In this series about starting a small business, we are going through all the steps to take when you are starting your business.
But if this is the first blog post you are reading in this series, then you have already missed out on knowing your Why, What to think about and get ready when you start, and How do you actually start the business. You may want to go back and catch up on the last three weeks!
This week, we are going to look in some detail about how you check if your business idea is sound and capable of succeeding. This is called a Feasibility Study.
To start, you may want to review a video I did some time ago explaining the Feasibility Study, and then we’ll go onto the steps.
A Feasibility Study is just a process of checking whether your business idea and your business goals, can realistically be achieved. The results of a Feasibility Study can help you decide to go ahead or not, and can also help in deciding on the final (and realistic) business goals as well as the cost-benefit or parts of your plan.
I shall now depress you to say that studies have found that one in fifty business ideas are actually commercially viable!
If these studies are right, then you have every motivation to prepare a Feasibility Study on your business idea before you invest any more time, money or energy in a project that is not commercially viable. A Feasibility Study is usually conducted at the beginning, and if your idea is found to be commercially viable, the results of the study can help you in the next stages of preparation which is to identify your Business Model and prepare a Business Plan. Time spent on the Feasibility Study is not wasted and in fact, will save you time later.
However, let’s conduct your Feasibility Study in context.
You are not, I’m assuming, about to start a business to send men to Mars. In context, a small business Feasibility Study need not be a huge market research project involving hours of study of markets and financing. You can conduct your Feasibility Study within a week of research that is well within your capabilities.
Starting a small business, what you really want to know is:-
- What is the market viability? Is there a big enough need for your product for you to make money?
- What is the technical viability? Can you deliver your product and deliver it cost-effectively?
- What is the viability of your business model? Will the way you conduct your business be efficient and deliver value?
- What is the viability of your management model? Can you manage the business properly to make money?
- What is the financial viability – what is the cost/benefit model?
Let’s go through each of these in turn.
But first, we will define your objectives.
What is your product? What will it do? What industry – and therefore what different set of problems and opportunities does it represent?
Let’s take an example of a new weight-loss supplement that you invented from natural products.
Does it fit into the health industry or the fitness industry? Is it in its own niche “weight-loss” industry? Or perhaps, because of legislation, it is in the pharmaceutical industry.
Defining your objectives like this will reveal the problems and opportunities in the business idea. As you can see, what you need to do to take your product to market will be very different if it is in the pharmaceutical industry than if it is in the fitness industry. The segment of customers you target will be different if it is in the weight-loss industry than if it were in the health industry, and so on. Doing this carefully sets the scene for the work below.
Having a great business idea is not enough. You need to have enough customers agree that it is a great business idea and buy from you. You cannot grab each customer by the collar and convince them, so, to a reasonable extent, it must meet existing needs that they can see will be met.
Having identified your industry, and therefore your likely or desired customers, you need to check if it is a big enough market. This will depend on if you intend to mass market your product, or at the other end of the scale, whether it is a niche product and requires a smaller number to make it feasible.
As a small business, your market research budget is limited, but you can do some common sense things to check the size of your market.
You can ask the industry association or other similar organisation or group about how successful their members are, how big or small do they become and what makes them so? In a less niche industry, you can join business groups and get an idea of the dynamics of members and even go and look at their businesses. You can search Google or social media pages to see what people are saying about similar products. What you are wanting to gauge is the demand in the industry and the demand for the product in that industry, or if there is a real need for the product as a solution to some problem.
If you searched for weight-loss supplements you will find plenty of ads online for them. But, you will also find articles about the dangers of weight-loss supplements and articles about whether they work or not. This should give you an indication that there is a market for them, but there are some risks associated with selling supplements like these.
At this time you write a note-to-self – “check out what the risks are and what can I do to mitigate them”.
If you wanted to do further research, you could research to see if weight-loss supplements are a sustainable business – or do individual products succeed initially and then disappear from the market. You could research any pending concerns that the Government has and if there is any legislation concerning the sales of these supplements.
You will also want to research the best ways of getting your product to customers. Does the market prefer face-to-face treatments or online purchasing? If the former, then perhaps you need to develop a network of naturopaths. If the latter, then you will need to look at creating a commercial website. Getting to your customers may also involve research into the location and geographical factors – there may not be the same need for weight-loss supplements in some ethnic areas perhaps, or in suburbs where people are older and not caring about weight loss? If your distribution will be through face-to-face engagement, and most of the people in your target area don’t have the need, you will have to move.
Finally, you need to check on the competition.
What is the state of competition in the industry? Industries with a large demand generally have a healthy state of competition, but who are your competitors? Are they dominated by large companies with budgets to market you out of business? Or is the demand being met by a large number of smaller entrepreneurs like yourself?
