3 Steps to Creating a Profitable Business Idea
Competition is mounting, so don't waste time and money solving non-existent problems.
Opinions expressed by Entrepreneur contributors are their own.
According to the Bureau of Labor Statistics, 20% of startups are closed in the first year, and half of them within the first five years. CBInsights reports 35% of startups fail because of a lack of market demand, among others failure reasons — cash flow problems, getting outcompeted, a flawed business model and legal challenges.
I wasn't passionate about wasting time and money solving non-existent problems, so before launching my business, I committed to doing great analytic work with my team. Here are three tips I've gained from my experience of starting a business that will help you be successful both short and long term.
1. Stop romanticizing about the business idea
Loving what you do and doing what you love sounds romantic and inspiring, but not in business reality. First of all, you need to assess whether there's enough market demand for your passion to be profitable. For instance, you like good coffee and even understand its varieties. Perhaps you have even taken barista courses or, moreover, won championships. But here's the bad luck: In your city, there are coffee shops on every corner and the competition is very high. Should you open coffee shop #101 on one street and hope that people will come to you? If you don't mind the time, money and effort, then you can give it a try. But it's much better to ask yourself a few questions before starting a business:
What is the real reason you want to start a business?
What are your personal and business goals?
Who is your customer?
What problems does your customer have, and how can your business resolve them?
What do your competitors propose, and how will you differ from them?
Which resources do you need for launching a business?
Related: How to Start a Business in 8 Simple Steps
Don't underestimate your competitors
You need to look at the market soberly and analyze your competitors. This is especially important if you are going to attract investments. After all, one of the critical questions that a potential investor will ask is your competitive advantage.
Here's a three-step system you can use to analyze the market :
Primary research: Instead of fantasizing about what the consumer wants, you can ask them directly. Use questionnaires, research and interviews for this. If you already have customers, you can use statistics from Google Analytics, YouTube, social media, email-services reports and other platforms to understand customers' preferences and behavior.
Secondary research: Systematize the information received and study it in detail. Does this match your understanding of the market? How can your product solve customer requests?
SWOT analysis: A SWOT analysis is a reliable way to study the strengths, weaknesses, opportunities and threats of an idea. From the analysis, you can decide whether the market needs a product and whether you'll get the profit you expect. You can easily find templates for this system on the internet and conduct an analysis.
As the result of this research, you'll find the answers to these questions:
Who are your customers, and what are their sales, valuations and limitations?
Who are your competitors, and what do your potential customers like/dislike in their products?
What should you propose to the market to be more successful?
What kind of unique offer can you provide?
Related: Why Messaging Is the Future of Market Research
Test your hypothesis
Once you've researched the market and know what the consumer wants, you need to ensure that your product meets their demand. Moreover, this should be done as cheaply as possible, in the form of an MVP (Minimum Viable Product). Long story short, an MVP provides an opportunity to develop a new product for less money and collect reviews from potential customers.
Another instrument to validate your assumptions about future business is A/B Testing. You can use this method to check what kind of website version or design customers like better. For example, you can create two versions of the same offer's landing page, with the same price and text but different designs or block layouts. Then you analyze which version consumers spent the most time on and which got you more quality leads.
Only after these three steps should you start looking for investments and teams. This way, you can be sure that money and effort will not be wasted, and your startup will not fall become a mere failure statistic.