Starting a business: problem, idea for the solution, validation
Every business is built on a real, existing problem and an idea — specifically your entrepreneurial idea that provides a solution to the problem that has arisen. The solution you provide is what you, as an entrepreneur, will ideally earn money from by implementing. The first thing you need to figure out is what you want to do. What product or service will you offer as a solution to a given problem?
Like everyone else, you sometimes get hungry — that’s a problem. As an entrepreneur you can offer several solutions: you can open a shop, a restaurant, provide lunch home delivery. You can run a food truck, or offer a service where you buy the ingredients, deliver them to the customer’s home, and cook the meal the hungry customer requested there.
Which solution will win out, and which you can actually implement, is determined by several circumstances. For example: which option has sufficient paying demand nearby? For which do you have the necessary expertise? For which do you have enough capital?
Some people start a business in the same field where they previously worked as employees, so they already have experience and expertise in that area. Others, as entrepreneurs, venture into a completely new field and take a new path. Some base a business on an existing hobby. It’s your decision which of these you choose.
Whether you base a business on your existing profession or on your hobby, it is essential that you really love what you do or what you intend to do. Don’t see it as a chore even if you’re still at your laptop at 9 p.m. because you have to write a proposal or prepare the newsletter for your next campaign.
It’s equally important that you are the first critic of your own idea. Just because you think your entrepreneurial idea is brilliant doesn’t mean others will. And a good idea alone is no guarantee that it can be implemented in a way that will eventually produce profit. As an entrepreneur you may have several ideas. It’s not certain that the first one will be the right one. That’s why you should examine them thoroughly, think them through, plan, and only then decide which one to start implementing.
So the foundation of everything is an idea around which you can build your business.
The problem, the idea, and their validation
The first step is always a problem to examine, then comes the solution you offer. Is there a critical mass of people for whom this problem is painful enough? If not, you will likely not find enough customers who will ultimately pay you for your solution.
So first you must identify the problem you assume exists, and then check whether it exists not only for you. Does it really exist, and does it really bother a sufficient number of potential future customers?
If you’ve had a cat, you know they love to climb and jump on everything, and there will certainly be people who are annoyed by this. That’s a problem that needs solving. A possible solution is a cat repellent that you spray on places you don’t want your cat to climb. At first you assume that it will mostly be cat owners who buy this product.
You ask them what they would think of such a solution. It quickly becomes clear that it doesn’t bother them at all: for them this is not a problem. Thus it turns out that your potential customers won’t be cat owners.
Someone who does not keep a cat, however, is likely to be bothered by stray cats visiting their garden or even climbing onto their terrace. Because of that, they are more likely to buy this repellent to keep the cats away. In other words, this is a real problem — just not among the people you initially thought.
Validating the problem is therefore the first step in the process. Your solution — the product or service — comes only afterwards. Partly because different solutions can exist for the same problem. Imagine you want to travel somewhere with your friends for the weekend: that’s a problem to be solved. You could go by bicycle, train, or car. These are all different possible solutions to the same problem.
Which of the solutions you offer will be the winner can vary greatly by target group. You’ll get the answer to this question after properly conducted market research. Market research is one of the most important steps in preliminary planning.
Market research
During market research you must first validate which of the solutions you propose the market will accept. How many it will accept comes after that. Once you’re past that, you can examine how many people you realistically expect to sell your proposed solution to.
A common but mistaken idea is that the market is huge and everyone will be a customer — you just need to find them and then sell. The reality is that unless you are as financially endowed as Coca-Cola, even if your idea is a perfect hit and the market huge, initially only a small portion will be accessible to you.
Assessing and determining this consists of three steps. Each has an English acronym: TAM-SAM-SOM. These abbreviations stand for:
TAM: Total Available Market. This is the theoretical, maximum market size — everyone who could possibly be a buyer for your solution.
SAM: Service Available Market. This is the part of the market you could actually serve in some way: the theoretically reachable market size. Staying with the Coca-Cola example: even if people would buy 5 million cans from you annually, if you can currently produce only 1 million in that period for any reason, then only 1 million is the market you can serve.
SOM: Service Obtainable Market. This is the market size realistically reachable and serviceable for you at the given moment. Even if there are 5 million potential buyers, if in the first phase you can reach and serve only 1 million of them, then initially only those customers exist for you — that’s what you can plan with.
The next step is creating the MVP. This gives you something you can actually gather feedback on. MVP stands for Minimum Viable Product: the first minimally functioning, demonstrable, testable prototype, whether it’s a tangible product or a service. The essence of the MVP is that prospective real users or customers can try it and, if necessary, you can still change it based on their feedback.
Therefore the MVP is one of the most important parts of your market research: it answers what you should sell. In other words, it answers which solution your market wants. The next very important question, once you know what you will sell, is how: how will your solution reach your customers? That is the business model, which we will cover a bit later.
After the MVP the next step is: From this product, to whom, at what price, in what quantities, how, and through which channels will you sell? Where and at what cost do you reach the people who will buy it? Once determined, how much will they buy from you and how often will they make repeat purchases?
These questions are unavoidable because without them you can’t do meaningful marketing or financial planning. You won’t be able to plan or calculate how much it will cost to acquire and serve a customer, how much they will pay, and therefore what revenue and profit — or loss — a sale will represent for you.
