The following is a guest post from John Crickett.
Firstly let’s clarify what a good business idea is. To me a good business idea is one that is both profitable and sustainable.
By profitable, I mean that you sell your product for more than it costs you to deliver it and after deducting a contribution towards your overhead costs you’re still left with a profit.
By sustainable I means that you are able to continue to make a profit, day after day after day. It’s not good making a tidy profit for the first day, week or month if after that the initial demand is satisfied and there is no further demand for your product or you’re no longer able to deliver it.
So how do you know if the business idea is going to be profitable and sustainable? Well you can not ever know for certain, starting a business is a risky proposition after all. What you can do however is gather together as much information as possible in order to make a prediction. Lets look at sustainability first.
Is my business idea sustainable?
In order to determine if your idea is sustainable you need to ask yourself a few questions:
Can I deliver the product over and over again, i.e. it’s not a one off.
Is there a market for my product? You can determine this by looking for competitors — the existance of competitors proves there is a demand.
Will that market repeatedly buy my product? Look for industry publications and find out as much as you can about the buying habits of the market.
Can I reach enough of that market to remain in business year after year?
Is my business idea profitable?
To find out if your business idea is profitable you need to establish as closely as possible what it will cost you to deliver your product to the customer. You need to determine two main costs:
How much it will cost you to make and sell each unit. This is the variable cost of your business.
How much it will cost you to operate the business regardless of the level of sales. These are the overheads costs of your business.
You then need to estimate the level of sales you expect to make and use that to determine what contribution each sale needs to make towards the overhead costs. You can then determine if your business idea is likely to be profitable by deducting the variable costs and the contribution towards overheads from the sale price. In other words:
Profit = Price — (cost per unit + contribution towards overheads)
If you’re left with a postive value for the profit and you’ve determined that the business idea is sutainable, then you’ve probably got a good business idea.
John Crickett is a UK based entrepreneur who runs the Business Opportunities and Ideas blog.