Somewhere between scribbling your idea on a serviette and actually starting a business, there is a process that an entrepreneur needs to carry out to try and determine whether the business is viable and how it should be set up.
Often, would-be entrepreneurs get so excited and energised by their initial epiphany that they forge ahead without taking time to find out whether the idea can actually work. Of course, sometimes the idea works anyway, in spite of lack of market research.
However, more often that not, those who proceed without researching their idea tend to be halted in their tracks by telling market forces. Market research is a key tool to manage the risk associated with launching a new business venture.
The market will always give the final evaluation of the quality and execution of a new business idea. There are, however, specific things that an entrepreneur can do to assess whether the market is likely to embrace or reject the idea.
Entrepreneurs should use market research to gain insight on issues like the market size, market growth and customers’ needs for a product or service, and to answer the fundamental questions on the viability of their proposed business model. The reality is that an entrepreneur is invariably limited by time and money constraints and can therefore not afford to engage a consulting firm to do a full analysis of the market.
Many entrepreneurs stress the importance of doing market research yourself, but they also suggest that it is critical to focus your research process to ensure you get maximum return on effort. The question therefore arises: How should an entrepreneur engage in a research process to maximise their return on time and effort?
The starting point for engaging in a process to research a new business idea is to work out what it is you need to find out, so establish your research objectives. Many entrepreneurs are guilty of diving into a research effort without establishing what it is they need to know; as a result, they feel overwhelmed, frustrated and directionless.
Stipulating what you need to know gives you an excellent launch pad for gathering data and insights. So what should an entrepreneur aim to find out when researching a new business idea? Meaningful market research should focus on the four Cs listed below. They will help you organise your thoughts and focus on what’s important:
It is important to ascertain the size of the market – that is, approximately how many potential customers there are and how fast the customer base is growing. It is also advantageous to try and ascertain what causes customers to buy – in other words, find out what the key influencers are on the buying decision.
It is useful to research who the potential competitors are, what their offering consists of, where they are situated and what their strengths and weaknesses are.
Entrepreneurs invariably rely heavily on other people and organisations to make their business model work. They need to form alliances with suppliers, funders, distributors and professional advisors. It is important to carefully research these relationships so as to make wise choices for the future.
4. Company model.
Researching the company model involves doing the necessary calculations to understand where revenue will come from, what costs will be incurred in generating revenue, what investment is required to keep the company cash positive, and identifying what the critical factors for success will be.
Sources of Relevant Research Information
- Refer to trade journals, market reports and industry associations;
- Interview experts in the industry;
- Interview, observe or survey potential customers.
- Become a customer of the competition;
- Visit competitor websites and stores and read their promotional material;
- Interview your competitor’s customers.
- Visit suppliers, talk to them and talk to their customers;
- Discuss funding options with other entrepreneurs;
- Make an appointment with the bank manager;
- Obtain and read the National Venture Capital Association’s handbook to identify all venture capitalists who offer funding for your type of business;
- Search the Web for entrepreneurial financing options;
- Attend networking events to find local business partners.
- Consider different revenue models, including subscriptions, unit- or time-based models, advertising models, licensing, franchising, or transaction fees;
- Evaluate the costs and the cost drivers. Distinguish between fixed, variable and semi-variable costs;
- Do cash flow projections to calculate the necessary capital funding;
- Speak to industry experts and other entrepreneurs to identify the critical success factors.