New ideas for a business are imagined every day. But when it is time to face reality and access the feasibility of your idea, understanding what makes a good business idea is crucial. Understanding how to design a business model is your long-term key to success.
At the most basic level, a business model is defined solely by its ability to make a profit. Studying the underlying cost structure (determined by understanding fixed costs versus variable costs of the business) determines the potential company’s operating leverage. Intuitively, the higher the variable costs, the lower the gross profit per product or service will be after covering the fixed costs. Think of a car wash. The more cars washed, the more supplies, utilities and employees the owner will have — all variable costs.
Other components of a business idea are market-related factors, including: understanding and identifying who your customer is, how many customers will buy your product or service and how your company will differentiate itself to be unique in the marketplace. One major cause of business failure is lack of market research. While you may be in a hurry to get started, acquiring market research is not optional for a successful business. Market information is what determines your marketing plan and pricing.
Your idea will include a competitive advantage based on your proposed company’s internal uniqueness. Consider how Dell Inc. entered the personal computer market. Its unusual direct delivery method was based on internal logistic processes that allowed Dell to deliver a customized computer, at a reasonable price, directly to a customer’s home. The personal computer was not a new invention, but Dell’s fundamental changes in how computers were purchased and delivered made them a market leader.
One last component of a business model to consider is the scope and size of opportunities related to your concept. If your plan just to earn enough for your family to live comfortably, this is considered a lifestyle venture. Lifestyle ventures, while successful, are rarely the type of business that will make you rich or allow you to sell your business for a huge gain after just a few years. In contrast, growth-oriented businesses require: bigger financial injections; an increased amount of ownership leverage; and, therefore, more risk.
Once you have reviewed the core components of your business idea, it’s time to do experiential research with real customers or assess the exploration with experts in the field.
Every semester, the Missouri State University College of Business’s entrepreneurship class, along with the MSU Small Business and Technology Development Center, work with several potential entrepreneurs to help them discover whether they have a feasible business opportunity or just an exciting idea. Students prepare a detailed report, along with a presentation that includes:
- An overview of the business and analysis of industry trends
- A market assessment, including a competitor analysis with pricing and promotional strategies
- A proposed financial evaluation that includes estimated start-up costs, a projected income statement, and a break-even analysis
- A compilation of alternative strategies and suggestions for turning the idea into a successful business
Evaluating your idea is crucial. So, take some time to do your research. Study the feasibility of your proposed business opportunity before you consider quitting your day job, investing and borrow money, and changing your life forever.
Rayanna Anderson, MBA, is the entrepreneurship coordinator and community liaison for Missouri State University’s College of Business. Anderson writes about issues from her 25 years of consulting with small businesses in Springfield and the state of Missouri. Email: RayannaAnderson@MissouriState.edu.
This article appeared in the November 26th, 2016 edition of the News-Leader and can be accessed online here.