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The 3-Step Approach For Testing Out Your Business Idea

Here’s how to learn the most from your potential customers and get honest feedback.

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Let’s say you wake up one day and decide the world needs a better mop, and you’re just the person to make it. Before setting out, you interview prospective customers. “Are you looking for a better mop?” you ask someone. The person searches his memory for all the times he’s wrestled with a mop or hated the smell of it, and he ignores the fact that most days he doesn’t care about his mop and can’t even remember the last time he used it.

The hits, not the misses, fill his mind. “Yes,” he tells you. “I am looking for a better mop.” You’re thrilled to hear that and go off to design it. Eight months later, with $20,000 of R&D money invested, you come back and ask him to buy it. “Nah,” he says. “I’ve already got a mop.”

What happened there? First, something psychologists call “confirmation bias.” It’s the tendency to look for information that confirms your beliefs and ignore what doesn’t. And second, “positive test strategy,” when we consciously or unconsciously ask questions that generate answers supporting our beliefs.

These phenomena working in tandem make us feel more reassured, self-confident and driven, but they also create traps for entrepreneurs and prevent us from getting good, honest feedback from our customers.

Related: The 10 Best New-Age Business Ideas You Haven’t Heard About Yet

Fortunately, they can be overcome. Here’s a three-step approach.

1Replace assumptions with hypotheses

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Make a list of all the assumptions you have about your customers – their price points, pain points and preferences. Now reframe them all as hypotheses. For instance, if your assumption is that customers want more options to customize your product, your hypothesis is that if you offer more customization, revenues will increase.

If you think customers will buy more of your product at a lower price point, your hypothesis is that if you lower the price, customers will buy more product more frequently.

And if you think investing more in social media will improve customer loyalty, your hypothesis is that by spending a portion of every day responding to customer comments online, you will drive up your retention rate.

2Test the hypotheses

This might be through interviews, surveys or A/B testing.

For that customisation hypothesis, you could create an A/B test on your website: Some customers will see customisation as an option, and some won’t. Do the customised offerings sell better?

For the price hypothesis, set up exit interviews with 20 customers who didn’t buy your product. (Email programs can be set to ping people who go through a sales sequence without buying.)

Was price their chief reason for bailing? And finally, for your social media hypothesis, track each customer who was engaged on social media to see if they buy more frequently than the average customer.

Related: 10 Business Ideas Ready To Launch!

3Ask better questions

If you do surveys or interviews, be careful not to ask leading questions. If you ask a customer, “Was price a large part of your decision not to buy?” they are more likely to say yes. Price is always a factor, but it’s not always the factor.

To get at the factor, let your customer fill in the blank. Ask, “What was the biggest factor in your decision not to buy?” Then she might answer, “The delivery window was too long.” Now you know where to put your effort.

When you let your customers lead you to the truth, it will allow you to set aside your own flawed assumptions and answer their needs better. That way, they’re happier, and you’re not stuck with a warehouse full of unwanted mops.

This article was originally posted here on Entrepreneur.com.

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Business Plan Advice

Writing a Business Plan May Not Be Your Idea Of Fun, But It Forces You To Build These 4 Crucial Habits

These key habits will allow you to grow a stronger, more profitable business.

Dave Lavinsky

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The average entrepreneur reacts to the term “business plan” with distaste, seeing it as a necessary evil when starting a business or seeking funding.

While the process of documenting your plan might not be enjoyable, the results you can get from it can be, as numerous studies have shown a direct correlation between a written business plan and a company’s success. Equally as important, creating your business plan forces you to build many good habits.

Goal setting

Your business plan forces you to set goals. You need to forecast what your sales will be this quarter, this year and in five years.

Related: The 3-Step Approach For Testing Out Your Business Idea

Creating goals is the first step to achieving them. And when you create them in your business plan, you are forced to support them. Specifically, you must explain how you will achieve those goals. Who must you hire? What type of marketing promotions must you implement? While you may not ultimately follow all the strategies outlined in your plan, you will assess multiple options and determine the best path to follow.

Goal setting clearly yields superior results than entrepreneurs who “fly by the seat of their pants.” Getting in the habit of setting annual, quarterly and monthly goals will help your business grow.

Focus

The biggest fault of most entrepreneurs is that they lack focus. They start down one path, learn of a new idea and then pursue that new path. This is rarely a strategy for success. Rather, it typically results in multiple “partially built bridges.” Importantly, 100 partially built bridges are worth nothing, while one fully built bridge could be all your business needs to be successful.

Your business plan forces you to focus. It does this most specifically in the “Milestones” section. In this section of your plan, you should document what your milestones are by month for the next three months and by quarter for the following four quarters.

