from selling your product or service) minus the expenses (the money you have to put out to deliver/make your product or service) . It can also be as complex as the projections of the 3 financial statements with multiple input variables – if you don’t know what this sentence means don’t worry about it. It may or may not be important to you but you can simply start with the following example:
Revenues – Expenses = Net Income
Take a look at the revenue that you will gain from your product and service, be reasonable (realistic). Ask yourself the following questions (please keep in mind that these are just the initial questions it can get far more complex depending on the type of product or service you are delivering):
Revenue
- How many customers can I get in the following months?
- How much will they be willing to pay?
- Will they be paying on a monthly basis or is it a one time fee?
Expenses
- How much will it cost to acquire a client?(i.e. marketing, advertising, phone calls, dinner lunchs with potential clients, business cards, website, etc…)
- How much time (man hours) will it take to deliver the service and how much raw materials or products will I need to deliver this product or service (resources)?
If you take the revenue and subtract the estimated expenses and you come out with a positive number you may have something great on your hands. You will need to look a little bit deeper though to really see how profitable it is.
Also, if you need a major asset to perform the service or create the product – like a vehicle to make deliveries – you will have to create a balance sheet stating those assets in the future. But for now you can just figure the monthly costs of that asset (monthly loan payments, insurance, repairs and maintenance, etc) into your monthly or annual expenses.
We will get more in-depth with this analysis but try and rationalize these numbers with proven examples either within the normal course of business or through actual market research.
STEP 5: START SELLING – TESTING THE MARKET WITH A LIMITED SET OF CLIENTS
The fastest way to find out if your product or service and most importantly your business model will work is to go out there and START SELLING IT. I would recommend this approach if you have a product that you are not developing (perhaps sourcing from other manufacturers) or a service that you have experience with. In some cases there will be some lead time but as soon as you do your initial analysis, Iwould say that you go and test the market. See the video below from Gary V to understand how fast other entrepreneurs are moving.
There is no greater indication of market need than the conversations that you have with your potential and current clients. In this dialogue you are afforded the opportunity to really understand the need that you are trying to fill and if you are flexible and nimble you can make adjustments to your offering as you see fit – as demand grows.
It is really important to listen in this phase because clients will always tell you what they want, if they are paying you money. Use this time to refine your offering and develop a real business plan. This period also serves to keep you away from what many people fall victim to – “analysis paralysis”.
My philosophy is that if you can test the market cheaply, you should not waste time pouring yourself into a ton of market research and projections. If you have the experience and a good product there is absolutely nothing wrong with jumping right in before you have ALL the questions answered. When starting a business, many folks believe that they have to collect tons of research and spend many hours working to develop their view of the market and their strategy. Most of the time because they are not part of the market – ie. Selling. They have no idea what is actually going on, where customers are actually spending their money, what a transaction in that space looks like and the relationship that they should have with their suppliers. They spend a few months building a great looking 50 page business plan that usually proves to be worthless on day 1 of actual work.
Look, markets are developing at a rapid pace and what is true about customers today may be totally inaccurate a few months from now. The best market research, does not come from the guys who study industries but from the guys who operate businesses in that industry, these are the people who have their ear to the ground. So if you can aim to become one of those people the better off you and your new business will be.
If you need some sales lessons take a look at one of my most popular posts – What Matt Damon Can Teach You About Sales
In addition to that I would also take a look at – How To Start A Web Business And Survive – even if you are not starting a web business
Lastly, check out this vid for Gary V on the speed at which our world is changing and how everyday people (like you) are changing the way we see the world and influencing how folks are connecting.
The following may be a great assignment for you to complete for this week (or month).
- Collect feedback from as many people are you can (family, friend, and potential customers). IMPORTANT: Don’t totally give away your idea, and keep the actual business model a secret!
- Decide on the business model
- Build a financial model
- If you can, map out a simple strategy and start selling your product or service NOW!
Send me mail and let me know how you are doing or if you have any questions.