Episode #10: Is Your Business Idea Feasible? Here's How to Find OutMay 06, 2020
Figuring out if a business idea is feasible comes down to a very simple, age-old business formula:
Profit = Revenue - Expenses
It’s a very easy formula, but coming up with the right estimates to determine the feasibility of your idea can be a bit trickier. That’s why we’re walking you through each piece of this equation to help you figure out if you should move ahead to creating a business plan.
Before we get started, it’s important to note that this exercise is based entirely on assumptions rather than specific data points. It’s not good practice to base a business plan on assumptions, so this exercise is intended as a “gut check” to determine if your company will be viable enough to move into the planning stage.
Let’s get started!
Profit: How Much Money Do You Need to Earn?
We’re going to work backwards with our business equation and start by determining our profit goal. Your profit goal should be what you want to earn for income.
A good place to start with your profit goal is by matching the amount of money you currently earn. This doesn’t just mean your base salary—it needs to include costs for your benefits such as paid time off and health insurance. These costs can nearly double your base salary, so be sure to research costs for your state and family size carefully!
Your profit goal will change over time and as your business grows (like if you want to give yourself a raise!). But starting with your current income to be sure you can maintain your standard of living is a good placeholder for assessing the feasibility of your business idea.
In the episode, we’ll walk you through an example of setting a profit goal with actual numbers you can use to get a sense of how much you’ll need to earn.
Revenue: Product Pricing & Number of Customers
This brings us to revenue. Revenue also has a simple formula:
Revenue = Price of Product x Number of Customers
These numbers are dependent on one another, so you may need to adjust your product pricing depending on the number of customers you’d need to reach your profit goal, and how many total customers there are in your niche.
First, we’ll get a rough idea of what you should charge for your product or service. Then we’ll see how many customers are available to you and whether it's feasible to attract enough customers to reach your profit goal. We aren’t basing pricing solely on the number of customers, because your product needs to be reasonable for what you’re offering.
Setting Product Prices
Before you determine a product price, you need to know what kind of product you’re going to sell. You don’t have to know every single detail, but you do need to know whether you’ll be offering an online course, a monthly membership, or another product.
Start your pricing strategy by thinking through these questions:
- What will your service be worth to your customer? (For example, how much time will it save?)
- What much time, effort, and cost will go into producing your service?
- What are other people charging for this service?
As you think through these questions, you’ll likely come to a combination of these three pricing models you can use:
- Value-based pricing: Prices are determined by the monetary value that the product or service offers, such as the hourly rate for the time your customers will save.
- Cost-based pricing: Prices are based on the time and effort it takes you to develop your product and serve your customers.
- Competitor-based pricing: Prices are based on the relative offerings and pricing of your competitors.
In the episode, we talk through each of these questions and pricing models with an example to help you better understand how each one applies to a real business idea.
How Many Customers Do You Need?
Now that you have a rough idea of what you might charge for your product or service, you need to research and calculate a few numbers related to your niche:
- How many customers do you need to reach your profit goal? To find this number, plug your profit goal, product price, and expenses (you can use our sample expenses from episode #9) into the business equation from the beginning. Then solve for the number of customers.
- How many total customers are available to you? Do some research on your niche to find an estimated number of people in it. The U.S. Bureau of Labor Statistics is a good starting point if your niche is occupation-related, and other statistical sites and databases are good resources for other demographic data.
- What percentage of your niche needs to become customers to reach your profit goal? This is the number of customers you need divided by your total customers, multiplied by 100.
To help you make sense of these calculations, we use real numbers as examples in the podcast episode.
Bringing It All Together
The last piece of the feasibility exercise is looking at conversion rates. This will help you understand how many people your business needs to reach in order to attain your desired number of customers.
There are several layers of conversions that are all part of a sales funnel. Many people will start at the top, the widest part of the funnel. They will continue to move through the stages if your product or service interests them. The customers who make it through the entire funnel, exiting at the narrowest part, are your paying customers.
The sales funnel requires several different methods of attracting and pitching customers, and each stage will have a different conversion rate. Here’s an example of what a sales funnel may look like for an online business, as well as the industry-standard conversion rates for each stage:
- Attract people to your business and offer them a service via a sales page, asking them to sign up for a webinar about the service.
- 51% of people who view the page sign up for a webinar.
- 36% of people who sign up for the webinar actually attend.
- 2-3% of webinar attendees become paying customers.
These conversion rates are an average for most businesses, but these may vary depending on your industry or type of product.
Now you can take your needed number of customers from earlier and work backwards to determine the total number of customers you will need to reach, understanding that at each stage of the sales funnel, some people you attract will fail to move to the next stage.
To calculate how many people you will need to reach to attain your necessary number of customers, you need to use several formulas:
- Total sales needed = (monthly profit goal + monthly expenses)/product price
- Sales session Attendees needed = total sales needed / Conversion rate
- Sales session registrants needed = Sales session attendees needed / sales session attendance rate
- Sales/landing page visitors = sales session registrants needed / sales session registration rate
Now that you have the total number of visitors you need to attract in order to get your total sales needed, compare that number to your estimated niche size. What percentage of the overall population do you need to attract and convert as a customer? This may help you with your gut check. Lastly, run different scenarios – change your pricing, change the customer conversion rate. For more insight into feasibility based on these numbers or how to adjust your idea, check out the episode!
Use Our Handy Calculator to Help You Crunch the Numbers
To help you with the math, we’ve created a handy calculator tool to crunch the numbers for you. It will calculate the number of people you need to attract to your sales under in order to gain the number of customers needed to be profitable.
Upcoming Live Workshop
We know we’ve covered a lot of information in this week’s episode. To help you have a better understanding of these concepts, we’re offering a 2-hour live workshop on Saturday, May 23. We’ll take you step-by-step through this exercise so you can figure out if you’re ready to create a business plan!
You can find more details and sign up for this workshop at www.Bloomdocking.com/2020MayWorkshop.
Listen to Episode #10 Now!
We’ve walked you through a few steps to assess the feasibility of your business idea. We’ve helped you crunch some numbers and do a gut check on whether your idea is worth pursuing and building a business plan for.
To conduct a feasibility check, you need to know:
- Your profit goal
- Your product offerings and pricing
- Your competitor’s pricing
- The number of customers you need
- The total number of people you need to reach
- How big your niche is
Listen to the episode to hear real examples, actual numbers, and deeper insights into determining the feasibility of your business!
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