By Whitestone Partners
Q. I’ve got a great idea for a new product. I believe it could make a lot of money if I can get it to market. Unfortunately, that will take a big cash outlay. Do you have any advice before I invest all of my savings into this venture?
A. We commend your entrepreneurial spirit and wish you great success. Before launching your business, we advise you to develop a robust business plan. There are many templates available. Find a good one and use it.
Below are several questions that your business plan must address. We caution you to be brutally honest. If your idea isn’t going to fly, it’s much better to come to grips with this reality now rather than after you have invested your life savings in the venture. The questions you should answer are:
• What differentiates your product? We assume that your product fulfills a want, need or desire. If it doesn’t, rethink your plans. Sometimes the market doesn’t know it needs your product—that’s fine. Henry Ford said, “If I had asked them what they wanted, they’d have told me faster horses.” The first step is to identify the need your product will fulfill. Then determine whether or not this need is currently being met and if so, how and by whom? Why should a prospective customer buy your product rather than a competitor’s? If you can’t answer this question clearly, concisely and definitively, go back to the drawing board.
• Is there a large enough segment of the market that will value this difference? Identify the segment of the market that values the thing that differentiates your product. Estimate the size of the market segment. Now, reduce the size of this segment by the percentage of people who won’t be willing to pay what you will have to charge to make your business profitable. Can you still reasonably project enough volume to make your business economically viable?
• Is the thing that differentiates your product defensible? If your idea is a good one, you had better know how you will keep a large competitor with deep pockets from copying it and running you out of the market. There are many examples of well healed copy cats overtaking people with good ideas. You need a plan to protect yourself from this. Perhaps you can protect your intellectual property through a patent. Perhaps your idea, for one reason or another, is difficult to copy. What entry barriers are there to keep the competition from moving in?
• How will you reach the target customer segment with your marketing message cost effectively? Whoever said, “If you build a better mousetrap, the world will beat a path to your door,” was simply wrong. If the world doesn’t know you have a better mousetrap, no one will come knocking. Make sure you are clear regarding how you will reach your target customer segment with your marketing message. You need to have a clear plan for cost effectively acquiring customers. A marketing cost per acquired customer of $50 is no good if you only make $40 on each new customer.
• How can you prove the viability of your idea quickly and inexpensively? You said that it will take a big investment to launch your product. We challenge that assumption. There may be ways to prove the viability of your concept without making the full investment. Outsource manufacturing or make version 1.0 by hand rather than buying expensive equipment. Launch in a limited geography.
Chances are good that the initial version of your product will fail—most do. Our advice is to fail fast and fail cheap. Launch as inexpensively as possible. Learn from the market’s reaction. Make the necessary changes. Prove that your concept will be successful before investing in a full rollout. You may even need to sell the initial units for less than they cost to make. That’s fine, if you know you can manufacture them at a cost that is sufficiently below the market price before rollout.
• What will your cash flow look like? Make sure that you build a thorough financial model that supports your decision to move forward. We encourage very conservative assumptions. New products most often take much longer and cost much more to launch than you would think. Unless you have a lot of experience launching new products, what you will consider fairway estimates are almost certainly aggressive. If the economics of your product don’t look good with very conservative assumptions, you may want to rethink things.
Launching a new venture can be exciting and rewarding. It can also be fraught with risk. Honestly answering the above questions will help you make decisions that are more informed.