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4

Your Business Concept

You’ve articulated your personal and business vision and identified opportunities in your area of interest. Now it’s time to start honing in on your business concept.

Meeting needs is the basis of all business. You can devise a wonderful new machine, but if it doesn’t address some real and important need or desire, people won’t buy it, and your business will fail. Even Thomas Edison recognized this fact when he said, “Anything that won’t sell, I don’t want to invent.”

Typically, entrepreneurs get their original business inspiration from one of four sources: 1) previous work experience; 2) education or training; 3) hobbies, talents, or other personal interests; or 4) recognition of an unanswered need or market opportunity. Occasionally, the impetus comes from the business experience of a relative or friend.

As you begin to move from defining a business opportunity to a concept, keep in mind that a successful business incorporates at least one of these elements:

■ Something new or improved. A new product, service, feature, or technology, or an improvement on an existing product or service encompassing more features, lower price, greater reliability, faster speed, or increased convenience.

■ An underserved or new market. A market for which there is greater demand than competitors can currently satisfy, an unserved location, or a small part of an overall market—a niche market—that hasn’t yet been dominated by other competitors. Sometimes, markets become underserved when large companies abandon or neglect smaller portions of their current customer base.

■ New delivery system or distribution channel. New technologies, particularly the Internet, allow companies to reach customers more efficiently. This has opened up many new opportunities for businesses to provide products or services less expensively, to a wider geographic area, or with far greater choice.

■ Increased integration. The occurs when a product is both manufactured and sold by the same company, or when a company offers more services or products in one location.

Your business should incorporate at least one of these factors—more than one if possible. Ideally, you can bring a new or better product or service to an identifiable but underserved market, perhaps using a more efficient distribution channel. Evaluate the ways your business concept addresses the elements described above. Your concept should be strong in at least one area. If not, you should ask yourself how you plan to make your company truly competitive. To help answer these questions, fill out the following worksheet.

worksheet: Is Your Business Concept Sound?

To determine how sound your business concept is, answer the following questions about your proposed product or service:

Is your product or service new or improved? Does it fill a gap in the current market or improve on what’s already available? If so, describe how:

Is it serving an underserved or new market? If so, describe that market:

Does it allow companies to reach their customers more efficiently? If so, state how:

Does it build on products or services you already offer, or can you both manufacture and sell it?

Traditional to Entrepreneurial

PRODUCT/SERVICE	WHERE THE IDEA ORIGINATED
No Fear	No Fear is a sports company founded in 1989 by three surfer buddies whose inspiration was to spread positive messages of self-esteem and to encourage all people to perform to their potential. At the same time, the founders eschewed traditional corporate values in favor of socially responsible and ethical business practices that emphasized an approach to commerce that transcended merely chasing profits. Originally selling T-shirts plastered with existential slogans that defied traditional fears of danger or mortality, they promoted wholehearted engagement with life, and expressed contempt for established social mores. No Fear now has an entire line of products, including SoBe No Fear energy drinks under the same brand, in a joint venture with SoBe, and No Fear trucks in partnership with GM and Nissan. The company currently employs about 450 people.
Martha Stewart	Martha Stewart, a former stockbroker and fashion model, built a business empire based on the domestic arts. She founded a catering business in 1976 and became well known in New York society circles for her talent at planning and executing parties. Her first book, Entertaining, was a cookbook that featured recipes and photographs from parties Stewart had catered. It became the best-selling cooking book since Julia’s Child’s classic Mastering the Art of French Cooking. From there, Stewart went on to write many more books and rapidly became a media personality through her newspaper and magazine articles and appearances on national television. In 1990 she created her successful homemaking magazine Martha Stewart Living. In 1997, Stewart gathered all of her domestic arts ventures under the business Martha Stewart Living Omnimedia (MSLO), Inc. In 2006, MSLO reported revenues of $288.3 million. Although in 2004 she was convicted of lying to investigators about a stock sale and served five months in prison, Stewart has successfully emerged from that scandal and has continued to expand her empire, including creating a 24-hour satellite radio channel and inking deals with department store Macy’s and warehousing firm Costco to deliver Martha Stewart–branded frozen foods.
Whole Foods Markets	The Austin, Texas-based natural foods store currently has hundreds of shops throughout North America and the United Kingdom, but its roots are humble. In 1978, a 25-year-old college dropout and his 21-year-old girlfriend wanted to open a small organic grocery store. They borrowed $45,000 and founded Saferway—an ironic twist on the name of supermarket giant Safeway—in Austin. At one point, the couple was so strapped for cash they were actually living in the store, in violation of local zoning laws. They changed the name to Whole Foods after merging with another natural grocery in town in 1980. In 1984, it began expanding to new markets, frequently by acquiring other, local health food stores. In 2007 the firm reaped $6.6 billion in revenues, and it has regularly reported annual growth rates in excess of 20 percent.

