2018-07-13 08:41:18 Starting Up English You know that you should validate your business idea before diving in headfirst. But, how? Here are five different methods to use to... https://quickbooks.intuit.com/r/us_qrc/uploads/2018/07/5-ways-to-Validate-a-Business-Idea_featured.jpg https://quickbooks.intuit.com/r/starting-up/5-ways-to-validate-a-business-idea/ 5 Ways You Can Validate Your Small Business Idea

5 Ways to Validate a Business Idea

9 min read

Is this actually going to work?

Is there a market for your new business idea? Will people buy what you’re selling? Is starting your own business even a viable option?

You have a multitude of questions when you’re starting a new business—but, those are the ones that keep you up at night.

Considering the risk, you’re often left with more questions than answers. However, working to validate your business idea before investing serious time or capital can give you a clearer understanding of the risk, and provide you with some reassurance.

Validation Matters

One recent study by CBInsights shows that 42% of new startups fail because there’s no market demand for what they’re offering.

Your target potential customers should be your source of business validation. They’re the ones who hand over the money, so they should be the ones to see the value in what you’re offering.

At this point, you should be intimately familiar with your target market. You should know things like:

  • Basic demographics (age, gender, location, etc.)
  • Income level
  • Education level
  • Personal values
  • Problem your customer is facing (and how your business solves that problem)
  • Major goals of that customer

If you haven’t already laid that groundwork, spend the time to do the research before moving forward to validate a business idea.

Once you’re comfortable with those topics you are ready to move to the next step. Look at the methods you can use to determine if there’s a market for your new business—without investing too much time or money.

Method #1: Dig Into Existing Market Research

The numbers matter. A few topics you will need to know are:

  • Size of your target market in your area
  • Outlook for your industry
  • Performance of your competitor

Start by pouring over any information and market research reports that you can find within your industry.

  1. Has your field been increasing in popularity—or has it been on a steady decline?
  2. What do economic experts project for the future of your industry?
  3. Have larger corporations been acquiring smaller businesses?

That could be an indication that you’re entering an industry with real potential.

Doing a search for news articles and other industry-relevant publications and associations can turn up valuable information that answers those questions.

You can also turn to USA.gov to gather data to help you analyze economic indicators and evaluate trends. USA.gov also links out to industry websites and trade organizations to help you get a more detailed breakdown and relevant market research for your business.

Protip: Statista.com also offers a vast collection of industry specific reports and projections to expedite the high-level research process.

Finally, you can learn a lot about the demand for your business idea by observing the competitors in your area.

If business has been booming, that’s a sign that your business is meeting a real customer need. However, if similar businesses have been closing up shop, that could be evidence that there’s not an existing market or demand for what you’re offering.

Method #2: Create a Survey

Surveys are a convenient and effective way to get valuable insights from your target customers.

If you already have a way to get in touch with your prospects (like an email list, industry forum, or even social media), you can create a simple survey using tools like SurveyMonkey or Google Forms.

Creating the survey is a start, but the magic lies in asking the right questions. Let’s say that you’re planning to open a neighborhood craft brewery. In your survey, you should inquire about things like:

  • Behavior: What do they like about craft breweries? How many times per week or month do they visit a craft brewery?
  • Competitors: Are they regular visitors of other craft breweries in the area? What do they like about those? What don’t they like?
  • Pricing: What’s the maximum they’re willing to pay for a pint of craft beer? What does it take to make a visit to a craft brewery worth the price?

That’s by no means a comprehensive list, but it should get the wheels turning on questions you could be asking your own prospective customers.

It’s also important to pay attention to the localization of your survey to ensure you get the most accurate and useful insight.

For example, are craft breweries already a thriving interest in your town? Of course, that means you’re going to get far more positive responses than if you’re starting the first craft brewery in a town where people have little to no experience with craft beer.

Rather than blanketing the world in your survey, narrow down to the types of people you’d most like to see in your establishment (your target market) and then survey only them. That will give you a more accurate read on the market demand than if you were to survey a huge assortment of people with a wide variety of interests.

Remember, the goal here is to find your target customer and confirm that specific person thinks your business idea is worthy.

With that in mind, your survey doesn’t need to be overly formal—it can be as simple as getting out there and talking to people face-to-face. That allows for a more personal connection than an online survey and can turn up even more valuable insight. Make sure to keep track of what you learn during those conversations.

