Have you ever heard of the term “good idea, poor execution?” It can be a common phrase, especially in the more artistic career fields such as writing or cinema. But, the phrase can be said in many other career fields: architecture, cooking, and business. Millions of business ideas exist and thousands of start-up companies form every week across the world. Many ideas are interesting, helpful, and even a way to change society, but sometimes these ideas require a lot of money, while other ideas are similar, but require much less funding. This is where you need to evaluate a startup idea before jumping in.
Regardless, all of these business ideas have different requirements and factors that play into them. That is why entrepreneurs have to evaluate their ideas that have those characteristics and requirements. Ultimately, you need to make sure that your idea is not going to fail you since it could cost you a lot of money and problems if you don’t know what you are doing.
For example, businesses with a lot of potential for growth, yet are heavily dependent on cash. Their solution would be to invest to accelerate growth, even if the numbers aren’t aligned to what they are supposed to be. That is, regarding short-term gains and sustainability all by themselves. It is then thought that the growth will compensate for whatever losses there were and promise new capital markets. An example of this would be Amazon. It took them well over a decade to make profits.
The Value of Value
You can’t just predict the value of the business. All entrepreneurs should have to make out all the correct calculations and logistics to identify if the characteristics of the business are going to be profitable at a predetermined date in the future.
To understand the value of the business, one can use unit economics. This refers to the costs of making the product and the revenue you get from customers. This helps understand the business’s success and what kind of money will be made coming through your doors.
The key to the profits is to calculate the orders made, especially for heavily demanded startups. When a lot of little orders make specific target goals for their volume, the company is more than likely to break even. But, the volume won’t matter if the startup idea is losing money with every purchase. Another reason to evaluate a new startup idea before getting started.
Statistics and Numbers
Business owners can also measure other metrics of their merchandise. These statistics include knowing what the cost is for customer retention and the value of how long a customer will be staying to do business at your business. To measure these, several numbers factor in. A business owner would need to know the average revenue the business makes per customer, the churn rate, marketing campaigns, and how many new customers are coming in any period.
But, what if you are doing this before having the business? Instead, you need to ask yourself some key questions and find those answers by using the research and data from other companies. These questions include:
- What are the fixed costs?
- What are the variable costs?
- Is the business profitable?
- How much does it cost for a business to gain a customer?
- What is the lifetime value of the average customer at the business?
- Any revenue-specific questions
These kinds of questions are to help entrepreneurs understand what practices are best for when they have a profitable startup business.
One downside to using the data of the competitors is that it is often only an estimation. So, depending on values and numbers, they can be higher or lower than what you were expecting.
A smart plan would be to research markets that are more niche or underappreciated. This can save you a lot of money trying to convince the public to go to your business over the competition. But, because of the existence of these more niche markets, you will need more research into what the demographics are as that can make you spend more money to find ways to retain customers.
In the end, the plan is to provide a good estimate of how practical the business is and if it has the stuff to survive for decades. This of course all depends on the resources and the finances at your disposal. This is why you evaluate a new startup idea before jumping straight in. Soon enough, you will get a clear picture of what you need to do. That may require a completely different execution plan than what you envisioned.
It’s probably best to know this kind of information sooner rather than later. It will save you a lot of money and headaches.