Once you have these milestones documented, you’ll gain the habit of judging all new ideas with regards to whether they’ll more effectively allow you to attain your milestones. If they will, then pursue them. If not, table them so they don’t distract you.

Figuring out your unique qualities

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I tell entrepreneurs to start their business plans with two succinct messages. The first is a clear definition of your business. That is, what it is that you do. This is important since if readers can’t clearly understand what kind of business you’re in, they’ll stop reading.

The next key message is to explain why you are uniquely qualified to succeed. The answer to this question varies. For instance, maybe your management team has incredible experience. Or you have patented intellectual property. Or you have unique relationships with customers or partners that your competitors don’t. Or market trends have shifted and now require an approach upon which only your company can execute.

Related: The Business Plan Is Dead

If your company is not uniquely qualified to succeed, then at the first sign of your success, you will have lots of competitors and nothing to keep customers from flocking to them.

That’s why in creating your business plan it’s not only critical to think about why you are already uniquely qualified to succeed, but what can you do in the future to cement that position. For instance, should you seek patent protection? Would hiring this person allow you to gain an unfair advantage? And so on.

This is an important habit to form. You should always be thinking about why your company is unique and how to make it more unique, particularly if competitors are gaining on you.

Getting others excited to join you

A great business plan doesn’t only document your goals, milestones, action plans and unique qualifications, but it gets the reader excited. The comparison I tend to use here is between an automobile’s brochure and owner’s manual.

While an owner’s manual tells you every key detail about a car’s features, it is boring and not something anyone reads for pleasure. Conversely, the car’s brochure has cool pictures and sells the car’s best features.

While your business plan needs detail, it should be more like the brochure then the owner’s manual. It should get readers excited. You get them excited not by giving them boring industry statistics, but giving them statistics that prove why your company will be successful. You get them excited by showing how your management team has unique qualifications. And how your past successes make you likely to achieve future success.

When your business plan gets others excited, you can use it to raise funding, and gain customers, partners, board members and virtually anything else you need.

This is yet another important habit to form. You should constantly be getting others excited about your business, as this can prompt your long-term growth.

So, next time you sit down to work on your business plan, realise that in doing so you’re building key habits that will allow you to grow a stronger, more profitable business.

Related: Apps To Help You Write A Business Plan


Download your free business plan template here

business-plan-template-300x350Free Business Plan Template Download

This article was originally posted here on Entrepreneur.com.

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The Business Plan Is Dead

We are living through the most disruptive period in our history.

Matt Brown

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We are living through the most disruptive period in our history. One only needs to consider companies like AirBNB, uBer, WhatsApp and Tesla to understand how quickly established companies can become disrupted by new entrants into the market.

The reality is that if your company is going to survive in today’s digitally enabled economy, your company needs to adapt to a plethora of new market pressures, increasing disruptive competition and a customer which is becoming increasingly harder to reach.

The New (Current) Reality

No business is immune. The reality is that the world is moving off a linear trajectory and onto an exponential one. Take the advertising industry for example, since the 1970’s it has been enjoying a steady linear growth but then, in the early 2000’s digitisation and connected networks suddenly exploded the number of distribution channels for traditional advertising networks.

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Related: Why You Should Scrap Writing That Business Plan And Become a Lean Start-Up

There are three key drivers of the evolution of media.

  1. Consumer pull: Consumers, and particularly Generation C, are already fully adapted to the digital environment
  2. Technology push: Digital technology continues to penetrate all aspects of our lives. We are after all living in the fourth industrial revolution. Tech has never been more affordable, but the capabilities of our technology (take cloud computing for example). Has exponentially increased.
  3. Economic benefits: The economic benefits to be captured through digitisation are real. The freelancing market in the UK contributed GBP 109 billion to the UK’s GDP last year, that is more than the entire automotive industry combined. The ability to scale at a fraction of the cost has seen a wave of capital being poured into new digitisation technologies, and the public markets reward early movers with unprecedented valuations.

The Business Plan Is Dead

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Business plans are often cited as the first thing an entrepreneur should write for a start-up, but no business plan has ever survived the realities of the market.

I recently interviewed Craig Mullett, the President of the Branison group about this exact fact. Craig has invested in hundreds of start-ups and went so far as saying: “If a start-up has more than one tab on the spreadsheet for its planned commercial model it’s way too much.”

The current business environment is changing so rapidly that even established businesses are suffering from ever increasing changing market and as a result these dynamics are putting proven business models under increasing pressure and duress.

This manifests in things like declining revenues, loss of market share and increasingly, exposure to new disruptive competitors that are not constrained by organisational inertia and arthritic corporate structures.

