Whether you’ve got an idea for a home-based graphic design business or something as ambitious as the next iPhone killer, it’s important to go in with a plan.
There’s a lot that goes into a business plan, from coming up with the product or service, to market research, infrastructure and a profitability plan. As with any big undertaking, the process of starting a business can seem overwhelming.
Any long journey begins with the first step. Jacob Cohen is a partner at Detroit Venture Partners, where the venture capital firm funds early stage tech startups. He shared some tips on how to get off to the right start with your business strategy.
Do Your Research
Cohen recommends that when you first get started, you focus on asking yourself two main questions:
- What does your potential customer base want that’s not currently offered in the marketplace?
- Can you make money selling it to them?
This process forces you to take a deep dive and really make sure you know your customers and the market environment you’ll be entering.
“Challenge yourself,” Cohen said. “Talk to as many customers as you can. Learn your industry inside and out so that you can answer these questions with a ton of confidence.”
It’s also important to go beyond the surface level. It’s obvious that, say, building a robotic spider leg exoskeleton will give you an original product, but is that really the best, most practical product for the target audience?
Let’s go back to Cohen’s guidance for a second.
“Really push yourself to go deep with your customers,” he said. “What do they need to make their businesses more successful or their lives better? What is a realistic price they would be willing to pay if you could deliver it to them?”
The target audience in this case might be people who have been paralyzed and want to get around places that aren’t necessarily accessible. However, it’s important to note that we’ve already got people working on mind controlled exoskeletons that let our target audience stand up on their own two legs.
So, this example fails the first test by not being a product consumers necessarily need. The fact that it’s also hideously expensive to do research and development for an eight-leg spider exoskeleton probably also means you’re not making a profit.
Admittedly, that’s a fairly extreme example, but it should help you get the idea of the types of factors you need to think about.
Customers Are King
By now you should understand that you’re building products and services for your customers. This may seem like a fairly obvious point, but Cohen says it’s a step that’s too easily skipped by budding entrepreneurs.
“Sometimes entrepreneurs spend too much time building a product before they get real input from the customers they are building it for,” he said. “Don’t wait until you have invested tons of time and money into your product before you spend time with real customers. Make sure your customers’ needs are informing your decisions along the way.”
Once you know what your product is and you determined there’s a market, you need to figure out exactly how big that market is. How much of it can you hope to capture? You determine this in different ways. If it’s retail, maybe you’re making projections based on how many shoppers for your particular product are in a given area. This gives you the total possible market in your area.
This market analysis also works if it’s not about retail or geography. Let’s say I’m a publisher of novels and you’re an author wanting me to pick up your work. You may have worked for 10 years on your novel but if you see very similar ones are selling poorly, there may not be as much of a market for your story. A competitive analysis would suggest you need to go with your next idea in order to differentiate yourself and succeed.
Next, you have to determine what percentage of that market is likely to buy your product. This is where competitive analysis comes in. To start, you can take a look at the sales of similarly positioned competitors and get an idea of what might be possible in your space.
You can also do a strengths and weaknesses analysis on yourself and your competition. What traits does your particular product or service offer to customers that your competitors don’t? What do your competitors offer that you can’t currently match? This gives you an idea of where you fit in the markets and what sorts of things are possible.
When you do this analysis, also consider where the market is going instead of just focusing on the present. If you jump on something before your competitors do, you have a real opportunity to expand your market share because of a first mover advantage. Always listen to the new needs of your potential customers.
The idea that “you must spend money to make money” is attributed to the Roman philosopher Plautus, who died in 184 BC. It’s an old idea, but it’s still just as true today. Nothing successful ever started without at least some investment of time and money.
Whether you need a little or a lot in order to get started, it’s important to have these financial items in your business plan. An investor or lender will want to see things like your market and sales projections. They’ll need to see a balance sheet and any sales you currently have.
It’s also important to put in your expenses and overhead. If you want to scale up with the market, what kind of investment would it take to do that and what results do you expect? If you add personnel, how many new customers can you expect to serve? It’s important to realize that this business plan is a living document that should be periodically updated based on your current market, goals and financial position.
Finally, how are you pricing your product? Are you doing it based on a cost plus model where you have the cost of a good or service as a given and then you build in your profit margin? Are you in a competitive market where most of the products are essentially the same and you have to match your competitors? Make sure you factor in how this is being distributed and the cost.
Once you have a handle on all these factors, you can start to get an idea of whether your business will be and viable in both the short- and long-term.
If you’re looking to start a business, it might also be helpful to learn from the mistakes of others. Failure may be a lesson learned, but getting the lessons ahead of time may give you a leg up.
We have a savvy reader base. I’m sure we can count more than a few entrepreneurs among them. Do you have any tips for others looking to get started? Join the conversation in the comments.
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