Positioning Your Product or Service

A crucial factor in a successful business is a clear strategic position that differentiates you from your competition—and the ability to maintain your focus on that position. All too often businesses fail because management loses sight of the central character of the enterprise.

Defining a clear strategic position enables you to capture a particular place in the market and distinguish yourself from your competitors. Different companies may sell a similar product, but each may have a very different sense of what the business is all about.

Suppose four companies are making jeans. Company A defines itself as selling work clothes; Company B sees itself as a sportswear manufacturer; and Company C identifies itself as being in the business of selling youth and sex appeal. But Company D has never clarified its mission—it just sells jeans.

These different positions affect the way each company markets itself, how it designs its jeans, what subsequent products it produces, and even the employees it hires. The first three companies may all succeed and rarely be in competition with one another. But Company D, which misses the big picture, is almost certain to fail over time as it flounders in its attempt to compete with all of the other, more focused companies.

Is First Best?

Believe it or not, being the first to bring a product or service to market isn’t always the best route to success. Often the maker of a truly innovative new product or the provider of a creative new service has to break down all sorts of barriers: such entrepreneurs frequently have to educate people on how something works or why it offers value. The second or even third business in a market may be the one that profits from the groundbreaking work of others.

A second aspect of positioning your company and maintaining focus is the development of a company style or corporate culture. By creating a consistent style that permeates every aspect of your enterprise—from the design of your stationery to personnel policies—you give your customers and employees a sense of trust in your company.

The best way to figure out your key differentiator or differentiators is to make a direct comparison to the other companies—or products or services—that are most like yours. In doing so, you’re looking to find a clear, objective differentiator that will truly distinguish you in the marketplace.

■ Similarities. First decide what will make your company, product, or service like other successful ones. In what way does it resemble the market leader? When pitching to investors to fund a new business, entrepreneurs always have to provide in-depth information about other companies doing similar things. The reason for this is that investors want to determine whether there’s interest in the area and judge whether others also see this as an opportunity.

It’s important to identify similarities because you want to ascertain that there actually is a potential market for your service. If there is absolutely nothing out there that even remotely resembles what you are trying to offer, it may be because no one wants it. You have to consider that possibility. Investros certainly will. Another reason to come up with comparisons is to give people a reference point as they try and understand why they should buy your offering. Although true innovations do exist—just think of phones, cars, radio, or television—generally even those can be compared to existing products or services to help the market understand their value. Radio, for example, although truly innovative at the time, was originally described to the public as just like listening to a stage play or concert, only in the privacy of their homes. Television, likewise, was advertised as “radio with pictures.” People need something they can relate to, or you will have trouble selling your product or service.

■ Differences. Think about what will make your business different from others attempting to solve a similar problem/need. Why would anyone care that yet another clothes designer or rapid-copy print shop, or painting contractor has entered the market? This is where your “key differentiators” come in.

Do you pride yourself on your sense of workmanship or customer service? Does your product or service provide unique features that competing products or services don’t? Are you serving a different market? Are you simply cheaper than competitors? Anything that sets you apart needs to be identified and emphasized as you establish and grow your business.

What Is Your Business Model?

Now that you’ve articulated a vision for your business, you need to consider a number of other factors as you begin to ground your vision in reality. These real, practical nuts-and-bolts aspects of running a business will ultimately determine how successful you are. No matter how brilliant the idea, execution in business is everything!

One of the first things you will do is create a business model. This is the business term for describing how you’re going to make money. Are you going to sell directly to consumers or use intermediaries? For example, if you’re manufacturing a product, will you use distributors or retailers to reach the actual users, or will you open your own brick-and-mortar storefront or e-commerce website? If you’re selling a service, will it be for a flat fee, via a subscription, or on a time-and-materials basis? In other words, what structure are you putting in place to make your money?

