Starting a business is the dream of the majority of Americans, but so many hesitate to start. Fear of failure seems to be the main reason why hopeful entrepreneurs never go through. While passion for a venture is good, it’s important to remember that starting a business means being able to make money – a profit. There are two main tools that can help give a clear image of whether or not your business idea is profitable: market research and a break-even analysis.
You could have the greatest profit margins in the world, but it won’t matter if it’s a product no one wants. From New Coke to the Facebook phone, the market has seen several products developed that have tanked. Most of this is attributed to companies not doing decent market research.
Why Perform Market Research
There are a few reasons putting forth time and resources for market research is worth it. You’ll be able to identify potential customers and understand existing ones. It will allow you to get a realistic number so you can set realistic targets and develop effective strategies. Getting experience in the field will help you examine and solve any problems, prepare for business expansion in the future, and identify prospective business opportunities.
What Competition Exists
Having competitors in your industry is not always a bad thing. It certainly means you’re going to have to stand out, but it also indicates there’s a need. Acknowledging your competition helps you consider what you can to be competitive and stand out.
If you can’t identify any competition, look till you find it. It is possible you have an business idea that is the only one of its kind. But what’s to stop other large and already existing companies from offering a similar product? Develop a plan for how you will stay relevant if a new company emerges that offers you competition.
The other benefit of this analysis is figuring out how saturated the market is. Discovering what the market already looks like gives you the opportunity to differentiate your company. If you’re still confident with proceeding forward as planned, you can react to the staleness of the market.
Your competition also might have data you need. Primary data research, which is when you or your team collects the data, takes a lot of time, preparation and even money. But using secondary data, or that which has already been collected by others will save you all that time and money.
What Problem Does Your Product Solve?
Every good product has a problem it solves. One way to predict if your next venture will be profitable is if it actually helps people in some way.
Problem-solving isn’t limited to toothpaste that lets us clean our teeth, saving us from all kinds of health issues and, as a result, money. Even something unhealthy like a candy bar is solving a problem: a craving for something sugary or sweet. Don’t limit your scope of a “problem” to something that’s necessary for life.
Who Wants/Needs It?
Even if you and your family like the products you offer, doesn’t mean enough people to make you money will.
Don’t get trapped thinking that because your product is suitable for anyone, you should market to everyone. Identify and focus on your target audience to create a customer profile.
What kind of people are they? What are their hobbies? What other interests do they like? How old are they? Where do they live? How much do they make? What can they afford? These are all questions you’ll want to answer in identifying who will take part in your niche market.
Include in your profile a demographic description such as gender; age range; ethnicity; nationality; income range; occupation type (i.e. white collar, blue collar, etc.); and hobbies and interests. A psychological description will help you identify what kinds of motivations the consumer has: wanting to be revolutionary; wanting to set trends; seeking higher status or to be admired; spending quality time with family; and so on.
Creating a profile will also enable you to create a purchasing profile, a description identifying your target demographic’s purchasing patterns. This will help you find a selling price that’s profitable and attractive.
To do this analysis, consider running a poll on social media. Find Facebook groups or subreddits or forums you’d expect your target audience to be a part of. You could even develop a prototype and go meet face-to-face with people you think would be your customers. Ask them for critiques, suggestions, and compliments.
A Break-Even Analysis
The most important thing is for you to do a break-even analysis. This is an examination focused on figuring out how financially viable your business idea is. To do it, you must first calculate the break-even point.
Break-Event Point Formula
A break-even point (BEP) refers to how much it will take in sales to cover total base costs. In other words, how many units of a product do you need to sell to make a profit? It’s formula is:
Fixed Costs / (Selling Price – Variable Costs) = BEP (in units)
Fixed costs refer to all overhead costs. Selling price is how much you’re selling each individual unit for. And variable costs is how much each individual unit costs you.
As an example, let’s say you have t-shirts you’re selling at $10 each. Each shirt costs you $3, and let’s say it costs you $100 total for all overhead costs – maintaining your website, designing the shirts, etc.
Using our formula, you’d put:
$100 / ($10 – $7) = 33.33.
This means our break-even point is 34 units. Once you sell 34 units, you’ve covered all the costs you’ve needed to in order to make a profit. In other words, at the BEP, the profit is zero. Everything you make after the BEP is profit.
Conducting a break-even analysis will give help you price your product to suit your company’s needs. This gives you a clear marker for how you can pay your bills and make a profit. Your findings will put your emotions in check, supplementing your passion with logic and numbers.
The analysis also puts finances at the forefront of your mind as you prepare to launch your idea. You can create realistic sales goals as a team. Having a clear number allows you to make specific plans to achieve your specific goal.
Your analysis will make your business plan viable. It will come in handy if you’re trying to take on investors. And once you’ve done one, you’ll be better equipped and have the experience to perform one again when you want to create a new product, add a new sales channel, or change your business model.
Using Market Research and Break-Even Analysis Together
There are some limitations to the practices we’ve discussed. Market research doesn’t show how much money you’ll make. And a break-even analysis doesn’t show you what your sales potential and probability are. If you notice, those limitations are solved by the other. Consider them the yin and yang of predicting the success of your venture.
It’s near impossible to get a truly accurate prediction of your market size. There are many confounding variables that could overrepresent or underestimate your market potential. Getting hung up and performing absolutely perfect research will take too long and hinder your progress. Get the bare basics down. Fill out a customer profile. Find out your competition and decide how you will compete.
A break-even analysis can have a lot of false assumptions and set limitations. For example, it becomes much more complex if you sell multiple products at multiple prices. Work with just one product at a time to get an estimate in the beginning. Do a few different calculations using your other products and prices to get a better idea.
Your analysis won’t show you how long it will take to break even, which could be a problem if it takes too long. There are several sales forecast templates and tools available online to help you manage and prepare to sustain your business.
Will My Business Idea Work?
It’s possible that you do all viable and practicable research techniques and methods and still not get an accurate picture of your idea’s potential. Large innovative corporations like Facebook and YouTube weren’t originally started with massive amounts of research efforts and data. Their creators recognized a need and acted promptly to satisfy it. You don’t need a doctorate-level thesis to decide if your idea could be successful.
While you should do all that you can to make proper and precise predictions of your idea’s potential, don’t let data and numbers get in the way of your entrepreneurial fiery spirit. Get started. Don’t hesitate. But you don’t have to go in completely blind.
Your intuition that your business idea will work is probably right, but that doesn’t mean you can make the business happen. These tools will help you get your product in front of the right customers and ensure you’re making a profit.
But as you start, be willing to adapt according to the research you find. Take advantage of the opportunities you have before someone else does.
How did you figure out if your business idea would be profitable?