Evaluation of a business idea: ways to test performance
This material was inspired by a corresponding lecture at a business school. Here I will voice the basic principles and approaches that the teacher shared and give my own comments and conclusions.
Criteria for analyzing an idea
- The level of motivation, personal involvement of the author in his future project.
- Compliance with own competencies and professional knowledge.
- Taking into account current trends and trends.
- Your market: target audience, competitors, volume.
- Initial investment size.
- Opportunities for scaling the enterprise, bringing it to new markets.
Personal enthusiasm, interest in the project
Secondly, there is quite a commercial effect from one's own motivation. Simply because investors are much more willing to give money to a keen person to implement an idea. Of course, “burning” is not enough, but it’s a good “bonus”.
How do you know if your enthusiasm is enough?
This is a very delicate matter. The main thing is to try to honestly ask yourself what you plan to get from the implementation. If in dreams only money is a bad sign. But if you savor in advance:
- pride in what we do;
- a new stage of personal development (“I haven't done this before!”;
- benefit that you will bring to the future clients,
I will also add that a thought “charged” with motivation drives out all others from the head, prevents thinking about other ways of creating a business. On this basis, it is quite simple to define it.
By the way, this also means:
- Ideas need to be generated at a specially allotted time, being in the flow, without getting hung up on them and not trying to develop them. It seems to be trivial - first to come up with many, many, then evaluate and discard most of it. But in practice, very often it is impossible to get rid of the analysis and criticism of the thoughts that are being born. This means that as soon as a concept that you think is worthwhile, it becomes very difficult to come up with the rest.
- You need to be especially careful and impartial to sort out the bones of the future project according to other criteria. After all, the "beloved child", kindling with enthusiasm, makes you close your eyes to real shortcomings.
If you have ever taken part in a brainstorming session, you may have faced such a problem as the difficulty of choosing a certain idea. Sometimes you get a lot of options, but you only need to select a few successful ones. But by what criteria should ideas be judged? How not to miss a diamond among the mass of ore? Today we will talk about techniques to avoid a situation in which effective innovations are lost among dozens of unusable ideas.
Who should evaluate ideas?
At first glance, the question seems unimportant, but it's not that simple. The group that just brainstormed may be overly biased. In addition, the lack of rest after intense intellectual work can negatively affect the quality of analytical work.
So usually a different group is used for this. However, another approach seems to be effective - when the participants in the brainstorming session return to the assessment after a week. During this time, they will not only rest and be able to look at the problem with a fresh look. During this period, the subconscious mind will live with its ideas, processing them imperceptibly for us. This can serve as a source of new insights.
You can't just say that this or that idea is good. This is too vague a description. In one case, innovation is easy to implement, but expensive. In another, simple implementation may be hampered by technical difficulties. It is necessary to define some criteria that make it possible to clearly establish the suitability of the idea.
Depending on the specific business, the criteria may differ, but we offer a generalized version:
- Usefulness for clients;
- Technical feasibility;
- Possible profit from sales.
You can also add your own criteria, but do not overdo it so as not to delay the process too long.
Is a private modification of the criteria method used by Synectics.
By what criteria and in what sequence to assess the prospects of the project before its launch. Olga Ivanenko, the founder of the accounting company BusinessStart, reports.
- Even a really good project today does not always give good results. Many factors affect the operation of an enterprise. The market environment is changing rapidly. Obviously, a new idea, especially in the current conditions, needs to be carefully, comprehensively evaluated before you begin to implement it.
Assessment largely depends on the area of business, but in any case, it should be conducted in these areas:
- Managerial / HR
A few tips on what to look for when conducting an assessment.
Focus on the most pessimistic scenario
I would recommend starting with a financial assessment. After all, if the project turns out to be unprofitable from this point of view, it makes no sense to evaluate all other areas.
It is important to make a forecast as pessimistic as possible. You should only start implementing an idea if it pays off even in the worst case scenario.
Include all costs. Including calculate how and how much taxes will need to be paid during the implementation of the project. Belarusian tax legislation is quite complex. The amount of payments, even in projects similar at first glance, can be different.
Embed all possible external risks. With an unstable exchange rate, it is almost impossible to calculate financial risks. Especially if the company deals with imports or imported components. Therefore, you need to lay it to the maximum.