A startup is well positioned to take advantage of this for several reasons, but by the time a business plan has been written for a market that market in most cases has changed to such a degree that the assumptions and strategy defined in the business plan has already become irrelevant.

Related: 6 Questions Your Business Plan Must Answer

Why Start-ups Need a Business Case

The highly-regarded entrepreneur Brad Feld has this to say:

Today, it’s clear to me that business plans for start-up companies are a historical artifact that represented the best approach at the time to define a business for potential investors. In the past decade, we’ve shifted from a “tell me about it” approach (the business plan) to a “show me” approach (the Lean Startup). Rather than write long exhaustive documents, entrepreneurs can rapidly prototype their product and get immediate user and market feedback.

Agility and the adoption of lean product development methods has all but replaced the need for a 30-page business plan. From an investors perspective, the key requirement of a business case is to table a view on a potential market opportunity at a product level.

Ideally, a problem or opportunity that is sizable and lucrative and based on that problem/opportunity it needs to define and demonstrate how a single action and strategy will solve that problem.

The business case should also predict cash flow results and the non-financial impacts that follow from the action and the execution of the strategy. A business case, unlocks the ability of an entrepreneur to get to market quickly and to disrupt the speed and frequency at which value is created.

The StratLab For Start-ups

With the business plan being past its prime, Digital Kungfu has developed a unique methodology that incorporates the best of aspects of a business plans while speeding up the process for a startup to disrupt a traditional market.

Our process, forced entrepreneurs to think through critical assumptions and strategic drivers about their business and helps them to the key strategic elements necessary to achieve success.

The StratLab workshop helps entrepreneurs gain a basic understanding of what they are getting into before the rubber hits the road and empowers them with a new process of thinking and new way to articulate the value that a start-up will create in any market.

The business environment is constantly changing. The start-ups that will succeed are the ones who have a clear strategy that is designed to make them #1 in their market and which positions them for exponential growth in the future.

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Business Plan Advice

6 Questions Your Business Plan Must Answer

If your product’s unique aspects aren’t defensible against a competitor’s copy, it’s time to fold your tent and go home.

Doug and Polly White

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The other night we were talking with a group of young people when one person said that she wasn’t able to start a business because she couldn’t qualify for a loan. As you can imagine, several of us chimed in that we didn’t have funding either when we started our businesses.

Of course some businesses require funding, and we understand that. Capital-intensive industries, for instance, require a large up-front investment to get off the ground. However, if you have an entrepreneurial spirit, a modicum of talent and a lot of drive, you can start a business without funding.

To back this up, we conducted a quick search and found dozens of articles with low or no-cost business ideas. We particularly liked one from Small Business Trends that lists 25 businesses that you can start for less than $100.

That said, some business ventures fall somewhere in the middle. They need some funding. And, to be truthful, we ourselves needed to live on savings for several months until we built up a clientele in our consulting businesses that supported our lifestyle.

If you plan to rack-up credit card debt or tap your 401(k) to fund your own dreams, you should fully understand what you are getting into. And a robust business plan is an important element. There are many free templates available. Find one you like and use it.

Below are several questions your business plan must address. We caution you to be brutally honest. If your idea isn’t going to fly, it’s best to come to grips with this reality now rather than after you’ve invested your life savings in the venture.

Download: Free Business Plan Template Download

The questions you should answer are:

1What 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 – and that’s fine. Henry Ford famously 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? The first question we always ask clients is, “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.

2Is there a large enough segment of the market that will value this difference?

Identify the segment of the market that values whatever it is 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?

Related: Business Plan Format Guide

3Is the thing that differentiates your product defensible?

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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 copycats 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?

4How 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 make only $40 on each new customer.

Related: Apps To Help You Write A Business Plan

5How can you prove the viability of your idea quickly and inexpensively?

If you are afraid that you will need a big investment to launch your product, find a way to challenge that assumption. There may be ways to prove the viability of your concept without making the full investment. Ideas include outsourcing manufacturing or making version 1.0 by hand rather than buying expensive equipment.

Another? Launch in a limited geography. For instance, we have been working with a company that is developing an app for the property-management industry. We started by working with several local property management companies to prove the concept and work through some challenges. Now, we are rolling out to other geographies.

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.

As happened with the app company, prove that your concept will be successful before you invest in a full roll-out. You may even need to sell the initial units for less than they cost to make. We sold that app to the first users for a greatly reduced charge.

6What 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.

Related: 7 Steps To A Perfectly Written Business Plan

New products often take much longer and cost much more to launch than you would think. Unless you have a lot of experience launching new products, the estimates you consider accurate will almost certainly be 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 these six questions will help you make decisions that are more informed.

This article was originally posted here on Entrepreneur.com.

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