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BRINGING INNOVATION TO MARKET

Test Your New Business Concept: 8 Questions
 

Before spending a cent on a new investment, answer these eight questions to help you focus your idea and ensure that it can be successful.

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Whether you are a CEO of a successful, established company or a young, eager entrepreneur, you need to constantly evaluate new business concepts. When we consider our new ideas, we find ourselves coming back to several common questions.  Here are eight that will test your new business concept and help you hone your model into a successful, scalable success:

1. Who are the ideal customers?

How many of these "ideal" customers exist?

If a new product or solution is going to be successful, you should be able to find a customer that it is a "no brainer" for it.  You need to focus development on this person or business.

There may be additional customer segments that are likely to buy, but a product or solution that is trying to be all things to all people is likely to fail.

Count the number of "ideal" customers, then add 20% of the non-ideal customers that are likely to buy. Most often you'll find that these non-ideal customers will find your product less appealing than you thought.

2. Does it already exist?

Most entrepreneurs assume that the best answer is "no," because they have the false belief that it's better to create something that doesn't exist than to improve upon something that does.

If an offering already exists, it proves that there is a customer need and provides a lot of information about the customer value that it creates. Most investors would more easily invest in an improvement on an existing solution than one that meets an unproven customer need.

3. What is the customer doing currently?

If the need exists, logic says there must be a current solution. In some cases, that is a manual, time-consuming process. In others, it's something very similar to your solution. In any case, you must prove a demonstrable value improvement to the customer, or it won't be adopted.

4. What is the all-in cost of the current solution?

In the best business concepts, it is easy to quantify the customer's all-in cost of the current solution. We are currently evaluating a technology-enabled solution in the healthcare business that replaces a manual process. We can calculate the current cost in terms of person-hours. Communicating this to the customer will be critical to initial customer adoption.

5. What asset or capability are you bringing that is unique?

The most successful business models are focused on a unique strategic capability that an entrepreneur or a business can bring to the marketplace. If truly valuable, this asset will increase the cost of entry by competitors and improve the customer offering.

You can usually improve the value of your business concept by focusing efforts on the part of your business model that is distinctively unique, while outsourcing or partnering in other parts of the business.

6. How will competitors react to a successful launch?

Don't hold out hopes for "first mover" advantage. Imitation is the sincerest form of flattery, and in business if you don't have competitors, you likely don't have something that's worth imitating.

If your idea is successful, you will have competitors, and they may already exist. Your concept will be more valuable if you focus on how it creates more customer value than if you focus on being the first-mover. If a second or third mover can easily take your customers and profits away, your business is not worth much.

7. What is the business model? 

Define an end-to-end view of your business model. We like to use Alex Osterwalder's framework, which includes customer segments, customer relationships, channels, value propositions, key activities, key resources, and key partners to build the revenue stream and cost structure. Put together two or three alternative ways you could build the business, say by using a partner instead of building something yourself. Then evaluate which alternative allows you to build on your strengths.

8. How can you test and learn before building the entire structure?

Most importantly, avoid the "if we build it, they will come" mindset. Instead, find creative ways to attract a set of beta customers and build your business around their needs. Your insights from the test-and-learn approach will be much more valuable than any initial ideas you develop.

Go through these questions first, before spending a single cent on developing your business. You'll find that it improves your business concept and makes it more valuable to customers, investors, and potential partners.

Share your thoughts on evaluating new business concepts with us at karlandbill@avondalestrategicpartners.com.

IMAGE: Getty
Last updated: May 29, 2012

KARL STARK AND BILL STEWART are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree.
@karlstark




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