Is It A Good Idea?

You’re thinking of getting started with your business any day now. Maybe your read about why your idea doesn’t matter, so you’re just going to go for it. There’s a nagging doubt though – Is your idea really any good?

When I wrote that post, it’s fair to say I received some “challenge”. In fact, my Dad put it to me that if ideas didn’t matter, then I was to make a living selling these 59 pence toy cars.

cars

http://www.flickr.com/photos/wadebrooks/

I’m not  sure that I could do that. So perhaps ideas do matter? The fact is, selling cheap toys is not a great idea for an on line micro business (even though the toys are micro).

So how do you know?

Get ready, and maybe pick up a calculator, because we’re about to do some maths. Maths that tells you if your idea will work as a micro micro business.

Ready? OK…

Question 1 – What is success for this business?

This is vitally important. If this your idea will be your business how much do you want to make from it? Are you looking for a side gig that gives you £100 a week, or to become a millionaire through the business? What’s the income you want?

Question 2 – How much can you sell your product for?

To be a business, you’ll be selling something. Product, service, advertising space – whatever. How much will you sell it for? If you don’t know, take a guess. If you’re planning on lots of products, what’s an average price?

Question 3 – How much does it cost to make?

Work it out per unit. If your product is digital, it could be zero. But if it’s physical like the cars, then there will be some cost. Again, if you don’t know -  guess. Take an average if you have lots of products.

Question 4 – The maths:

Part 1 – Subtract your unit cost from your selling price to get an approximate profit per unit.

Part 2 – Divide your target income number by the unit price – That’s how many you have to sell.

Question 5 – Does that sound achievable?

Could you generate that many customers?  If you answer yes, then maybe the idea might work. No, and you have the answer.

Lets use the cars example:

Q1 - Let’s say I want to generate the average UK income of £26,500 per year from my business.

Q2 – I can generate £0.59 per car sold

Q3 – I have no idea how much they cost, and suspect it varies wildly by how many I order, but lets take a guess at £0.20 per car

Q4Part1: The per unit profit could be £0.39. Part 2: I would need to sell 67,949 of these puppies each year to make my desired income.

Q5 Probably not…

For me, that doesn’t sound particularly achievable. I can’t see a way of generating that many sales. Put it another way, assume each customer bought one car, and I can achieve a 5% conversion rate of visitors to sales, which would be AMAZING in this context. That would imply that I’d need nearly 1.4m yearly visitors to my site to make it happen. That’s a lot of traffic.

Before you point out the flaws in this, and the fact that it’s way to simple -  it isn’t supposed to be your business plan. It doesn’t factor in a hundred variables that would make up a comprehensive sales model. That’s not the point.

From that simple calculation, I can already see that the idea isn’t for me. In less than a minute it’s rejected, and I can and move onto something better. If you want to make a sustainable micro business, you should listen to what this simple maths tells you.

It’s amazing how few people do something as simple as this level of diligence before pouring time and energy into something with no hope of meeting their objectives.

On a more positive note, this isn’t just to reject ideas. The same simple equation can be used to work backwards. A product with a per unit profit of £100 would need only 265 customers to meet the target income. This sounds a lot more achievable, and guides us to the right type of product.

Find one that looks OK, then move on to the next stage of the planning / business building process. Don’t invest your time in something which could never meet your ambitions.

What do you think? Have you run your idea through this sort of test?  Do you have a better way of evaluating ideas? Do you make your living out of selling cheap toy cars? Could you? Let me know.