For your planned business to be profitable under a given business model, you will need a certain minimum revenue together with its profit margin. The quantity expected to be sold at the given prices must at least reach this level so that your business does not operate at a loss. If preliminary surveys and feedback indicate that expected sales will remain below the minimum required, stop and redesign the whole plan.
After validating the market, in the next market research phase you must clarify the following three very important questions:
• Who will be your customers; who will make up your target group(s)? Which of the solutions you want to sell will they choose?
• How much do you expect to sell to them and at what prices?
• Who are your main direct and indirect competitors?
A frequent mistake among startups is to think they can sell to everyone — that everyone is their market and everyone is their customer. The reality is they won’t be. Even large multinational companies (for example Apple, Coca-Cola, Nestlé, or Audi) do not want everyone as their customer. After research they precisely define who their customers will be. They create customer profiles, commonly referred to by the English term “buyer personas.”
A buyer persona might be described like this: aged 40–50, earning at least 30% more than the median wage, living mainly in a city or suburban area, with several hobbies on which they spend €3,000–5,000 per year. The point of creating a buyer persona is to know as much as possible about them and to have the most accurate information you can.
You may have several such personas, each with different attitudes, purchasing motivations, and demographic characteristics. It’s important to know them well because that makes your marketing much more effective, efficient, and — most importantly — more profitable. You will spend less on poorly performing or completely unprofitable advertising.
Expected sales numbers and prices are important because they let you plan revenue. If this remains below a certain level, it’s not worth starting the business. This is not a half-year or one-year rule — the time it takes a startup to take off varies by industry — but generally a business should be standing on its own by the second, and at the latest the third, full business year.
The market is not static: both demand and supply continuously change. Therefore when planning, don’t only look at the present but also at the past and the future.
It’s natural as an entrepreneur to always look at the upper bound, the starry sky, but you should also occasionally watch where you step. When estimating how big your market will be, remember there will be people who would like to buy but cannot afford to pay you. They will not be your customers. A customer — and thus the actual market — is only someone who can and is willing to pay you.
Therefore examine carefully:
• how long the market for the given product/service has existed;
• how customer needs and habits have changed;
• what the current trends are;
• what future, expected trends may be;
• whether the market is currently on an upswing or in decline;
• which factors have influenced or are influencing these developments.
Whatever field you enter, it is almost certain others will already be competing in it: you will not be the only participant in the market. There will certainly be competitors who, in part or in whole, target the same customers as you. Since the target is similar, the tools will likely be similar too: assume they have products or services like yours and try to reach their customers in roughly the same ways.
Do some competitor research and analysis as well!
Look at who your competitors are, review their product portfolios and pricing, see what marketing activities they run, and glance at the financial results available in their public reports. From this information you can infer, among other things, the consumption habits and price sensitivity of your prospective customers.
We already mentioned direct and indirect competitors. If you run a cinema, other cinemas are your direct competitors — they aim to serve the same audience who want the cinema experience and don’t want to watch films at home.
People who want to watch a film can, however, do so elsewhere. While the VHS era is past, there were video rental shops then, and now there are services like Netflix or HBO Go. As indirect competitors, you also compete with them.
Broader still, you compete with many other providers offering leisure activities — a go-kart track, an adventure park, or a zoo, for example.
When analyzing competitors, examine the following:
• what size companies they are and what the mix of large and small is;
• what their communications look like — which channels they use and what types of messages they advertise with;
• how flexible they are;
• how they price and where that positions them;
• how often they run promotions;
• what competitive advantages and disadvantages you see compared to them.
There are two main methods of market research: qualitative and quantitative.
Qualitative research aims to learn about the individual characteristics, habits, purchasing preferences, and motivations of your potential customers. For example, if you have a restaurant, a prospective guest may care more about the quality and origin of ingredients and the level and personal touch of service than about the dinner price or the restaurant’s location if they want to dine at a good restaurant.
Quantitative research aims to provide precise numbers and data: for example, your prospective customer’s average net monthly income might be HUF 450,000–500,000, they may travel abroad on average five times a year, and spend HUF 150,000–200,000 per trip on average.
Together, these two methods give you information that, properly interpreted, enables you to build a profitable business.
There are many methods and even more — sometimes free — tools available for market research. For example: personal or telephone interviews, surveys, product samples you ask opinions about, a Facebook or Instagram page where you present your service and monitor feedback, questions and opinions.
In product development and market research it is not important what you personally would buy the product for or at what price. Many people get this wrong.
Don’t make that mistake. Don’t start from yourself and what you would like. Don’t let the opinions of family, friends, or acquaintances be decisive. In a business only the opinion that matters is the one of the person who pays you — the person you will make your living from. That person is the customer.
Always try to think from your potential customers’ point of view and approach things from there.
Market research has two serious difficulties. The first is knowing how to ask questions well: your market research won’t be good if it gives you the answers you want to hear. That can cost you a lot later. So don’t lead respondents with questions that push the answers you prefer into their mouths. The other difficulty is correctly interpreting the data you receive. If you draw the wrong conclusions from it, you will mislead yourself and often head in the wrong direction.
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