Have you ever seen the TV programme Dragons’ Den where entrepreneurs and inventors pitch for real money from multi-millionaire investors?
The Dragons only have a short time to decide if they are going to invest based on whether they think the business that is being pitched to them will succeed or fail.
How do they do it?
How can the Dragons or any other experienced entrepreneur or investor decide if a business is going to succeed so quickly and especially if the new business start-up has little or even no track record?
Or how would you do it if you were in their place, listening to an eager and persuasive pitch from an ambitious entrepreneur eager for your cash?
I look at three major risks for new business start-ups and any business that hasn’t really established its position in the market:
- Market risk – is there demand from customers and clients? Does the product or service solve a pressing problem? Will people be willing to pay for this solution to a problem?
- Competitive risk – can the business survive competition? How is the business or the product differentiated and is that differentiation sustainable?
- Capability risk – can the business owner and business deliver on the marketing promises? Is he or she prepared to do whatever is necessary to make the business succeed?
Which factor is most important?
They are all vital and you need to make sure that you’re getting three Yesses.
Preferably three loud, proud Yesses.
Demand Risk – Will Customers Buy The Generic Product or Service?
A business operating in a weak market – either with a solution to a problem that no one really cares about or with an unconvincing solution to a real problem – will struggle to first attract attention and second to convert some of the attention into paying customers.
This is the focus of step 4 your customers and step 5 the future are so important in my differentiation process. It gives you the understanding of what customers want and what frustrates them about the current solutions as well as looking at how those needs are likely to change in the future.
Competitive Risk – Will Competitors Offer A Product Which is Preferred By Many Customers Because It Is Better Or Cheaper?
A business which is uncompetitive or too similar to existing competitors in a strong market will be ignored. If competitors are better and cheaper, then you’ve got huge problems. What are the economics of the business like? Are margins high or low? Is the break even point realistic?
This is the main focus of my differentiation process, from step 3 on your competitors, step 4 customers, step 5 the future, step 7 your differentiation options and step 8 the differentiation strategy you choose.
Capability Risk – Can You Really Deliver On The Promises You Make To Customers?
A business may have a great market and appear very attractive but if it can’t deliver on the marketing promises, then unhappy customers will create chaos and ultimately destroy the brand.
Negative word of mouth can be even more powerful than positive recommendations and the big number of Internet searches for scams shows that buyers have learnt to be wary.
Step 2 of my differentiation process looks at your existing business (or your underlying skills if the business hasn’t started) and step 6 delves deeper after you’ve done the work on looking at customers, competitors and the future.
Putting It Together
Finally your business may score three big Yesses but if you’re not prepared to do what it takes to be successful because of hang ups about sales and marketing or building a team to do the work necessary, then the business is never going to grow to its potential.
Steps 9 and 10 of my differentiation process are concerned with communicating with staff and the market.
If you’re going to invest your money – or your time and energy – you need to check the market risk, the competitive risk and the capability risk.
Any one can cause your business venture to fail. If there are problems in all three areas, then you’re best not to start.
What Do You Think?
What do you look for when assessing a business idea?
Paul Simister is a differentiation coach who helps small business owners to profit from differentiating their businesses, being distinctive in the eyes of their customers and standing out in a crowded marketplace.
You too can move past your profit tipping point by answering the seven big questions of business success (mp3).
Check out my business start-up coaching services.