One more important note: People usually aren’t inclined to take their time to fill out surveys for the sake of helping you out. If there’s an incentive you can offer—like a coupon or discount code for when you open or even a free pen—you should do so.

If you don’t have an existing pool of target customers, a company like Survata will help you define your target market and send customized surveys to them. Unlike the free tools, it comes with a price tag ranging from $1 to $2.50 per respondent. However, it takes the guesswork out of the process.

Method #3: Capture Emails to Gauge Interest

You want to get a read on the level of interest out there, but you don’t want to commit the time or the capital into developing a product for a beta or soft launch.

That’s smart. Your goal is to validate a business idea—not lay all the groundwork of your business and cross your fingers that people are interested.

A better use of your resources it to launch a “coming soon” page for your business.

On that page, provide an overview of what you plan to offer and include an email capture form where interested people can enter their information and receive updates when you’re preparing for the launch of your business.

Doing this accomplishes a couple of things for you:

  • You can gauge market reaction. When people are interested in learning more about your business, that’s validation that you’re onto something worthwhile.
  • You can build an email list. That’s a captive audience for those surveys we just discussed.

Creating this “coming soon” page will require a small investment in time and money. However, it’s significantly cheaper than purchasing product and hoping that people buy it during a soft launch of beta test.

Method #4: Host a Focus Group

Surveys are quick and convenient, but they also yield surface-level responses. A focus group allows you to dig into the psychology of buyers.

In a traditional focus group, a select number of your target customers gather in a room to learn about your product or service and respond with their opinions.

If you have the budget, you can search for market research companies in your area that will coordinate the focus group for you.

But, you don’t need endless dollars to make a focus group work for you. You can go the simple route and rent a room in a local library, co-working space, or other event venue and have someone on your team lead that face-to-face discussion and gather those insights.

This is another scenario where people won’t offer up their time for free. Provide some form of incentive or compensation—whether it’s cash, a gift card, or a catered lunch—to make it worth their while.

Method #5: Solicit Honest Feedback

Feedback isn’t always easy to hear, but it’s crucial in the early stages of your business. People might not be forthcoming with the criticisms you actually need—it’s up to you to actively solicit those.

Let’s go back to the craft brewery example from earlier. You’ve already been making some brews in your basement as a hobby, and you’ve found a local craft beer club who loves to sample new beers.

Offer to bring some of your product into one of their meetings. In exchange for the free samples, all you ask is that they provide honest feedback.

After they’ve tried your beer, ask tough questions like:

  • Do you like this?
  • Would you pay for this?
  • What would make this better?
  • Is there anything I’m not doing that I should be?

You’ll get helpful feedback from people who actually have an interest in what you’re selling—and it’ll cost you no more than a few free samples.

Even if you don’t currently have a product or service for people to test, it’s still possible to have these frank discussions about your business idea.

Let’s say that you’re starting a cleaning service and you’re targeting busy professionals who care about maintaining a tidy home but don’t have the time to do it themselves. You can find these people through a local professional association or networking event and share:

  • What you’re planning to offer as part of your cleaning service
  • What an average cleaning would cost
  • What sets you apart from other cleaning services

Follow that up by asking those same four questions we outlined above to get some candid feedback—without having to invest the time to develop a product or offer a free cleaning.

Remember, as brutal as receiving constructive criticism can be, people struggle just as much with offering it.

Make it clear that the purpose of this conversation is growth and that you won’t be offended. Setting that precedent means that person will be more comfortable being honest.

Validate Your Business Idea and Make an Informed Leap

We’d all love to live in a world where every one of your seemingly smart business ideas is guaranteed to succeed, but that’s not reality. In the real world, you need to validate your business idea to avoid setting yourself up for failure.

The key with validation is to have a complete idea to present to real people and then gather their feedback and measure their interest.

This is an experimental phase where you should be constantly learning and refining your concept and determining if there’s a real market for your business.

It’s not a step where you should over invest time and money into development of your product—or you run the risk of starting your business at a loss.

Fortunately, it’s possible to get validation for your idea, without a huge investment in resources. Put these methods to work, and you’ll ease those stomach flips and move into business ownership with a greater sense of confidence.

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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