Your business model is important because even the best concept will have a hard time succeeding if it’s not supported by the right business model. For example, AOL—which created an Internet empire based on charging people a fee (based on hourly usage) to provide Internet access and email—found itself floundering in the early 2000s as a plethora of low-cost Internet service providers (ISPs) flooded the market, and industry giants like Microsoft, Yahoo, and Google offered email for free. Losing subscribers at a rapid place, AOL changed its business model to a monthly flat fee and began giving away email services to the public. By doing this, it was able to slow the drain of people from its popular portal and thus stabilize the revenue inflow from advertisers—from whom AOL derived the bulk of its profits, since advertising is a major component of its business model.

worksheet: Similarities and Key Differentiators

Use this worksheet to write down all of the key things you plan to deliver to your customers. For example, if you’re an accountant, you would put down “preparing tax returns” and “financial planning services” as key features of your business. Then, you would explain how the products or services mentioned are both similar to and different from your competitors.

Key Feature of Your Business	How Do You Resemble Other Businesses in Your Market?	How Do You Differentiate Yourself from Competitors?

How Will You Make Your Product or Perform Your Service?

Next, you have to begin to think about how you will make your product or perform your service. If your business is based on a product, will you manufacture it yourself or provide design specs to a contract manufacturer and let them handle that aspect of the business? Where will you get your raw supplies? Where will you store your supplies and your finished products? There’s a range of issues you need to start thinking about now—even before you spend the first penny on establishing your business.

If you will be providing people with a service, what supplies will you need? If you are baking organic breads, where will you get your ingredients? Will you need a secondary backup supplier in case your primary supplier can’t deliver for any reason on a given day? Will you be performing the service on your own or will you need partners or employees? Will you perform the service at the customer site, at your location, or somewhere else? Will you require a special permit or license? Insurance? These are all important questions you need to consider. It’s never too early to start sketching out a plan that addresses all of these, and other, issues. Not having the answers can prevent even the best business concept from ever becoming a thriving operation.

How Will You Get Your Product or Services to Customers?

You will also have to decide how you will be distributing your product or service to customers. Will you do this directly, or will you hire intermediaries to do it for you? One term related to distribution is sales channel, or the specifics of how you will sell your product or service to the end user.

It’s actually much easier to come up with a new product or service than to change the ways that customers currently buy that product or service. For example, two darlings of the dot-com bubble were Pets.com (a pet supply company) and HomeGrocer (a grocery delivery service). Each spent millions (if not billions) of dollars trying to get customers to purchase products in a new way: over the Internet. Yet both bombed because people had not yet become comfortable buying things online. Today, such businesses might succeed. But it takes time for people to change their buying habits.

How Will You Price Your Products or Services?

Your pricing strategy is critical: in fact, it will determine whether you will have a sustainable business. Price your product or service too low, and you won’t generate enough money to pay your bills, much less make a profit. Price it too high, and you may have trouble getting people to buy it. Formulating the right pricing strategy will involve researching prevailing market rates and conditions as well as accurately identifying all of the costs you will incur in making your product or providing your service. (See Chapter 20 for more on pricing.)

Pricing is about more than just covering your costs, however. It’s also a competitive tool that shapes how your products and services are perceived by the market. For example, do you want to be considered the “low-price leader?” Or do you want to build a reputation for selling the premier product or service in your market? Low prices aren’t necessarily always the best way to go when attempting to build a business and capture customers.

Who Is Your Customer?

Your business concept must also take into account whether you will be selling to other businesses, to consumers, or to both. For example, you may be selling office supplies, but only in the kind of large quantities that businesses would be interested in, and therefore might not even have a storefront, but only a warehouse from which you make deliveries to client locations. Alternatively, if you wanted to sell into the consumer market, you could open a retail stationery store that catered to individual buyers. B2B is the business term that stands for business to business; B2C, in contrast, represents business to consumer. Generally B2B and B2C companies sell through different channels and at different price points, and use different marketing strategies to reach their desired customer bases. Until you know exactly whom you’ll be selling to, your plans for starting a business will be incomplete. (See Chapter 5 for a more on customers.)

