Does your business stand a chance?
How do you see the difference between a business model that's a winner and one that should be passed over?
Everyone schedules FunnelFixing Funnel Assessments to answer one question:
Does your business idea stand a chance?
I've spoken to hundreds of online entrepreneurs and had full access to their shopping cart accounts. I'd see the frequency and size of the orders and the page designs they were using, but more importantly I'd see what they were marketing and how they marketed it.
What they were looking for was for a reality check on their business dreams.
When I judge this, I think of it in terms of what someone should pay to buy your business from you once it's more than just an idea.
There are a number of factors in this type of appraisal, but the first is:
How to tell what you should be spending on your business
This is a commonly overlooked part of business tutorials because it's so obvious to people who've done it before, but it doesn't occur to most people when it's their first time.
I've seen a huge number of people who say, 'A HUGE number of people would want this!'
This is a completely unacceptable basis for a business. If it's a labor of love, which is another way of saying it's something that always costs you money and time and never pays it all back, then that's completely different and it's up to you. When it comes to business though, even though we live in a culture where creativity is romanticized and doing math is considered to be an activity suitable for one of the deepest circles of hell, you shouldn't be spending a cent until you do the following calculation:
1. How many people might pay for this product or service if you could get it in front of them in a store, at their front door, or office (as a percent)?
2. How many people can you actually reach?
3. How much will it cost in marketing time and dollars to get this product or service in front of them?
4. How much time can you afford to make nothing if you are still paying your rent and living expenses while paying for the marketing expenses in #3?
5. How much does your product or service cost you to produce and deliver?
6. What will someone pay for this product?
7. Is your product or service good enough that you or your partner/spouse can have a day job that can pay for your living expenses and your customers will still put up with it?
8. If things go outrageously well, can you scale the business to bigger markets and delegate what you do to employees?
9. Can your business survive without you or someone equally knowledgeable and dedicated?
Now that you have those numbers, I should tell you that you're probably wrong by a long shot on most of them.
Let's forget that for now though.
Here's an example of how you calculate what I'd look for:
Let's say I have a service or device that I think would sell (#6) for $120.
I'd immediately cut $20 off in my calculations because I think it's wonderful and if it's viable at a discount then it's viable.
I would then look at the service or device cost (#5)and if it's $30 or less, I'm excited, if it's $40 it's nice, if it's $50 I'm cautiously optimistic, and if it's anything over $60 it better be either an actual goose that lays golden eggs or you better have a huge amount of startup capital.
If you punch #6 in your calculator and subtract #5 you have your profit per unit, before operating costs, and this number is the most important one.
The moral is that your profit before you pay for your marketing, staff, rent, and utilities should be at least half or a 50% return on investment (ROI).
Intel can get away with a small difference between cost and sale price, but you probably can't.
Next, I'd compare #7 and #4.
If you can't keep a day job at the same time then you need to calculate all of the monthly costs of your business and all of the monthly costs of your living expenses. If you can only afford to make nothing for 6 months or less, either give me a call or wait until you have more savings or investors because that's not viable unless it's an actual goose that lays golden eggs. Since that example's getting old, we'll just say 'think that it's not viable unless I tell you otherwise.'
After that number's out, I start looking at the profit per unit and the size of the market.
I call this the best-case terminal value of the business.
Take the the profit per unit before operating costs and times it by the number of people who would eventually buy it if there was enough time.
If you have a service or product that would be bought more than once, like a haircut or a computer then this number is irrelevant, but if it's a single invention, a trendy trinket like a pet rock, or a one-time service this would be the largest amount of money that could be squeezed out of it. This is the raw potential for the product or service assuming the market had the perfect pitch and perfect attention until it gets to the point we call a saturated market.
I would then also calculate in that the way something is sold gives you anywhere from a fraction of a percent to a ten percent chance of closing, and that's assuming the audience or market even listens to or reads one sentence.
If you assume that you can close 2% of those deals then you're either already an accomplished sales person, or you're likely giving yourself too much credit.
To continue my example, let's say my service or device is a one time sale, my #1 is about 5%, I can get it out to about 150 000 people by doing some types of guerrilla marketing (that means cheap and well thought out) like local newspapers following you to a display at a local retailer.
This would mean that 7 500 people would buy it if they knew about it and had a good pitch, and if you get 2% of that you're looking at 150 sales. If you make $50/unit you've made yourself a cool $7500.
A good salesman with a good product around the $100/unit range will get about 50-75 sales per month, and a superstar will get 100 if they have a constant stream of leads and the manpower and inventory to supply it.
So what's the problem?
Even at those numbers your customers won't come back until you have something new to sell.
Also, if you didn't see it, all of the parts in the sales per month calculations were a Big Fat If.
Moral here: Avoid businesses that rely on one-time purchases. Either use planned redundancy, recurring memberships, or some other method to keep your happy customers coming back.
If your business doesn't include recurring billing or the ability to brand other products or services, I wouldn't invest.
Maybe 'wouldn't' is a little harsh, but keep in mind that anything like the pet rock has an expiration date stamped on it, and most investors can't be bothered to keep such a close eye on the business to plan and time the exit strategy.
In the eyes of investors, the same goes for #8 and #9 in that they just won't be appealing as a long term allocation of assets.
That's a fancy way of saying that investors wouldn't invest and so you probably shouldn't either.
I call #9 the 'getting hit by a bus' contingency, and I wouldn't just avoid any venture that fails that contingency, I'd run and hide.
Before you have a large investment in business assets, you need to ask yourself if your business would be something your family or partners could continue on with if you were somehow out of the picture.
Loads of people want to be the next Gates, Jobs, Zuckerberg, or whoever but you need to have confidence that if you have the entrepreneurial spirit, this idea might not be the big one but the next one might be. Take what you learn but don't get married to an idea.
The other thing that you need to be able to do is take advice from people who know, and we're here and I'm here to help you with that.
This article is still the tip of the iceberg as far as how complex starting a business is, and if anything it should give you enough to know that there's a lot to learn.
Give us a call for a consultation, and we'll do a non-disclosure agreement at no extra cost so that you can rest assured that you're not going to lose out on your idea's potential, or your idea won't make you lose out on yours.
As always, Good Luck, and Thanks for Reading.