Having active competition is not in itself a bad thing – it just means that demand is high, and the activity may even mean that market awareness already exists, and all you have to do is to show your product is better.
On the other hand, niche markets may not display a great deal of competition, and this may play into your hands if your product suits niching down.
This research should have had the side effect of telling you a lot about your market, enough to eventually help you prepare a marketing plan.
Researching and checking all the above should give you an idea of whether you have a strong enough market to sell your product. If not, you may wish to stop right there!
If you feel you do have a strong market, look at the technical viability.
You need to check that you can deliver your product in the right amounts and cost-effectively.
Research into market viability should have revealed what people are willing to pay. Let’s say our new weight-loss supplement costs $100 to make but the market expects to buy it for $50.
You need to see if you can technically make the product for less than $50, or (a much harder task) find a way to show the market why your product is worth more than the competition. Thinking this problem through will tell you if your product is technically viable.
Technical viability is not just about making the product though. It is about the ability to provide value to the customer. Let’s say the weight-loss supplement can be made for $60, but only if there is sufficient volume and reduced distribution costs. One solution may be to prepare a larger than preferred marketing budget to explain why it is worth $10 more and set up an online low-cost order and delivery sales system.
Technical viability will also take into account the legislation or other barriers to entry that it may face.
For example, a weight-loss supplement, while in this case, not a pharmaceutical, is more than likely required to pass some Therapeutic Goods tests by law. Or a specific ingredient may be subject to some patent held by someone else. These are examples of barriers to entry that will make the product no longer technically viable.
If your product is not technically viable, you have to stop.
Business Model Viability
But say the product is technically viable.
Next, you need to check if the way you wish to conduct your business – your Business Model -is itself viable.
Let’s say our weight-loss supplement manufacturer would like to operate an online sales model, selling to men who can’t be bothered to go to the gym and who drink too much (now that’s a niche!). The manufacturer will reach out to them through social media advertising, and maintain a newsletter database from orders. However, researching social media advertising, it is found that reaching the specific niche is perfectly achievable, but the cost per click is well over $10. This means that if the ad was served to more than 6 people who clicked, and only one bought, the business would be at a loss.
The business model is not viable in this case.
What you need to do is to go through every key aspect of how you would like to set up your business – reaching out to your customers, your channels of distribution, creating customer relationships, providing value, key activities in your business, finding the key resources you need, working with key partners, your cost structure and your revenue streams – and see if they integrate and are viable in the context of your market and technical viability.
Management Model Viability
Next, you need to check if the way you intend to manage your business is viable.
Let’s say the weight-loss supplement manufacturer intends to outsource the manufacturing and spend his or her time on marketing, not intending to employ anyone else.
Go back to look at your business model – what are the key activities and will this model of management allow them to be conducted? Will they have the time to keep the books? Check on new advancements on the supplements? Maintain relationships with suppliers?
Some businesses may suit this model of management being a set-and-forget business like Amazon stores, but others may require more management.
The question you need to ask here is does your management model provide sufficient management resources to make this a successful business?
Finally, you need to look at your financial viability.
This is conducted at the end because if your business is not market viable, technically viable, business model viable or management model viable, then there is no way it will be financially viable.
However, having researched and tested that your business idea is viable in those areas, we now need to prepare forecasts and budgets to check if you have the capital you need, and that the business can be financially viable for you. Bear in mind, the profits provided to an owner with a large family and a mortgage is not necessarily the profits required by a young, single person living at home with parents, so financial viability, assuming the budget shows a profit, is contextual.
If you don’t have the skills to prepare your own forecasts and budget, go and see your accountant with the information you have found so far. Approximating the market and knowing the costs of production and the costs of a viable business and management model should give you enough information to prepare a forecast and budget.
It may be useful to prepare three – probable case, worst case and best case – in order to feel comfortable that you have stress-tested the budget. It would also be useful to prepare a break-even analysis that shows you how much you need to sell in order to just break even.
Your budget and other calculations like the break-even analysis should show that your business idea, based on the assumptions and information you have discovered, is financially viable especially if you look at the cost of investment against the benefit you will derive from that investment.
So ultimately, before you go any further in working on starting your business, you need to have conducted a simple business feasibility study to check that the idea is viable. This involves market viability, technical viability, business model viability, management model viability, and financial viability.
Even if you find that your business idea is commercially viable, it is not a guarantee that your startup business will succeed. However, it is a significant step in showing that it has every chance of being successful, especially if you now plan for that success. Which is the next step!
Next week, in our series about how to start a small business, we will discuss planning and a high-level roadmap for your business, that will set your strategic direction to achieve what you want to achieve. It’s called a Strategic Plan, and for your small business, like this Feasibility Study, it need not be complicated.
Join me next week, or even better, sign up so that the blog article will be sent directly to you to read at your leisure.
See you then!