Lara Mulawka

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How to project whether or not your small business idea will succeed

Do you have an idea for a new product or service? Are you interested in starting a business in a familiar space such as a restaurant, pet-sitting service or gift basket company? Is your current business looking to diversify into another area, adding a new revenue stream?

Starting a new small business or expanding an existing one will be less scary and more predictable if you follow the basic principles of pre-launch research. Here are tried-and-true steps that will help you put together a basic business plan to determine whether or not your business idea is likely to succeed before you invest your money.

  1. Business, product or service overview

    This section describes your concept. The reader of your document should understand exactly how to use your product or service, what problem it solves, the need it fills or opportunity it presents.

  2. Marketplace analysis

    This is where you present the demand for your product or service, based on what is currently selling that’s similar. Describe your target customer, your competition, where people go to buy this product and what they are paying.

    Research and list any trends in your marketplace that might affect future demand, sales, costs and pricing. For example, if the population in a particular area is trending younger, there may be more of a demand for daycare. If the prices of homes are rapidly rising in an area, there might be a bigger demand for upscale restaurants.

  3. Marketing strategy

    Marketing is not advertising, public relations, social media and other promotions; those are forms of marketing communications. Think of marketing as Product, Price, Place and then Promotions. (The four Ps.)

    • Product – As you research your business idea, describe the product carefully: What features are you including and not and why? Is it a high-end item or a bargain product? Does it have a better warranty or come with free customer service?
    • Place – Look at where you should sell your product and why. Options include online, a brick-and-mortar store, direct mail, catalogs, trade shows or fairs, sales reps or direct selling via TV and radio. Analyze the cost of using each distribution channel and the profit margins you end up with when using each. For many new small-business owners, a catalog, TV ads or even a physical store might be too expensive. More affordable options might include using eBay or Esty. Local newspapers, radio stations and targeted mailings to specific zip codes (working with your local post office) might be affordable. Explore word-of-mouth and referral programs, including cross-promotions with other businesses. For example, if you’re starting a landscaping company, create a cross-promotion with a local tree-cutting service or house painter.
    • Price – Analyze what might happen if you sell at different prices. A low price increases sales but positions you as a bargain brand. A high price might generate fewer sales, but creates a higher perceived value, allowing you to make higher profit margins on lower sales. Your price also affects your “Place” decision. For example, a high-end shampoo would sell in hair salons, while a low-cost shampoo would sell in a Big Box store.The marketing strategy section should include the results of any product testing you do, such as getting feedback on free samples, holding focus groups or taking online surveys about your concept.
    • Marketing communications plan – In this section, you discuss the “Promotions” part of the Four Ps strategy. List the types of print, broadcast and digital advertising that will best reach your target audience. Discuss how you’ll use social media. This includes explaining how you’ll use tools like Facebook, Twitter, Instagram and YouTube, as well as managing your reputation on review sites such as Yelp or Angie’s List.
  4. Key stakeholders

    This section should explain who the key people are who will run the company. The section should also list any suppliers and contractors you will use and their expertise.

  5. Financials

    Divide this section into two. The first section lists the costs to launch the company. The second section lists your operating expenses once you begin running the company. Determine your overhead costs, which are expenses like rent, insurance and phones. Next, calculate your costs to make and sell one unit of your product. Project how many units you might sell per month, then divide your monthly overhead cost by the number of units you expect to sell. Add your overhead and production costs together to determine your break-even price. Add your desired profit per unit to determine your final selling price. This will help you determine whether or not your product will be competitive in the marketplace.

    Create a pre-launch budget document using a simple spreadsheet. Create an operating budget the same way. Project your sales and the time it will take you before you start making a profit. If possible, project first-year through third-year profits.

  6. Concept testing tip

    When testing your concept with potential customers, don’t simply share your idea and ask their opinion. Many people will want to be encouraging and tell you they love your idea. Ask them to give their opinion on two or three ideas or products without telling them which one is yours. Ask them what price they would be willing to pay, not if they would be willing to pay your projected price. Ask them where they would prefer to purchase your product, not if they would purchase it if you sold it one particular way.

  7. Summary

    Create a short summary of your plan that’s similar to your executive summary, but now include a bit more support, in terms of numbers and projections.

  8. Appendix

    Your appendix should include any supporting documents such as photos of your product, mock ads or industry research you want to include.

  9. Resources

    Take advantage of free business plan assistance by checking out the website of the U.S. Small Business Administration and SCORE. SCORE has local chapters with retired business executives who will review your business plan and offer suggestions, free of charge.

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