So you’ve been reflecting on your current career path, or maybe just come out of university full of hope and dreams, and decided that you want to forge your path.
Running a business can be an excellent way to create a legacy, gain independence, and build an asset for you to build over time. Overall, creating a business has to be both a rational and emotionally involved endeavour.
If you are prepared to deal with all the challenges of running your own business, you will need to spend a little time working out whether your business is viable and sustainable.
Is there a need for your Business?
Probably the most important question you should ask yourself is whether there is a need for your business to exist.
If there are existing businesses which deliver the same good or service, but do it to an inferiorly or more expensively than you can, then you may be able to capitalise on this.
What makes your Business Different?
Making your business stand out to customers or potential investors is critical to its success.
It might not necessarily involve bringing something completely new to the market. For instance, certain brands pride themselves on customer service.
An example is how Amazon differentiated itself from other retailers by making it as easy as possible for the consumer.
They were fast at delivery, quick to refund customers, and had the necessary product selection to bring consumers back to the website.
Your business may have certain strengths that set it apart, and you should let everyone know what makes you different.
What are the Barriers to Entry?
The harder it is to enter an industry, the better the business.
If it is difficult for competitors to enter a market and replicate what you do then it is a stronger business.
Why does this matter?
Less Competition
First, if it is an easy industry to enter, you’ll have to fight in the red ocean of competition.
A “Red Ocean” is a term that was coined by Chan Kim and Renée Mauborgne to describe a market where many competitors are vying for the same piece of the pie.
In the Red Ocean, markets are competitive on price, and businesses are looking to undercut their competition. If, however, you can build a business where there is a high barrier to entry, then there are naturally going to be fewer competitors.
In Blue Ocean Strategy (written by the aforementioned), carving out a niche market where there are no or few competitors, should be the aim of the game.
Higher Margins
If there are few competitors, there is the opportunity to improve profit margins and raise prices.
A business with high margins is more likely to prove an excellent business.
A higher barrier to entry means that the customer is unlikely to be able to provide a service or good to themselves.
This fact alone enhances the value of your service in their eyes and will increase willingness to pay.
Greater Control
If you are the sole provider of a good or service then you hold the cards.
In this situation, you become the gatekeeper. Think about the top companies in the world such as Apple, Amazon, Google, Alibaba, Netflix, Tencent etc. They each hold a unique position in their markets.
For instance, Amazon is the main player in B-2-C E-commerce and Cloud Computing.
Their unique position means they can exert significant control over the businesses that use their cloud services and Amazon Sellers. This position means that they can dictate terms to anyone looking to get involved
How much Capital is Required to Operate your Business?
If a business requires a lot of start-up capital to get going then it might not be an awful business, but it might make it an unrealistic proposition.
Capital can loosely be divided into financial and human capital. In other words, you can have the cash to set up the company from years of saving and investing, or you have people on your team (including yourself) who are skilled in particular areas.
For instance, you may have spent years learning how to create a website using HTML, CSS, PHP and JavaScript.
Employing someone who can do this straightaway might present a financial limit, but your pre-knowledge will give you an edge if you want to create web applications.
Your business is ultimately limited by capital. If you require a lot of start-up capital and/or a highly skilled labour force then you must have that capital at your disposal or build up reserves over time.
Is it Quick to Get your Product or Service to Market?
The speed at which you bring your product or service to market directly impacts your revenue stream.
The faster you launch, the sooner you can start generating income.
However, if the process of getting your product out there takes longer than expected, it doesn’t automatically spell doom for your business. Instead, it signifies that you’ll need a more extended period to gain traction.
Just like a plane requires a long runway for takeoff, a business with a lengthy time-to-market needs a similarly extended “runway” to build momentum and profitability. This extended runway might necessitate more initial investment or patience while waiting for the business to gain traction.
So, while speed is advantageous, a longer journey to market doesn’t inherently indicate failure; it merely requires a different strategy and mindset.
What is the Total Addressable Market (TAM)?
When you’re introducing a product or service, it’s crucial to know how many people might be interested in it.
You can figure this out by looking at who lives in the area or by asking people through surveys. These surveys can be either paid or free.
They help you understand if there’s a market for what you’re offering.
By doing this research, you’ll have a clearer idea of whether your idea will catch on and if there’s a group of people waiting to buy what you’re selling.
Are there Significant Switching Costs for Customers?
In other articles, I discuss the importance of moats. One “moatish” characteristic, is how challenging it is for a customer to switch out a product or service.
For instance, Apple has an ecosystem, and if you have a lot of Apple products, it can make it very difficult to change to products which run on Windows and Android.
If your customers can easily switch out your service for another, then it is not a “sticky business” as Buffett would say.
Apple users are “very, very, very locked in, at least psychologically and mentally” to the product and the ecosystem. – Warren Buffett
Is it easy to get Repeat Business?
Getting repeat business is an essential part of having a sustainable business model.
Are your clients going to stick around, buy your product again, or feel obligated to use your service again?
Even the most simple businesses rely on repeat custom. For instance, a nail bar relies on the fact that every few weeks, people want to refresh their looks and will come back to a nail bar that delivers a great service.
Gillette‘s shaving business relies on the fact that blades wear out after a period of time. They make most of their money on the blades over a long period.
Subscription models are the most prized model for any business. They ensure that a business can maintain cash flow and that there is a connection point between the customer and the business.
Do you have a Clear Strategy to advertise and Market your Product?
Having a clear strategy for advertising and marketing your product is essential for its success.
It’s not just about getting the word out; it’s about reaching the right audience with the right message at the right time.
A well-defined strategy outlines your target market, identifies the most effective channels to reach them, and crafts compelling messages that resonate with their needs and desires.
It ensures that every marketing dollar is invested wisely and maximizes the impact of your efforts. In today’s competitive landscape, a clear marketing strategy is the difference between standing out and getting lost in the noise.
Conclusion
As you embark on your entrepreneurial journey, it’s crucial to consider the key factors outlined above.
Entrepreneurship offers avenues for independence, legacy-building, and asset creation, but a thorough assessment of your business’s viability is essential.
From evaluating market demand and differentiation to analysing barriers to entry and capital requirements, each aspect plays a pivotal role in determining your venture’s potential success.
Moreover, recognising the paramount importance of a well-crafted marketing strategy cannot be overstated.
In today’s fiercely competitive landscape, it serves as the guiding force directing your product or service to the appropriate audience, ensuring optimal impact.