An idea is worthless without implementation. But how to understand how promising this idea is? Is it possible to invest resources in its development and implementation, or is it better to look further?
We've put together ten easy ways to test your idea.
Look at the competitors
If you are not creating a new market from scratch, your idea already has competitors. To understand its viability, one can look at existing solutions.
There are several ways to analyze your competitors:
- See how long their site has been running. This will show the Domain Age Checker.
- Examine what traffic is going to their sites and from where. Use SEMRush and Similar Web or Alexa - this site will also show you the ranking of competitors on the network.
- Take a look at competitors' social networks.
- Examine competitors' brand mentions on the web: discussions on forums, reviews in social networks. Services like YouScan or Brand Analytics will help you with this.
The challenge is to understand the niche the product is in. It is good to have large and developed competitors (which means that the market is well-bred and it is large), as well as weak competitors in a potentially large market.
Look at the trends
A simple Google Trends tool shows the development of interest in a given keyword. You type in a word (like auto parts) and Google Trends shows you the dynamics of search activity, related keywords, and a lot of other useful information.
How has the number of requests for auto parts in the Russian segment of Google changed over 5 years
Obviously, it's not worth releasing a product in a stagnant market. For example, over the past five years, requests for the word "flash drive" began to fall - most likely, people no longer need flash drives.
The demand for flash drives decreases every year
In this article, I want to show you in practice a simple and very effective way to calculate the possible profit and loss of an idea. This must be done before the detailed business plan stage. Yes, yes, a plan is also desirable, since in the process of drawing up it you will ask yourself a lot of the right questions and you will find many answers. A business plan helps to analyze all the pros and cons, strengths and weaknesses of a business idea. And yes, then you throw it out, since it, overwhelmingly, has nothing to do with reality. Any idea needs to be wrapped in a business model. As Gref likes to say, in the modern world there is no competition between goods, there is competition between business models (in Gref's - control systems). And I agree with that. So, let's start with a universal practical guide to determining the viability of a business idea.
Stage Traffic / Attendance
Any business is people. With the help of you, they solve their problems or problems, satisfy their own or other people's needs, and receive benefits. The more people know about you, the naturally better. That is why stores try to open closer to bus stops, where there is more human traffic, advertise in the media, where there are most readers, and hang billboards on highways where there are most cars. Have you seen in shopping centers students periodically sit with notebooks and write something? They often count traffic per unit of time. No people - no money. People walking by your store - traffic, coming to your store - leads, from the English word Lead - interest. The ratio of those who came to the store from the total number of passing ones - the conversion of traffic to leads. For example, let's assume that out of 1000 people, no more than 100 will enter our store. The conversion at this stage is 10%. (100 logged in / 1000 traffic * 100%)
stage Demand / number of sales
This metric shows how accurately your proposal is able to meet the needs of people. How well your salespeople or yourself will do. How many out of 100 people who enter the store will use your offer? Five? Seven? One and a half? This metric is called the conversion of leads to deals / sales. If we assume that five people out of 100 will use our offer, then the conversion at this stage is 5%.
stage Average bill
Your proposal's average bill is an important component in your business model. Entrepreneurs are always trying to increase the average check. In our example, the average check will be 6,000 rubles.
Stage Markup / Delta
It's important to understand the difference between ROI and margin. The markup only shows the added value you have added to your offer. This is what you want from the client. But with this money you need to cover current expenses. What remains after covering the costs is profitability. For our store, the margin will be 50%.
Now we know the basic parameters of our model and can calculate whether a shopping center with a rent of 150,000 rubles for our store is suitable for us. Will it be profitable and please us?
We go to the commercial service of the shopping center and find out the average daily traffic in the shopping center. For example, this is 1000 people. Our estimated conversion to leads is 10%, remember? Therefore, we have 100 potential clients. 5% of them will buy our product, as we assume. This is the conversion of leads into deals. 5 purchases with an average check of 6,000 rubles will give us a revenue of 30 thousand rubles. We remember that our markup is 50%. This means that after we deduct our obligations to pay the supplier for the goods 30,000 / 1.5 = 20,000 rubles, then we will have 10,000 rubles of the trade margin. Multiplying this amount by the number of days that we will trade, we will get a gross profit. Suppose there are 30 such days, which means our gross profit on sales is 300 thousand rubles. Depending on the taxation system, our net income can be drastically reduced.