The Four Layers of Feasibility
Which numbers should be presented at each stage of an idea’s development?
Having worked with internal startup teams across a series of large companies, the most common question I get from upper management is:
Where Is the Feasibility Study?
While I do not discount the necessity of evaluating the financial feasibility of any new business idea, it is unrealistic and detrimental to create full feasibility studies for startup projects at an early stage. At the same time, I have witnessed many projects that only focus on procuring and understanding qualitative data; numbers are equally important in generating insights and helping to convey the validity of an idea to others.
Thus, to create a middle ground for management and internal startup teams, I’ve created a guideline for specifically which type of numbers should be presented at each particular stage.
- “We Have an Idea”
- “This is Our Solution”
- “Our Pilot is Taking Off”
- “Our Metrics are Improving”
Feasibility #1: “We Have an Idea”
When an employee or a team first comes up with an interesting business idea, everything is an assumption. Thus, most numbers that can be derived at this stage will also be largely assumptions.
Therefore, the level of feasibility that can be expected is only concerning the potential for the idea, specifically the size and attractiveness of the market. The team should seek to answer the following questions after doing some primary and secondary research, by both talking to potential customers and searching online for market and competition data:
- How big is the market, i.e. how many people or businesses could use the product/service?
- How much money is being spent by the market today?
- How many different alternatives are there in the market and how are they grouped?
Feasibility #2: “This is Our Solution”
After an attractive market and customer segment(s) are determined, the team should start shaping their solution and value proposition against the discovered expectations of that market segment.
At this stage, the market size and potential customer budget, especially for the first early adopter market, becomes a bit more refined, which also provides some sense of the potential pricing. The team should be seeking to answer the following questions using primary research, utilizing a variety of low-fidelity MVPs until an attractive solution is discovered.
- How large is our early adopter market, i.e. customers who are eager for and willing to buy the solution now?
- How much value will our solution create for the customer? On average, how much do they think it is worth in return?
- Roughly, how much will our solution cost for us to develop?
Feasibility #3: “The Pilot is Taking Off”
In the pilot phase, teams are seeking to build a functional solution and deliver it into the hands of early customers to get feedback on usability and willingness to purchase.
Through the pilot testing process, teams should be generating numbers from their tests and measuring them against early financial feasibility. This includes the fundamental costs of solution development and delivery to the customer against the price customers are willing to pay. Furthermore, pilot testing should provide insights into the customer stickiness of the solution, i.e. how much do they like it?, which will help to estimate long-term turnover.
- What price can we charge for the solution?
- What is the current Cost of Customer Acquisition (COCA) on at least one channel?
- What percentage of customers are happy with the product and 1) want to keep using the solution/use it again, 2) tell other people about the product?
- What is the cost of delivering the solution to the customer and where do we estimate improvements can be made?
Feasibility #4: “Our Metrics are Improving”
After the viability of the idea has been proven during the pilot phase, teams strive to optimize the numbers in their business model as they prepare for scale. This includes improvements on the customer acquisition and conversion funnel, beginning from first customer contact, refining the business model, specifically the cost structure, and building out long-term financial plans.
At the end of this stage, teams should have a fully-articulated financial feasibility study that includes long-term growth targets and capital required to achieve those targets. The financial and customer numbers in the study are based on actual results from the market, and can thus be reasonably scaled upwards as the customer base grows.
- What are the improved COCA across different channels?
- What percentage of customers are happy with the product and 1) want to keep using the solution/use it again, 2) tell other people about the product? (incl. churn rates, k-score, cross selling & up selling rates, etc. as relevant)
- Based on the optimization improvements, what is now the cost of delivering the solution to the customer?
- What is the size of our next markets?
- What are the profit/loss estimates for the next 2–3 years as we scale customer growth and organizational capacity?
I believe this guideline helps to set reasonable expectations for both management and internal startup teams, defining the framework for which numbers should be pursued relative to the developmental stage of the idea. This ensures that teams don’t spend an inordinate amount of time trying to forecast assumptions in spreadsheets and gives management a solid base for which to evaluate the business idea.
Feasibility studies are important, just in the right doses at the right time.
“Everything is always feasible if you run a corporate finance exercise: you can always try to come out with a justification on how things could work. But the real issue is to say how do you translate that into practice.”
- Sergio Ermotti
Make Innovation Work
Core Strateji is a strategy consulting firm that specializes in supporting leading companies to transform into ambidextrous organizations. Are you ready to move your innovation activities forward?
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