You have a new business idea and your mom swears it is a great one. But keep in mind that she also thought your frosted tips looked good. So how do you know if it is a good business idea? Startegy was built around helping people figure out if an idea was profitable or not, but there are other factors that play into a “good idea”.
Cost to Enter
How much does it cost for you to enter the market place? A good rule of thumb is, “cost of entry must not capitalize all future profits.” This essentially is telling you that the amount of money it takes for you to enter the market should not be more than what you expect to earn from it in the future. Use Google for example. Google purchased YouTube for $1.65 billion. Chump change. Just in 2011, YouTube generated $1.5 billion in revenue. If YouTube’s revenue is the same the following year, then Google just made a genius decision. If YouTube was never profitable after that second year though, then Google’s cost of entry would have been more than the return.
Barriers to Entry
Barriers to Entry are the economy’s way of saying, “Good luck, punk.” High start-up costs, or other painful, complicated, or expensive obstacles, that prevent a new competitor from simply jumping into an industry is a “barrier to entry”. This is typically done through government intervention (industry regulation, tax benefits, etc.) or naturally through patents, high costs, or customer loyalty. Barriers to entry can be a good thing if you are already in the industry and want to prevent competition from stealing your customers and lowering your prices, but as a startup or small company it complicates things. Make sure that your business idea is either welcomed into the world with open arms or can climb over those barriers and compete in the industry.
Research and Development Costs
Developing new goods/services isn’t always cheap. In fact, it almost never is. As an example, a blender company would spend a lot of money on researching and developing profitable blender improvements (because we all need to blend an iPhone). While this cost will decrease the company’s current profit, it will also create the potential for significantly higher profits in the long run. As you enter the market, make sure you know your development costs and plan for additional research.
Avoid Pioneering
Business pioneering may not involve crossing plains, but there can be some equally painful points in it. High costs occur in pioneering when trying to switch to a foreign country. The time, effort, and expenses devoted to the pioneering effort are a high cost for an unknown outcome. Take the Chevy Nova for instance. Great vehicle, but it wouldn’t sell in Latin America because in Spanish, Nova means “it doesn’t go”. After all of the efforts of producing the vehicle, they were at a loss because of a wording error. Research shows that the “probability of survival increases if an international business enters a national market after several other overseas companies have already done so.” Essentially, it doesn’t always pay off to be the first one. It is a high price to pioneer in business and can definitely be worth it, but for the most part, wait for someone else to do the nitty gritty before you jump in.
What else have you found helpful in defining a “good” idea?
