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Topic: Strategy

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Forecasting Financial Prospects Of Business Ideas

Posted by public on 125 Points
Hi. I want you to consider this as an exercise with the purpose of bringing to light those techniques you consider might help with the problem. The problem might not be a very practical one, but I want you to ignore that and seek to provide a solution never-the-less.

Imagine Joe has come up with two business ideas. Joe thinks his task is to establish which one is better in terms of financial prospects (income/profit).

Joe says that his two business ideas are (a) designing and producing simple tools for the DIYer and (b) Designing simple educational toys & aids.

Working on the information Joe has revealed, are there any methods or techniques that are capable of producing results that are capable of clearly showing Joe which idea would likly be the better choice?

I do not know what answers I might receive, but I realise that "gut feeling" might be as good as anything, given the scarcity of information.

Also, could anyone say, in basic terms, how much detail would be needed to be able to clearly establish which choice of a business idea was comparative best?


EDIT: I asked the second question, because I anticipate that perhaps no techniques are suitable given the information given about the ideas.

  • Posted by Jay Hamilton-Roth on Accepted
    Ultimately, financial results is a function of profitability. So, first Joe will need to determine likely volume, cost of goods sold, customer acquisition cost, etc. If Joe could create a prototype of each, then he could gauge interest through a targeted PPC campaign (a landing page to have people pre-purchase, sign up, or take some specific action). If the landing page has a pre-purchase, then you'll also get a rough idea of acquisition cost. The interest in either may be from an audience unimagined, so a gut feel may very wrong. If there's deep knowledge of a community with an unfulfilled need (that they'd pay for), start there. Failing that, do a lot of short/focused testing. These numbers would funnel into a business/marketing plan which would be useful for planning/fundraising.
  • Posted by dubois on Member
    I have to admire Jay for jumping in with practical advice on an academic question. But he arrives where I would have, i.e., an academic answer: that Joe should not start his quest with a business idea at all.

    Rather, Joe should start with a suspected unmet need, confirm his hypothesis with research, and then devise a business to fill that need. Otherwise, Joe's ideas are solutions in search of a problem.

    Ted Levitt wrote a very popular book about this, it's called "The Marketing Imagination." Levitt borrowed fundamentals explained in the 1960s by management guru Peter Drucker.
  • Posted by public on Author
    Hi. Thanks for the responses.

    Can I just explain some of Joe's thiinking.

    Joe studied design thinking and wants to try his hand at innovating products. He is a man of faith, inasmuch as he is confident that the scope for innovation regarding tools for DIYers and educational toys and aids is very good, or comimg up with innovative products is likely. Let's say that is true.

    He also recognises that firms are currently trading as businesses making simple tools for the DIY market and also educational toys and aids. He therefore recognises that, in principle, his two business ideas have merit, because such businesses are trading.

    In this scenario, Joe is seeking to find out, before he commits himself to one of his business ideas, if there is any way he can know which business idea is going to be most profitable. He has a concern, but has no knowledge of it, that perhaps one business idea could be 2, 3, 5, 10 times more profitable than the other. So, he wonders whether his concern can be met, by use of some method or technique. He does not have a product yet. But, has his faith they will come..

    Now, Joe has what I have called a concern. But does it amount to a hill of beans? Is it a misplaced concern given all the variables? If it is, then the task Joe wants to accomplish, that of establishing which business idea is better from a profit metric is somehow flawed.

    Joe sees that if it were a matter of forecasting sales or profit arising from a product he has innovated, and has a prototype, that is one thing. But in his case such level of detail does not exist. All that he can offer is: Tools for the general DIY market and Educational toys & aids.

    So, we don't have a case where Joe is going to make a product where there is going to be no evidence of an unmet need. This will surace. But, Joe is wondering before his products come to light, whether he can find out which idea is likely most profitable. And I guess he can achieve that task or he cannot. For he is not offering much by way of detail.

  • Posted by telemoxie on Accepted
    Joe wants this. Joe wants that. So what? Who cares?

    Marketing is not about doing what you want. Marketing is not about getting what you want. Marketing is about finding out what other people want, and serving their needs.
  • Posted by Mike Steffes on Member
    Joe could take a look at societal trends.
  • Posted by public on Author
    I see clearly how marketing people can be myopic and fail to anwer the question. With a fixation on what the market wants, in certain situatioins, blindness can happen. Joe will meet and establish market need when he identifies an innovation that is valued by a market. Because Joe recognises the need to make products that other people, a market wants.

