According to Bloomberg, eight out of 10 businesses fail within the first 18 months. That means a whopping 80 percent crash and burn. In this Golden Age of entrepreneurship, how does an innovator improve the odds of transforming a germ of an idea into a successful company? While timing, passion, luck and execution are all important factors in entrepreneurial success, the key is a delicate balance of intuition and analytics.
Once an business idea is formed, candid answers to the 10 questions below can help both first-time and seasoned entrepreneurs determine whether a business has the legs to become a full-fledged, market-changing company. The answers uncover the sweet — or bitter — truth and determine whether an business idea is ready for launch, if it’s time to more fully develop and retool the concept, or abandon it completely.
10-Question Litmus Test for Determining If You Know What Business You Are In
- What is the target audience?
- What is the problem or need the target audience has that they are willing to pay to solve?
- What is the solution?
- What is the packaging and pricing of the solution?
- What value does the solution deliver?
- What are the channels of distribution for the solution?
- What messages do you use to reach and influence the target audience?
- What is the business model to make money?
- What are the competitive forces and what is unique about the solution?
- What are the relevant macro trends that can be leveraged?
The way you answer these questions is through a great deal of primary research with- and validation from- the market that you intend to serve. Period. Fundamental to business success is “knowing what business you are in” which starts with having clear answers to the questions (and others) above.
Passion and innovation are absolutely essential for entrepreneurs, but the truth is business ideas live and die by what the market is willing to pay for what your business offers. The classic mistake among entrepreneurs is a romantic attachment to a shiny new idea that ultimately has no path to becoming a thriving business.
When an entrepreneur becomes attached to a business idea without flushing out the practical answers to the questions above, it becomes a matter of an business idea chasing a problem, not a solution to a market problem that allows you to launch a successful business. Great companies are all about delivering products and services that provide solutions to problems that a market is willing to pay for (repeatedly).
Successful entrepreneurs think about business ideas, but not in a vacuum. They have to figure out the true value they bring to a market they intend to serve and how their solution is unique and different to others in the marketplace. Getting the answers to the litmus test questions above requires listening to prospective customers. Without engaging with the intended market to fully understand the problems, challenges, and needs they face, what a proposed solution is, what they would pay for it, etc. at best, it’s an interesting business hunch, but not a business idea with the clarity needed to be successful.
Dialogue with prospective customers will uncover the market’s business problem and reveal the value that a new solution will deliver. This dialog also helps entrepreneurs craft messages that clearly convey value and reach and influence targets.
It’s important to be smart and thoughtful in the market research phase too, and ask the right questions. While prospective users may say they find a new idea interesting and may even agree to pilot it, ultimately validation comes in the form of an agreement to spend money. If the idea truly solves a problem or satisfies a need, users will commit to paying for it. For that reason, entrepreneurs must have a well-developed business model that delivers the needed solution — in a repeatable, cost-effective way. That requires understanding channels of distribution, packaging and pricing.
But what if an entrepreneur doesn’t yet have the answers to these pragmatic questions or the answers aren’t clear and don’t tell a story of success? That doesn’t have to mean the end of the business idea. Often, gaining business clarity doesn’t happen in the first iteration. Entrepreneurs must be agile, adaptable and ready to pivot (often repeatedly). It’s essential when testing to keep listening to what is said and what is not said; using that insight to change as needed.
While it’s not uncommon to pivot, the best business ideas follow a relatively straight line from conception. Every pivot from the initial idea costs money, time and resources, and too wide a pivot, too often, usually indicates a business in search of a problem and a good time to move on.
While these questions are a guide, ultimately the market provides the answers if you ask the right questions and listen carefully. This is a lesson all successful entrepreneurs learn, and usually only once.
The Pragmatist’s Guide to Reaching Business Clarity was originally published in Austin Startups on Medium, where people are continuing the conversation by highlighting and responding to this story.
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