Starting a business is a little like buying a car: You need to do some research before taking the plunge. First, figure out if there's demand for your product or service. Do a competitive analysis. Find a place to set up shop. And create a plan to differentiate your offering.
Doing your due diligence can mean the difference between success and failure, and it doesn't have to cost a penny. Networking, online research, informal focus groups and other do-it-yourself methods can often do the trick.
Consider the case of an event facility in the South. It started as a place to hold weddings. Located in a beautiful old house, it attracted wedding business, but wasn't turning a profit because it usually sat empty on weekdays.
So the owners contacted members of a nationwide wedding planners' association with similar estate-type settings in other geographic markets. They discovered that others in their situation filled the gap with corporate meetings and by offering bed-and-breakfast arrangements. Today, 40 percent of the facility's business is corporate events, and the owners are building a lodging facility on the grounds to expand their offerings.
Before you get the research ball rolling, you need to come up with a solid business concept. Once you have a concept, you need to determine if it's viable. To figure out if you should go ahead with your business idea, you need to ask questions like these:
- Is the market saturated? Does your city really need another hardware store or flower shop? How much money is spent in your industry each year in your area? Is there room in the market for one more business?
- Does the market want what you're offering? If you're thinking of providing day care for dogs or a facility where people can cook a week's worth of meals in a group setting, will anyone care? Or if you're developing a new online service for day traders, is it something they can't live without?
- What's the competition doing? What do they do well? What do they do poorly? What's unique about them? Can you offer something different that'll encourage customers to patronize you instead of more established businesses?
- Can you reach your target audience? If you're selling inline skates, are you opening in an area with a population of the right age and disposable income?
Once you're sure of your business idea, dig in deeper. You need information that'll help you develop a unique business proposition that'll give you a competitive advantage. The best sources of information will vary depending on the type of business and circumstances, but options include the following:
- Trade information. In the wedding site example cited earlier, the trade association for wedding planners provided a direct pipeline to the information the event facility was seeking. Other trade information can also be found in print or online trade publications, or by walking the aisles of a trade show.
- Demographic and economic data. Try the U.S. Census Bureau's American FactFinder , State Data Centers or most recent Economic Census to find things like age range, income, number of businesses by type in a geographic area and total sales in your category. For even more information, a reference librarian can point you to other specialized databases.
- Business groups. Your local chamber of commerce may be able to help you find the information you need. Also try government-sponsored Small Business Development Centers , which assist entrepreneurs and small-business owners.
- Local universities. Sometimes professors at business schools are interested in having their graduate students do a market feasibility study for course credit.
- Local competitors. If you're starting a local business, shop the competition and check their websites. Or find a similar business in a similar city and ask to talk to the owner. Also look for similar businesses for sale and contact the brokers for information like why they're selling and what their financials are like. You may be interested in buying that business yourself.
- National competitors. Do an online search of businesses in your industry and evaluate what they offer to help fine-tune your idea.
- Potential customers. Run your idea up the flagpole with informal focus groups. Talk with friends of friends--but not your own friends or family, since they may not tell you the truth--and old customers or existing customers if you're already in business. This is the acid test to see if your plan is ready for prime time or needs tweaking.
All this detective work will pay off, either by helping you validate your business plan, sending you back to the drawing board, or convincing you to shelve it altogether. And don't worry if that happens--inspiration will strike again.
The author is an Entrepreneur contributor. The opinions expressed are those of the writer.
Brad Sugars is the founder and chairman of ActionCOACH. As an entrepreneur, author and business coach, he has owned and operated more than two dozen companies including his main company, ActionCOACH, which has more than 1,000 offices in 34 countries.