How to open a business in eight easy steps

So you want to open a business. Great! Maybe you’re even most of the way there. But like it or not, there are eight steps you’ll need to follow. Skip any and you’ll probably find that no one will want to buy what you’re selling. Luckily, they’re pretty easy.

Remember when you open a business, if you’re not returning value for the money you receive then you’re either receiving charity from someone (which is ok for a little while) or stealing from them. The more people you help, the more value you’re creating, and the more money you deserve. The skill is turning a problem into an income.

So to get money, let’s create some value. The eight steps are:

  1. Find a problem or opportunity
  2. Find out how how big the problem is (is it worth solving?)
  3. Think up the solution
  4. Position your solution in the market
  5. Implement the solution and create the product
  6. Test and adjust your solution
  7. Test and adjust the price
  8. Spread the word
The point of writing a business plan is basically to cover these steps in your own head (it can also be presented to potential financiers to prove you’ve thought these through). However you don’t always need to write a business plan, skimming through these steps first should be the first thing you do when evaluating any opportunity.

1. Find a problem or opportunity

This must always be the first step. Even if you find the solution first, you should always backtrack and think to yourself what is the problem this product is solving? If there is no problem or opportunity for improvement, then there is no market to purchase what you’re selling. This is the most important one, every business must be solving a problem.

This is the most fundamental mistake. You only have to turn on an episode of Dragons Den to see just how many solutions looking for problems there are out there. Once again, you have to start with a problem to solve! What’s the problem that’s being solved for your current product? (or conversely what opportunity is being created?) If it’s a problem that you yourself have had then you may have done this step somewhat intuitively, which isn’t necessarily a bad thing, but can you think of one other person who also has the same problem?

Also note that it need not be a fundamental, huge problem, it can be an incremental one. Google didn’t invent the search engine, they just made it incrementally better and in doing that took the entire search market. They realised that search engine’s just weren’t useful enough (a problem), and they had a solution. The problem could be that business analytics are too confusing, and your solution will simplify them, or that no coffee store in your area uses ethically sourced coffee beans. You don’t need to invent something fundamentally new like a jetpack or flying car (in fact what problem would 60 second flight jetpack solve anyway?), incremental problems are just as good.

2. Find out how how big the problem is
This step isn’t nearly as hard as the first one as you have direction now, but it’s also often missed. This is basically a large deal of what is called ‘marketing’. You need to know how big your target market is, or how many people would potentially be interested in your product. For example if you’re selling basketball shoes, you’d want to find out how many basketballers there are in the areas you’re planning on selling the product to, and how often they buy shoes.

If you’re selling basketball shoe insoles, you might consider what percentage of the population require insoles, and take that percentage of the number of basketball shoes sold per year. That’s how big the problem is. Say 20,000 basketballers, x 2 pairs per year, 20% of which need insoles = 8,000 potential customers per year. These can be pretty rough, off the top of your head if necessary, but each time you do that you lose accuracy. Once you have these figures, you simply need to ask yourself whether the problem is big enough to be solved.

This will depend on the price of your product, but if you identify a target market size of only a thousand people and the maximum you could possibly charge for your product is $20, then it follows that the most money you could possibly make is $20,000. Is that enough to justify starting an entire company, marketing the product, paying the production cost on every item and converting every single potential customer into an actual customer?  (hint: often you’d be extremely lucky to get just 5% of the target market). Often the answers to this question will send you back to step 1 to redefine the problem.

3. Think up a solution
This step comes most naturally. You’ve identified a problem, now what’s the solution? It could be a physical item, it could be a website, an app, an ebook, a service, insurance, etc. A solution solves a need or problem.

Most people will immediately be able to give an answer, but you can iterate solutions also. Is that solution really the best one? Just for argument’s sake, why not force yourself to think up five more solutions to the problem (even though you’ve already found the one you like best). Then look through each of them and ask yourself which one really does best solve the problem. Often you’ll find your first answer wasn’t actually the best solution at all. It’s this kind of thinking that brings some out of the box answers that can really take the market by storm.

4. Position yourself in the market
So you’ve got yourself a technical solution. People who don’t like chopping veggies will get their snap chop. Confused people who can’t handle their money will get financial consulting services. The elderly will get their lawns mowed, you’ve got products. It’s time to fine tune both the market selection and the solution by positioning yourself in that market.

The problem is that there may be other people who provide the exact same solution as you, and the answer is to differentiate yourself within the market. Are you going to be the fastest solution? Are you going to offer the best customer service? Will you have the cheapest product? Will it be the most customisable? Will it be have the highest quality? Ideally you’d pick just one or two characteristics and focus on them, they’ll form the culture of your company and be part of the message you send to your customers when dealing with them.

Let’s say Freddy wants to start an accounting firm. He’s got 15 years training as an accountant and he knows that there will always be people out there who don’t want to do their taxes, a classic problem for him to step in and provide a solution to, with a large market to sell to. But there are already accountants out there. He sees a huge firm that guarantees to be the cheapest, in fact they guarantee a (modest) return for every customer. Another firm has the fastest turn around, they’ll do your accounting in 2 days flat or it’s free.

Freddy picks customer service. He’ll have the best customer service of any company in the area. He’ll really think about his customer’s problems and be proactive in offering solutions, give quick replies to email and will always go above and beyond to make every customer delighted. He won’t be the cheapest, or the quickest, or maybe even the most thorough, but his company will give service with a smile, quick replies by email and keep the client base small to really get to know them. And everyone will know that if you want the best customer service you go to Freddy.

