When you have a business idea, it's important to evaluate it carefully to help you determine its viability. A business idea evaluation typically involves studying market conditions, establishing a target market and analyzing the projected costs of the new venture. Knowing how to evaluate a business idea can help you plan effectively so you can achieve your goals.
What is a business idea?
A business idea is a concept to offer products or services to customers for financial gain. As the first step in forming a business, a business idea can motivate you to achieve your goals. With an appropriate and well-defined business idea, you're one step closer to starting a business or supporting your current organization in developing new ideas that may appeal to a set of consumers.
Before you move forward with your business idea, it's important to complete an evaluation to help you assess the concept's feasibility. A business idea evaluation can help you learn more about the market, the competition and customer needs, which are all important factors in deciding if it's an idea worth pursuing. A thorough evaluation can help you form a business plan, explain your concept to investors or communicate with potential customers.
How to evaluate a business idea
Once you have a business idea, use these steps to evaluate it and make sure it's a sustainable idea to help you be successful:
A target market is a group of people who are likely to purchase a company's products or services. They're the consumers you believe can benefit most from your business idea. It's important to learn what you can about this group so you can better form your idea and later market to them successfully. When you understand your consumers, you can anticipate their needs and serve them appropriately, which can make a major difference in your success.
As you evaluate your business idea, learn more about your target market's wants, needs, motivations, spending habits and challenges. You can collect this information by performing preliminary research, asking different people questions about your business idea and observing shoppers. Begin to define your ideal customer by considering the following demographics:
Age
Gender
Geographic location
Income level
Profession
Marital status
Education level
Related: How To Identify Your Target Demographics
As you gather information about your target market's demographics, you can establish buyer personas, which are characters who represent the members of your target audience. Rather than being real customers, personas are fictional customers you create to help guide your business decisions. Personas are important because if you can view each persona as an actual customer, you're more likely to understand and empathize with them.
Create a buyer persona to represent the target market you've identified for your business idea. Consider the persona's background, motivations, values and buying factors. Ask yourself a series of questions about the persona's characteristics and write down the answers. Some questions to help you create a buyer persona may include:
What are their personal beliefs or values?
What challenges are they seeking to resolve?
How do they learn about products or services in the marketplace?
What other types of products or services do they buy regularly?
How does cost factor into their purchasing decisions?
Read more: How To Create a Buyer Persona (With 4 Examples)
A market analysis is an assessment of market factors, which may include economic details, consumer buying patterns, trends, forecasting and the competition in a market. Research various companies in your industry to determine whether a demand exists for the new product or service. You can also further understand the market and your target audience through efforts such as focus groups, interviews and surveys. Once you've gathered sufficient data, analyze the information carefully to help you determine the viability of your business idea.
Read more: How To Do Market Analysis (With Steps and Tips)
It's important to know more about potential competitors so you can see what they've done to find success and make sure you can supply a unique or higher-quality product or service. To analyze your competition, gather information about the company and its offerings and write an observational list of its strengths and weaknesses. Search online to read reviews about the company's products, pricing and customer service.
Once you know more about the competition, you can identify ways to distinguish your business idea. Think about why a customer might purchase from you instead of a competing business. You can even write a unique value proposition that tells customers what you offer, how it differs from the competition and why it meets their needs.
Read more: How To Conduct a Competitor Analysis
Part of evaluating a business idea is being able to understand the finances associated with its launch. Even if your idea doesn't require a lot of overhead costs to get started, this analysis can help you gauge your financial outlook. You can use this knowledge to help you work on securing investments, marketing your idea and planning for future expenses. As you consider your finances, ask yourself these questions:
How can I get the necessary funds to start my business idea?
How much money do I plan to invest in the beginning?
What are my projected income and expenses?
What's my total earning potential in the first month? Three months? One year?
How can I realize sustained profits?
Related: How Much Money Does It Take To Start a Business?
Once you've completed the other steps, you likely have an effective understanding of your business idea's feasibility. At this stage, it can still be helpful to get feedback from others who can provide insights or ask questions you may not have considered. Ask your friends, family, professional contacts or company stakeholders what they think of your idea. Share your preliminary research to explain why you've developed your idea in a certain direction. Collect their feedback and use it to further evaluate your business idea and determine whether you want to take the next steps.