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How to Test Your Business Idea Four ways to prove there's a market for your product.

By Brad Sugars Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.

Given the choice between starting a business built around a new whiz-bang widget and starting a shoe store, I would go with the shoe store every time.

I've said for many years that the main reason businesses fail is not for lack of capital -- it's for lack of knowledge.

Knowledge in your business -- most important, how to run your business -- is the most potent weapon you can have. It often means the difference between a good and a great business, as well as success and failure.

That said, one of biggest mistakes most would-be entrepreneurs make is going into business based on what they think people should buy, rather than what people really want or actually do buy.

Here's another way to look at it.

People buy shoes every day, and I can easily put a number on the size of the shoe marketplace. Additionally, because our global population grows every day, I can be pretty sure the market for potential shoe owners will continue to grow -- and people will buy multiple pairs of shoes -- in the years ahead.

Maybe this is an extremely simple example, but most inexperienced business people would opt for the whiz-bang widget business. Enamored with a potential market they can't quite measure or identify, secure in the knowledge everyone needs it and will want to buy it, they'd later be bewildered when their warehouse is full of stock they can't even give away.

How can you avoid this trap in your own startup?

Here are four simple and inexpensive things you can do before you get into business to make sure there is viable, sustainable and growing market for your business.

  1. Identify your market. How big -- in terms of dollars -- is the current market for your product or service? Is it a new or mature market? Are you in a new or mature category? A lot of these questions can be answered with a few hours of online research -- or offline research in your library. Or go to an industry association and get your hands and mind around the numbers of your market and your category.

    Another good tactic is to go to a trade show or exhibition and look at your prospects as well as your competition. What does your potential customer really want? Who are they? What is your competition selling and at what price point? Can you deliver the same at a lower price, or can you add value and charge a premium? Is the sales cycle long or short? Is the exhibitors' list growing or declining from year to year?

    Answers to these types of questions will give you a big advantage in getting a handle on the opportunities within a marketplace, and if your initial assumptions about your product or service really hold true.
  2. Identify your customer. One of my CEOs used to work in advertising, and she and her teams would develop lists to help profile the "perfect customer" for the product or service they were trying to sell. Her original list consisted of 53 questions and included questions such as "Is the target male or female?" "How old are they?" "Are they married?" -- as well as deeper questions such as "What was their main motivation purchasing a particular product or service?"

    Why is this so important?

    Because this knowledge will give you additional insight into how your own sales process should be structured. It will also help you operationally tailor your product or service offering to better fit your audience.

    For example, if you are looking at a dry cleaning business, you may discover there is a want or need for a higher-end delivery service to professionals in your area. Given that, you might be able to reorient your distribution and delivery systems to meet an unmet demand.
  3. Test and measure demand. Big companies spend lots of resources testing ad campaigns and hiring focus groups, but you can do a lot more effective research on your own by simply starting small -- then testing and measuring everything you do.

    We've talked about consignment arrangements, farmers markets and local markets before, but don't forget trade shows, expos and industry meet-and-greets as opportunities to meet industry players, network, make contacts and get feedback on your product or service. All of these are relatively inexpensive ways (in many cases less than $1,000 for some type of sponsorship) to test the waters.

    And if you think that is expensive for little or no return, just imagine spending 10 to 100 times that amount without generating any sales or revenue, simply because you are selling something no one -- or very few people -- wants to buy.
  4. Start your list of contacts. At this point in your startup and planning phase, you may have a list of vendors, suppliers or even potential customers. If so, great. Keep building that list and start to develop a communication strategy to keep in contact with that list on a consistent basis. Today's contacts may be tomorrow's customers. More importantly, they have access to entire networks of people who may want or need your product or service.

    The real goal of networking is not making a sale to your direct contact. It's about creating a relationship with that contact that leads to referrals and word-of-mouth leads down the road. Whatever you do -- and however you keep track of your list -- make sure you protect it and treat it like gold. For most businesses, your contacts database often becomes the most valuable asset you own.

In the end, there is no fail-safe formula for business success, although people are always trying to find one. The best indicator is a proven market with room for growth, populated by people willing and able to pay for something unique or different that helps them make their lives better, easier or happier in some way. It's the business that does the usual in an unusual, unique or different way that wins customers and keeps them coming back for more.

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.

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