5. Implement the solution and create the product
This step can involve anything. It can mean flying to China to start widget manufacturing, getting your hands dirty writing HTML code, or turning on your camera and creating the film you’ve been dreaming of, or running dress rehearsals of the services you will provide. Whatever your solution is, you need only the skills to make it a reality. Of course, you can also outsource this step, just make sure you have a rough but conservative estimate of the final price you will charge first to make sure you can afford to pay the supplier in the future. It’s also pretty standard to break even on the first batch for physical items, as you can bring the price down later if the first small batch sell simply by ordering more products in greater volume. The minimal profit lost on the first batch will more than make up the risk of having to order too many items before making sure any of them will actually sell.

Put simply: You can run at a loss initially and plan to scale up production to bring your costs down once you you’ve confirmed the product sells.

6. Test and adjust your solution
In a perfect world you’d do your analysis, find the market, design the solution to meet the need and the dollars come pouring in. It can take a lot of judgement however to get this perfect, so in the real world it will most likely need some testing and adjusting. For physical products, it’s important to physically test them to make sure they to supplier has delivered. If it’s a rifle scope for example take it for a spin and ask some basic questions like, is this actually doing the job I want of it? Is it holding the aim after firing from bigger weapons too? Are there any tragic design oversights? Can I think of one other person who would pay for this product?

Software products are a little different in that they can be ‘finished’, sold, and then later updated, so who’s to say when they’re really done?

Two counter examples are Minecraft and Blizzard. Minecraft opened their business by putting a very, very early version of their game into the market and immediately had millions of paying customers while they finished the product, whereas Blizzard famously refuse to release a game until it’s absolutely perfect. The feedback from launching an unfinished product can be extremely valuable in knowing which features are great and which don’t need to be created at all, but it’s at the cost of the goodwill of the customers who will need to be understanding that it isn’t quite finished yet.

Aiming too far into the future could bankrupt your business. So as a rule, the bare minimums for when to release should be:

  • Your product is good enough, ie it really solves the problem, and;
  • It’s better than the competition (if any)

7. Test and adjust the price
Cost vs Price
The most important thing to remember is that the price has no relationship to cost. The price is what the customer is willing to pay. This could be more than it cost you (hopefully) or less. Obviously if it’s less then you need to go back to step 1 and find more value.

Sell Value
The other thing to remember is that it’s value you’re selling, you’re solving the problem. Don’t concentrate on how good the product is or the amazing features it has, look at how many problems and how useful it is to the customer, that’s how you’ll work out the right price. Sell the product on value instead of features, which customers only care about in terms of how well it solves their problems.

Optimal Price
You no doubt already know this point but it’s worth mentioning just in case.  The price lives in the world of supply and demand, where charging too much or too little for your product gives you less profit. Yes, you can go broke charging too much, because no one buys what you’re selling. Reducing the price too much can give you many, many more customers, but the margin between your price and cost reduces very quickly as you lower the price. Sometimes reducing the price by even a dollar can halve your margin.

Segment the Market
Sometimes you’ll be able to segment your market and it’s a good thing for the seller. For example a car garage has identified two different customers for the exact same product. In the city, some people come into the garage wanting all day, every day parking, it’s part of their daily routine. Whereas others only want parking for a few hours. If you look at value, the person who only needs it for a few hours is getting a lot more value in the form of convenience, so they’re willing to pay more, whereas the daily commuter has time to make alternate arrangements. By segmenting the market a garage will charge the customer up to $16 an hour in Melbourne Australia, for a total cost of around $40 for a three hour stay, whereas the daily commuter who spends 9 hours in the garage pays a total of $10-15, even though they used more than twice the time on the exact same product. They’ve managed to segment the market by saying you only get the $15 daily rate if you enter before 10 and leave after 5, which is the daily commuters, while the other market segment has to pay the higher rate.

Testing the price
Large companies will often do huge campaigns with test groups, sounds expensive to me. There are many more creative methods you can use online. Once you have a landing page and Google Analytics (or similar) setup you can drive a small number of potential customers to your site with ads and play with the price as they arrive. Start high enough to get no sales and slowly move the price down at intervals (lower it say every 3 days), and measure the response down until you’re selling nearly at cost. It’s best to do this in the startup stage when there’s not yet any public awareness of your product, established customers can be sensitive to price changes.

8. Let the word spread, use advertising only to accelerate it
If you’ve done your marketing and testing right, then there are people who want exactly what you’re selling. If it’s amazing they’ll tell their friends about it and you won’t need to advertise at all, but for every degree less than amazing your product is you’ll need to use advertising to make people aware of what it is you’re doing. Products that are only marginal or downright scammy will need go as far as using outbound telemarketing to gain new customers, so you can see it’s far cheaper to put the effort and cost into having an amazing product rather than resorting to that! Make the user experience great and you might not even need to advertise at all, plus it’ll feel better than running a scam.

Another way to spread the word more easily is to target a smaller market. Even an amazing product might get lost in the sea of shouting voices when the market is particularly large. If you pick a niche, for example invoicing software made perfectly for bird vets (maybe they have a problem keeping track of all the different bird medicines), you can more quickly establish yourself as the number one choice in that niche, and there are a lot of benefits to being number one. People in niches talk to each other and it’s far more likely they’ll mention your product if it’s number one, rather than targeting a market like ‘cheap airfares’, which no doubt has a ton of competition.

Your turn
There now, wasn’t that easy? Now it’s time to open your business. To be fair the title was a little misleading because while it’s easy to talk about, pulling these steps off is an art and it’s all in the implementation, it’s all about you. But knowing this process will save you wasting all of your time and effort on something that would never have reached the end point anyway. Like it or not, whether you do it consciously or not, whether you do the paper version of this (the simple business plan) or not, any successful product you ever launch will satisfy each of the above eight steps.

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6 Comments.

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