Most businesses are the product of a spark of inspiration, followed by months (or even years) of preparation, research and investments. There are many decisions to make before you begin your new business, and many more will follow once you start it. But one of the biggest concerns associated with businesses is “Will my business idea be profitable?”
Whether it’s investing in a lawn franchise cost or starting a small bakery in the city, it’s important to determine the profitability of a business idea. After all, the last thing you want is to invest money and time into an idea that will fail.
Doing research and estimations will give you an idea. There isn’t a full-proof way to know everything about your business idea, but there are some ways to find out.
Map Out Your Financial Standing
Do you know how much it would cost to open your business? How much will it cost to stay in business and bring in money that will cover your expenses? How can you make a profit? It’s important to answer these questions first to create a financial forecast that addresses your revenue goals and anticipated expenditures (e.g. location, paperwork and digital marketing).
Meet Your Target Audience
Who will you serve? Before you open a business, you should understand who your ideal customers are. Determine their purchasing habits and decisions, as well as their potential income brackets. By doing a psycho graphic and demographic exploration of your target audience, you gain insights on the demand for your products and services, as well as potential pricing.
Define Your Points of Differentiation
What makes your business stand out from your competitors? Conduct a SWOT analysis of your business idea to determine how you’ll measure up to the competition. Once you’ve analyzed your strengths, weaknesses and more, you’ll know if the time is right to start a business plan.
Another bonus: a SWOT analysis arms you with significant information, which you can use for your business plan outline. Use what you know to create a unique selling proposition, which will help you differentiate your business from your competitors.
Study Your Competitors
What other companies are targeting the same audience? How big are they in the industry? Create a list of potential competitors to know the answer. Once you know who you’re up against, conduct a SWOT analysis to measure the strengths and weaknesses of your competitors.
An Assessment of Your Business Idea’s Profitability
If you don’t know where to start with your assessment, here’s a sample you can start with:
- Start with the problem you’re answering. Does your business idea address a problem? Can you explain the idea in a concise statement or in terms the client will understand? This is where you need to talk to potential clients and ask them about their pain points. This segment is not about what you can offer; it’s more on how you can help your customers.
- What is the likelihood of people paying you to solve their problem? Have you tested your idea on your target market? Before you start your business, you must be clear on how your business will make money, as well as make sure that you clients will pay for it. Start by setting up a PayPal account and asking someone to buy your products. Even if you haven’t produced them, say they will be available next month. If you get a sale and make it happen, you have a better idea in terms of who will pay for your products and services.
- How passionate are you about your business idea? Answering this question matters since this determines how your brand your business, as well as how you make your USP. Your story and passion will add to your brand no matter what your products and services are.
It’s important to determine a business idea’s profitability as soon as possible before you start planning the business. As mentioned, this prevents you from investing an idea that promises no profit at all. Determine how much you can potentially make from an idea before you start.