What (or Who) Is Your Competition?

In many cases you’ll know exactly who your competitors are: the restaurant down the street, the other big law office in town, the overseas manufacturer who produces the same component as you, or the other Web-based payroll service in your areas. Other times, though, your competitors might not be who you think they are. Sometimes competition comes from indirect sources. If you provide landscaping and lawn maintenance services, your direct competitors would be other like services. But your indirect competitor would be the local hardware store or superstore, because they sell supplies and equipment that allow people to maintain their own properties. As you price your services, you might have to keep in mind that new products and equipment make lawn do-it-yourself outdoor maintenance easier and are coming down in price significantly.

How Big Is the Market?

You might have the highest quality, most innovative and in-demand product or service in your particular market segment. But if the market for your product or services is too small, you won’t be able to earn sufficient income to sustain your business. Inventors frequently run into this problem: they may come up with a device that performs a task extraordinarily well, but if it will only be of interest to a small number of people, the resulting revenues won’t sustain a business.

On the other hand, you probably can’t be all things to all people. If you view your market as huge, chances are good it’s crowded with lots of competitors, and it could be harder to differentiate yourself than if you’d chosen a specific niche within that market.

business Buzz

words

“channel”

The sales channel is simply the means by which you get a product or service from you, its originator, to the end user or customer.

Direct, wholesale, and retail refer to different types of channels; typically, the wholesaler is a middle-person between the creator of the product or service and the retailer, which is the business that deals directly with the user. You may actually be a retailer yourself—in which case, you have a “direct” channel, or you may choose to supply others with your product or service and create a “retail channel.”

Sales channels can include trade shows where potential distributors or retailers find out about new products and services. Depending on your distribution strategy, you may need to reach these kinds of people rather than the end users themselves. In technology and engineering markets, for example, products are frequently sold through third-party intermediaries who install or otherwise add value to the product. (Indeed, these individuals/companies are commonly referred to as value-added resellers.) For example, rather than simply selling the software that operates an electronic cash register for a small retail business, a value-added reseller might also install that software (along with other technology tools) and provide ongoing maintenance.

The way to gauge whether a market is a good size for your business is by seeing how expensive it is to reach and advertise to them. Are there trade shows, magazines, and websites aimed at your target market, and can you afford to be part of them? If you have to use general consumer media—such as TV or the most popular websites—to reach your market, you’ve probably defined your market too broadly.

How Will You Let People Know About Your Product or Service?

Reaching your target market can take some ingenuity—as well as cash. This is where further research (yes, more!) and marketing and advertising come into play. After all, just because you build it, that doesn’t necessarily mean that customers will come. Entrepreneurs must understand how to get the word out—not only to let people know their products and services exist but to make people aware that those products or services are superior in some crucial way to competing products and services. This is called marketing, and there are a variety of ways to do it—indeed, different businesses will require quite different marketing strategies. (For more on marketing, see Chapter 17.)

How Will You Finance Your Business?

Where will the money come from? You may not have enough personal funds to jumpstart your business or keep it going until you’re able to turn a profit. Restaurant owners, for example, routinely face this challenge. It takes a lot of capital to set up an operation, buy all of the necessary equipment, pay the staff, and purchase the ingredients for the meals they will serve. Few individuals possess these kinds of resources, and most must look elsewhere—to friends, family, angel investors, venture capitalists, or financial institutions—to bankroll their business visions.

Without a viable plan for funding—even if this just means “bootstrapping” your venture or using only your own money without any outside financing—you won’t have a viable business. Spend some time thinking about this upfront and be realistic about your comfort level owing other people money (called “debt”) or perhaps sharing ownership with them (called “equity”). (For more on financing, see Chapter 15.)

Location, Location, Location

If you’re a retailer or service provider, you’ll be concerned about the neighborhood or business district you operate in. What other businesses are nearby? What kind of automobile or foot traffic do you need to be successful? Will you depend on “drop-ins” or expect that people will make a special effort to come see you? The chart below shows how your business needs relate to your choice of location.

TYPE OF BUSINESS	BUSINESS NEEDS	BEST LOCATION
Seafood restaurant	Populated area, vacation crowd	Seaside/tourist town
Women’s clothing boutique	Foot traffic, upscale clientele