Is that concept a business opportunity or just an exciting idea?

People conceive new ideas for businesses every day. But when it is time to face reality and access the feasibility of an idea, understanding what makes a good business idea is crucial. Understanding how to design a business model is your long-term key to success.

hand drawing lightbulbAt the most basic level, a business model is defined solely by its ability to make a profit. Studying the underlying cost structure (determined by understanding fixed costs versus variable costs) determines the potential company’s operating leverage. Intuitively, the higher the variable costs, the lower the gross profit per product or service will be after covering the fixed costs. Think of a car wash. The more cars washed, the more supplies, utilities and employees the owner will have — all variable costs.

Other components of a business idea are market-related factors, including understanding and identifying who your customer is, how many customers will buy your product or service and how your company will differentiate itself in the marketplace. One major cause of business failure is lack of market research. While you may be in a hurry to get started, market research is not optional for a successful business. Market information is what determines your marketing plan and pricing.

Your idea must include a competitive advantage based on your proposed company’s uniqueness. Consider how Dell entered the personal computer market. Its unusual direct delivery method was based on internal logistics that allowed Dell to deliver a customized computer, at a reasonable price, directly to a customer’s home. The personal computer was not a new invention, but Dell’s fundamental changes in how computers were purchased and delivered made them market leaders.

One last component of a successful business model is the scope and size of opportunities related to your concept. If you plan just to earn enough for your family to live comfortably, this is considered a lifestyle venture. Lifestyle ventures, while successful, are rarely the type of business that will make you rich or allow you to sell your business for a huge gain after just a few years. In contrast, growth-oriented businesses require bigger financial injections, an increased amount of ownership leverage and therefore more risk.

Once you have reviewed the core components of your business idea, it’s time to do experiential research with real customers or assess it with experts in the field.

Every semester, a Missouri State University (MSU) College of Business entrepreneurship class, in conjunction with the MSU Small Business & Technology Development Center, work with potential entrepreneurs to help them discover whether they have a feasible business opportunity or just an exciting idea. Students prepare a detailed report and a presentation that includes:

  • An overview of the business and analysis of industry trends
  • A market assessment, including a competitor analysis with pricing and promotional strategies
  • A proposed financial evaluation that includes estimated startup costs, a projected income statement and a breakeven analysis
  • A compilation of alternative strategies and suggestions for turning the idea into a successful business

The MSU SBTDC also offers regular entrepreneurship and other business training events.

Evaluating an idea is crucial. So take some time to do your research. Study the feasibility of your proposed business opportunity before you consider quitting your day job, investing and borrowing money, thus changing your life forever.

For personalized help exploring business ideas, marketing, finance, management, technology, international trade, growth or other business issues, contact a business specialist at a center near you. Or visit the full list of training courses to find an upcoming training seminar.

– Contributed by Rayanna Anderson, entrepreneurship coordinator and community liaison for MSU’s College of Business and former director of the MSU SBTDC. Anderson writes about issues she regularly sees consulting with small businesses in Springfield and in the state of Missouri.
This article first appeared in the Springfield News-Leader and Used with permission.