Many first time entrepreneurs make the mistake of going directly from idea to business plan and implementation. Without first “vetting” the business idea, entrepreneurs increase the chance of losing time and money. The vetting process may include validating the product/service value proposition by customer testing using the least costly modeling method (minimal viable product) to find a product-market fit while gathering feedback from potential customers. Doing market research forces the entrepreneur to become familiar with all aspects of the market so that the target market can be identified and the business model concept can be refined to solve a real customer pain-point.
A business model is a conceptual structure that supports the viability of the business & explains who the business serves, what it offers, how it offers it, and how it achieves its goals. Think of the business model in terms of product/service, customer, and value. Peter Drucker said that the business model is supposed to answer who your customer is:
- The customer forms the heart of a business model.
- It answers who the company plans to sell its offerings.
- A business usually groups the customers into different segments with certain homogeneous needs, characteristics, or behavior.
- It then defines one or more customer segment that it serves or wants to serve, followed by an answer to why it plans to serve this segment.
When “vetting” a business model concept, one of the first things needed is an estimate the total sales of the market target. To do this, begin by researching the industry competitors which will provide a fairly accurate estimate of the total potential market. Once the total size of the market has been estimated, the next step is to define the target market. The target market narrows down the overall potential size by concentrating on segmentation factors that will determine the number of users within the sphere of the business’s influence. The segmentation factors can be geographic, customer attributes or product/service-oriented. For instance, if the distribution of the product or service is confined to a specific geographic area, then define the target market to reflect the number of users or sales of that product/service within that geographic segment.
The next step is to estimate your market share for the time period that the business plan will cover. In order to project market share over the time frame, two factors must be considered:
- Industry growth which might increase the total number of users. Most projections utilize a minimum of two growth models by defining different industry sales scenarios. The industry sales scenarios should be based on leading indicators of industry sales, which will most likely include industry sales, industry segment sales, demographic data and historical precedence.
- Conversion of users from the total market segment. This is based on a sales cycle similar to a product life cycle where there are five distinct stages: early pioneer users, early users, early majority users, late majority users and late users. Using conversion rates, market growth will continue to increase your market share during the period from early pioneers to early majority users, level-off through late majority users, and decline with late users.
Knowing the target market size will help you know if it is large enough to proceed with a business plan. If it is not, go back to step 1 of the vetting process and revise business concept to address a larger market opportunity. Vetting a business model concept is an iterative thought process that should lead to figuring out the product/service you can offer at a reasonable cost, what customer is best suited for this product/service and how much they value it (which means you have to figure out what about the product or service they value). The process is iterative because the product/service, target customer and value are interrelated so it is almost impossible to figure out all three without going back to revise the first…and then the second..and then figure out the third again. Having a great business model means all three are well aligned and fit your own interests and abilities.
For more thoughts on vetting your business model concept, view the free video entitled How to Vet Your Startup Business Model Concept.
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