Seven ways to know if your business idea has legs

How do you know if your business idea is any good? As an entrepreneur, or an aspiring one, you’ll probably have several ideas floating around but it takes some planning to know which one has the potential to thrive in the competitive market.

While there's no foolproof formula for predicting success, and a lot of it is about trial and error (and luck!), there are certain indicators that can help you gauge the viability of your business idea.

Here are seven ways to validate your business idea and determine if you're onto a potential winner.

1. Problem solving

Before looking to create any product or service, ask yourself, what problem does it solve? Who will buy this product or use this service? If your business idea is so brilliant, why doesn’t it already exist?

It’s not always the case that you have to bring a new product to market and change the status quo. Your unique selling point (USP) could be that you are simply going to do it better than your competitors, or at a better price point.

2. Competition

When looking at starting out a new business, one of the biggest barriers to success is competitors in the same sector. It’s important to be aware of who they are, what they do, and how they could impact your own business venture.

Competition shouldn’t always be seen as negative though. Lots of businesses operating in the same sector creates greater competitiveness and drives companies forward to create better quality products and services.

Take the airline industry for example. While British Airways and EasyJet operate within the same sector, for the most part, their propositions, price points and target markets sets them apart. How would your business sit alongside others, and how would it remain competitive?

3. Cost of production

The cost of creating a product or the running costs for a service can be a sticking point for many business ventures. Doing your market research and reaching out to potential manufacturers or suppliers is an essential stage of understanding if you have a commercially viable business.

Once you have clarified the above, you’ll need to consider to potential stumbling blocks your business could face in uncertain times and how they could impact costs. For example, is your manufacturer or supplier based overseas? If so, how could supply chain issues, import costs, and fluctuations to the price of material used to create your product impact your bottom line?

And what about the logistics? Both the Red Sea and the Panama Canal are beset with problems meaning ships are having to navigate longer routs via the Cape of Good Hope and Cape Horn. This increases costs and delivery times.

4. Price point

The value of your house is how much the buyer is willing the pay for it, not how much you think it’s worth. The same principle applies to any product or service. The second step to understanding if you potentially have a commercially viable product is establishing your price point. You’ll need to find out how much a typical consumer in your target market is willing to pay for your product. This could be achieved through interviews, questionnaires, and surveys.

Once you have a grasp of the cost of product and price point, you’ll be able to calculate your margins. The difference between the selling price of your products or services and the costs of production.

Read more: How do entrepreneurs fund their business?

5. Scalability/ market opportunity

Even the most brilliant business idea will fail if there's insufficient demand or a limited market opportunity. Assess the size and future potential of your target market. Is there a sizable and growing demand for your product or service? Are there trends or shifts in consumer behaviour that could work for or, against you e.g. artificial intelligence?

Look for signs of market validation, such as growing interest in similar products or emerging trends that align with your idea. Additionally, consider the scalability of your business and its potential for expansion into new markets to diversify your business and income streams.

6. Sustainability and longevity

Any business needs to be sustainable and have longevity. Creating a business model based on a ‘fad’ might be popular with your target market today, but it’s likely to be short lived.

The Peloton Bike was an example of this. The virtual fitness platform and its products became immensely popular during the COVID-19 pandemic as consumers were forced to exercise at home as public gyms were temporarily closed. Peloton Interactive Inc’s share price rose above $150 during the height of the pandemic. At the time of writing, they’re now worth less than $5 per share.

7. Customer feedback/positive reinforcement

Positive feedback from your target market is a proven way to understand the potential of your business idea. This could include surveys, organising focus groups, seeking advice from mentors or industry experts, or creating a prototype to showcase to potential customers.

Pay attention to the feedback you receive and be open to making adjustments based on constructive criticism. Positive feedback, genuine interest, and early signs of traction can indicate that your idea has the potential to resonate with your target market.

Working with Charles Stanley

At Charles Stanley, we offer professional advice and work alongside multiple partners to help effectively manage your finances. We offer planning across the generations with both personal and business finances fully considered.

Our experts are at hand to provide a financial planning perspective to business owners and their advisers as they decide the best way to fund their business. We work with legal, tax, and accountancy teams to help owners structure and manage owner wealth outside their business and ensures that a wealth plan aligns with a holistic plan for life including philanthropy, new business causes, and personal life and retirement.

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