Starting a business is an enriching and rewarding experience. Entrepreneurship is important for an economy for a number of reasons. It promotes social change on one hand and drives innovation on the other.
Entrepreneurs are treated as national assets to be encouraged and motivated in almost every country in the world, including Sri Lanka, to the best possible extent. Most developed countries have become what they are because of forward-thinking and vibrant entrepreneurs.
In my long career in the private sector, I have seen many business successes and also failures due to multiple reasons. Particularly small start-ups sometimes fail due to a lack of understanding of the market potential.
A daring individual forms an idea of a business, product, or service and straight-away plunges into action. Most often such bold action does not work as it should. Hence, my advice to start-ups is to evaluate the market before entering.
Buyers for a product or service is the most important factor in business. Therefore, as the first step, determining the market size is exceedingly crucial for a new business.
Evaluating the market size provide the owner, his investors, and the team with how big the potential is really out there in the market. This information helps calculate the highest possible business volume. The market size can give an indication of the levels and size of investment and profitable growth goals.
Market size
Depending on the type of the business, to calculate the market size, either the entrepreneur can look for the data of the number of potential buyers in a specific geographical area (a city, province, region, or country) or the number of transactions possible in a specified time frame.
Clear knowledge of market size is one of the most fundamental parts of a new venture. Every entrepreneur needs to know how to calculate market size and relate to the potential revenue.
A new entrant must also do a competitive pricing analysis to evaluate the consumers’ reaction potential based on market information available. This exercise is performed to find the highest average price consumers will pay for the product or the service. The pricing strategy of a new product should be based on the competitive products available in the stipulated market. The cost of acquiring a new customer is known as the customer acquisition cost (CAC). An entrepreneur cannot afford to ignore the cost of bringing in a new customer. To convince potential customers to purchase the new product, companies use a wide variety of marketing tactics and tools in various forms such as digital and electronic media, social media, press advertising and various other promotions.
The aim of any new business start-up is to grow consistently and profitably. Hence, the new entrepreneur must consider customer acquisition cost as a process. A systematic approach for drawing new customers must be analysed to keep the overall cost and the profit margins in check.
The value-delivery involves everything necessary to ensure that every paying customer gets the best benefit for the money spent on a product or service. Hence, every business entity intends to deliver the value they have promised to the customers to surpass the expectations. The purpose of the action is two-fold; sell instantly to generate revenue and retain the customer for repeat sales. Everything from order-processing to customer support is adding value to the cost of value-delivery.
Securing start-up funding as capital and running expenses to cover a definite period of time before launching is an important step. There are several methods to raise funds to start a venture. Using the founder’s own money, inviting investing partners, bank financing, and obtaining personal loans are some of them.
Usually, the intention is to use the funds at the launch stage and pay them back when the business is stable and revenue generation is steady. Whichever way, an in-depth evaluation of start-up funding and how to pay it back is an extremely significant prerequisite.
Pitfalls
When deciding on start-up investment, the entrepreneur must not forget that there can be pitfalls and they must be looked at thoroughly before starting up. One of them is excessive borrowing where the loans are obtained without proper diligence. Repayment time and capacity, interests involved, and the risks of failure are the areas that must be analysed. There are other negative factors such as borrowing or drawing capital without proper preparation, failure to evaluate the debt-to-equity ratio and thinking that the repayments are easy rides also exist.
When deciding on a product to sell in a new business, it is important to create uniqueness in the offer against every competitive product in the specified market. It is important that the target potential customer base notices the uniqueness of the product.
Therefore, before the start-up begins, the entrepreneur has to understand the competitive advantage of the intended business, product, or service. Marketers create powerful Unique Selling Propositions (USP) to provide clarity and assurance to customers and communicate to them that the offering has irresistible value.
A start-up should evaluate the opportunities available for the new products or services for up-selling and cross-selling. Up-selling takes place when a company encourages the buyer to purchase a higher-priced alternative and cross-selling means providing additional or complementary products that can be used alongside the original purchase.
Both types of secondary offers can help generate additional value for the company as the main benefit. It also has other advantages such as creating stronger relationships, generating increased Customer Lifetime Values (CLV), and so forth.
Timing
In business, as in life, timing plays a pivotal role. It is not always the best product that becomes successful in the market. Even a mediocre product can win the market if the timing of all related aspects such as launching, marketing and advertising is right.
The purpose must be to beat the competitors’ timing. The concept of ‘Speed to Market’ is how long the product can be taken into a market from the initial formation of the business idea. If the entrepreneur wants him to be known as the innovator, he or she has to evaluate the earliest possible time to launch.
Risk evaluation is a process that helps the entrepreneur to identify and manage the potential problems that he or she may face in the future. In my opinion, risk analysis before a start-up is one of the most important and essential tools of a new business.
Risks are made up of two parts: the analysis of the probability of something going wrong and the negative impact it can create on the business. If the possible risks are not evaluated, the consequences of a sudden and unexpected negative event can have devastating results, including total failure of the business.
If the entrepreneur is prepared in advance to evaluate the possible future risks before the start, the approach to a sudden situation can be done in a more logical manner. In turn, such an approach can minimise the impact of the damage.
For a small business start-up, most often, the risk comes due to financial aspects. Small start-ups, usually with limited financial resources and tight budgets may face initial revenue drops if the product is not sold in the market as anticipated. However, if the business owner is prepared to take on such a risk with a plan, the challenge can be confronted successfully. There are several other risks in business such as human resources, operational disruptions, failures in accountability and loss of customer confidence. Therefore, a risk analysis for a start-up is an integral part of the market evaluation in business planning to avoid or accept risks.