At this point, you have examined your personal motivation for business ownership and chosen an interesting possibility. Most likely, you are anxious to run to the bank, get a loan, and open your business. STOP! Before you pump your life savings into a small business, you want to know if it has a chance to succeed.
A common mistake made by many people is to blindly begin a business without evaluating whether it is feasible. A feasibility evaluation will allow you to make a more informed "go" or "no go" decision. A sampling of topics that should be honestly appraised includes:
- Is there really a demand for your product or service?
- Have you researched market demand or have you just assumed people need or want your product or service?
- Does your product or service satisfy an unfulfilled need? Is that need ongoing or is it a "fad" that will quickly fall away?
- Will your product or service serve an existing market in which demand exceeds supply?
- Will your product or service be competitive based on its quality, price or location?
- Do you know who your customers will be?
- Will your business be conveniently located for the people you plan to serve?
- Do you understand how your business will compare with your competitors and how you can differentiate it?
- Are there barriers to entry in the industry, such as the need for specialized equipment, skills, or licenses, or can anyone open a similar business?
Ultimately, your idea must fulfill a need for your buyers and must do so in a way that is somehow superior to the competition, however you define it. If you want to be certain your idea will do these two crucial things, you need to know as much as you can about your market.
There are four components to researching a market:
- Personal knowledge. Understanding the industry is vital to assessing the market for a product or service. Personal knowledge of the industry develops from having contacts in the industry, personal experience and a general feel for the industry.
- Competition. Who are your competitors? What are their strengths and weaknesses? What are they planning to do next? What are their spending trends? A survey of the competition may be needed to determine if there is room in the market for another business or an unfilled niche you can fill. Learn about your competition by observing their businesses either in person or by regularly visiting their Web sites. How busy are they? What problems do the businesses seem to have? What type of customers do they attract? Look for newspaper and Internet articles about the industry and the current players. Observation helps to determine the size of the market and problems businesses may have in serving that market
- Customers. Do you know who your customers are and why they would buy your products or services? You can learn a great deal by interviewing owners of similar businesses located outside your planned market area. If your business will draw customers from a 25-mile radius, similar businesses in towns 100 miles away generally will not be competing for your customers. Business owners may be quite willing to discuss their businesses and to share advice. Often, they have insight and experience that can be invaluable to a new business owner. Also, after developing a profile of a typical customer, talking with a few people fitting that description will help identify needs of customers.
- Secondary research. Finding information that is already published through searching the library or Internet, is necessary to quantify the market and to verify your findings from the above three steps. How big is your market? Is it large enough to sustain your business and competition? What is the growth trend for the next five years? Once a market has been identified, what is the size of the actual market in which you can compete? The actual market segment you can sell to may be a small fraction of the total market.
The following tools are designed to help with research at the library or on the Internet. This research should not be neglected nor should it be the sole source of information used in developing a business or marketing plan.
Local and university libraries contain publications which can provide much of the information entrepreneurs need. Materials not available in your local library may be obtained through interlibrary loans. Check with the reference librarian. Most libraries also have Internet connections and the reference librarians can help you with on-line research.
Use the following list as your guide to begin secondary research on a specific business or industry.
- Identify the appropriate Standard Industrial Classification (SIC) or NAICS code for your business.
- Check either on-line or at your library for current periodical literature on the subject (magazine articles). Be sure to look for trade journals and publications as well as general business publications.
- Look for the websites of appropriate industry trade associations and trade journals related to your industry.
- Obtain the financial ratios for the business category. Trade association financial studies, if available, usually provide the most detailed information. If the information is available to the public, you may find it on the trade association's website.
- Examine material on populations, such as income, age, and family size of populations in areas as small in size as zip codes. Information can be found in the Census of Population and Housing, Census of Retail Trade, Census of Service Industries, Census of Wholesale Trade, and Census of Manufacturers.
- Search the Internet for information on your topic.
Now that you know there are enough customers for your product or service, it's time to determine the financing.