Many of you are thinking about or are in the process of starting a business. First, I have to say congratulations on doing something that most people don’t have the guts or the drive to do.
Second, I have to ask, have you done your homework?
I have seen many would-be entrepreneurs get burned for a simple reason. They were so in love with their idea, they were blind to its real market potential. I’ve been caught up in this trap myself. Several years ago, I was so sure my idea was a hit, I launched a business without doing any of the things I’m about to tell you – and fell flat on my face.
Before you invest a lot of money into a business idea – or if you need to reevaluate the future of your existing business – do these two things first. It will save you enormous amounts of time, money, and pain.
#1. See if there is a market.
It’s very unlikely that your business idea involves something that has never existed before. That means that people are already buying the product (or something that accomplishes the same goal) already. The first thing you need to do is to see for yourself what (and how much of it) people are buying.
Considering an online business? Search on relevant keywords for your product. Are many (or all) of the top listings for sites that are selling that product or service? Are there several PPC ads? If you can’t find anyone selling in the market already, beware. If there are many people competing, there is probably a business there.
Also, look at what people are buying. Many big e-commerce sites allow you to get some idea of the popularity of the products they sell. Go to Amazon, PayPal, eBay, affiliate networks like ClickBank, and other similar sites to see how well the products in your market are doing.  Lots of sales are good, low sales or no similar products are a warning sign that the market might be too small to make any money.
In the bricks and mortar world, visit competing stores and observe how much traffic they get and how much customers are buying to get a feel for the market.
#2. Figure out if you can make money.
Once you’ve confirmed there is a market for your product, you need to figure out if you can make a profit. You’ll need three numbers to do this.
- Your fixed costs. These are expenses you have every month regardless of whether or not you sell anything, such as rent, payroll, advertising costs, etc.
- The cost to deliver the product. This is your cost to buy a product if you are reselling it, or your cost to buy the materials and produce the final product if you are making something. If it’s a service, this is your cost to deliver it to a customer.
- The price you can charge.
You’ll want to do some research when estimating these costs, but quick estimates are fine early in the process. As you move forward, you will need to get more precise.
Now, calculate your breakeven volume. This is the number of units you need to sell in a given period to cover your costs.
Calculate your gross margin by subtracting your cost to deliver the product from the price you can charge. Then, divide your fixed costs by your gross margin.
The answer is the number of sales you have to make to break even.
For example, if I had $100 per month in fixed costs and sold a product for $10 that cost me $5 to buy, I would have to sell 20 units every month just to break even.
Is it realistic to think you could sell that many units?
Now, write down the amount of money you would like to make in profit. Add your desired profit to your fixed costs and divide the result by your gross margin. This is the number of sales you will have to make to earn your desired profit.
Is this realistic?
If the answer is “no,” – STOP. Either find a way to charge more or spend less or find a different business idea.
If the answer is “yes,” you have an idea that has a fighting chance.
