How to Evaluate a Business Idea Before Taking the Plunge

Man standing in empty expanse holding a lightbulb indicating he has an idea
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Before you plunge into the personal and professional transformation of launching a small business, take the time to research and analyze your idea as objectively as possible, and determine if the business model itself is as unshakable as your enthusiasm.

Below are a few suggestions for getting started.

Identify a Target Market

The first step in validating your business model is determining who the target market is for purchasing your product or service. You won't be able to accurately quantify your model's potential until you have a clear understanding of your audience, their size, and their spending habits, among many other variables. As such, you should construct a profile of your ideal customer based upon your personal observations and analysis, third-party market research, and any feedback you've received from mentors, colleagues, and test users. The more accurately you can define and anticipate your ideal customer, the more potential your business has of anticipating and serving their needs. Consider the following demographic factors of your ideal customer:

  • Age
  • Location
  • Income
  • Gender
  • Occupation
  • Education
  • Marital Status
  • Ethnicity
  • Number of Children

Once an audience has been established, you need to conduct market analysis to determine how big the market is, how saturated it is with competitors, and if there's room for your product or service.

It's helpful to create a test segment of your target market and conduct a focus group or a survey to discover more about who they are and what they want. This can help you decide if it makes sense to test launch your business within a smaller, niche segment of your intended market.

Research the Competition

During your initial research, you will likely discover that other businesses are offering similar products or services within your target market, but this doesn't mean your business model is doomed to fail. Being faced with competition underscores the importance of reinforcing the value of your product or service, and identifying why a competitors' offering can't match your own.

Develop a unique selling proposition (USP) for your small business and repeat it frequently. A USP should differentiate the value your business offers from your competitors and can be an effective tool for making your business memorable to potential buyers.

Just as you need to identify and connect with your ideal audience before launching your small business, you need to know who else is in the market is competing for their attention. The following are five tips for researching your competition:

  1. Gather Important Information: After you identify your main competitors, you should learn what products or services they offer and to whom. Document their pricing methodologies, positions and branding, and overall market reputation.
  2. Know Which Type of Competition You're up Against: Do they offer direct competition (same products to same clients), indirect competition (slightly different products to different clients within the same market), or substitute competition (offering different products and services to the same clients in the same market)?
  3. Identify Your Competitive Advantage: By conducting research on your competition, you can identify your own business strength that’s distinctive and can appeal to your target clients. This competitive advantage can help you create messaging and a brand image that will set you apart from the competition. 
  4. Conduct a Strengths and Weaknesses Analysis: You should carefully document what makes your competitors strong and what makes them weak. By searching online reviews, visiting brick and mortar storefronts, or talking with their customers, you can determine how the competition is perceived within your target market.
  5. Reach Out to Your Competition: This may seem counterintuitive, but by directly communicating with your competition, you can gather important information to help you differentiate your business within the market. Building candid relationships with your competition may also lead to a beneficial partnership or mentorship in the future.

Two more excellent tools for researching your competition are preforming a competitive analysis or a SWOT analysis.

Conduct a Financial Feasibility Analysis

The next step in validating your business model is financial analysis. This means developing answers to the following questions:

  • What will it cost to get your business off the ground?
  • Where will the startup capital come from?
  • What are the initial and ongoing expenses of your small business?
  • What is the earning potential of the business once it's operational?
  • How will you bridge the financial gap between the startup process and sustained profitability?

Searching for detailed answers to these questions will help you establish financial data on your market, and will force you to consider the potential sources for earning, investment, and credit available to your business.

While it's disappointing to discover your business model is risky or infeasible under the conditions of a given market, this discovery can help you avoid wasting time and money on unproven intuition, or from facing the greater despair of financial failure.

If the model for your small business has a clearly identifiable audience, limited competition, and a solid financial foundation, you have an advantage during the next step of the business development journey, the creation of a business plan.