    However, to explaijn once again, Joe is wondering whether there are methods or techniques that are able him to make a comparison between his two business ideas in terms of profit/income.

    Joes is confident that he likely will come up with product innovations. Therefore he is confident he can succeed with either business. Joe is not asking how he can succeed in business, he knows he likely can. All Joe is seeking to know is can it be determined which business can bring him the better financial suceess for all his efforts, given the nature of where he is at with his ideas. To fail to understand this is to fail to grasp Joe's need.

    A professional understanding of marketing, should not blind anyone to recognising Joe's need, and in considering whether there are any marketing methods or techniques Joe can employ in helping him decide where his efforts will be most rewarding. But, as I keep saying, maybe Joe's problem only has a reliable solution if he had a secific propduct in mind or a prototype. But then, if this is true, his need will have changed somewhat.
  • Posted by Peter (henna gaijin) on Accepted
    I agree with you that folks here can sometimes get a bit myopic, but in their defense, they do know the history of marketing and innovation which is often missed by entrepreneurs. Folks here have seen over and over again that the saying "make a better mousetrap and the world will beat a path to your door" does not hold true for the vast majority of entrepreneurs. Many a product which should have been a great success has died for reasons not related to the product's value (lack of marketing, lack of cash, etc.).

    Now the answer to your question is simple to answer here, but immensely hard to implement. Joe needs to make a business plan for each prospective product and the answers he finds in doing so would guide as to which product (if either) is worth doing.

    Below are the basic sections I use as a template for business plans I write. There are software programs and such that can automate some of this, but the primary input which can't be automated is market/product knowledge and thinking creatively on how to find get decent estimates for the vast amounts of information you don't have.

    Business Plan

    Context (Background of business, Who are the customers)

    Corporate Objectives (Short term and long term objectives – measurable)
    • Short-Term:
    • Long-Term – growth options/exit strategy

    Market Analysis (Brief description of market, major influencers, competitors, etc.)
    • (insert brief description of market here)
    • Why I believe there is a market for my service
    • Competitors – direct and indirect competitors.
    • Target Customer:
    • Benefits of my service:

    Marketing Plan (4-Ps, channels)
    • Product
    • Price
    • Place
    • Promotion

    Operations Plan

    Financial Plan (refer to the Appendixes)

    Management (who, brief summary of their background, etc.)

    Ownership of Organization (business structure, ownership, etc.)

    Critical Success Factors (SWOT)
    • Strengths:
    • Weaknesses:
    • Opportunities:
    • Threats:

    Appendix A – Break Even Analysis

    Appendix B - Profit-Loss Summary

    Appendix C – Cash Flow Summary
  • Posted by MonMark Group on Accepted
    I admire each response from the Forum, especially Peter's. As experienced in assisting AND launching both products and ideas into various marketplaces. Additionally, mentoring dozens of startups with "concepts" and products through the years, I find that one can only speculate the business financials, based upon a prospective revenue generation.

    One can research all he wishes, only to discover that everything he finds will be based solely upon the product/service/market of that company's specific documentation...not speculation.

    Even if "Joe" had an idea of the product he is considering, he can only speculate, based upon market conditions (all of them). Markets change...even if Joe began to create a product/solution, it is based upon today...not next year.

  • Posted by mgoodman on Accepted
    In my opinion, there is no technique or approach that will help Joe determine which of the markets will be most profitable for him to enter. There are simply too many "unknowns" at this point.

    Even if one market were 10X the other in current sales, Joe wouldn't know about the costs of entry and the specifics of his future product until it exists.

    Business IDEAS themselves don't have value. You need a [rough] business PLAN to begin to assess value (and to identify additional information required).
  • Posted by saul.dobney on Accepted
    Inventors often have lots of good ideas. The best develop multiple businesses/products over time. So a way he can think about it, is which he should do first. That's going to depend on the level of investment, prior interests and relationships in the market (barriers to entry), and the time and ability to get a competitive product to market and make sales at a profitable price. It will also depend on his experience in building a company (not just the product) and skills of attracting a team and finance to make the project happen.

    So in terms of which to do first, a product in a relatively new market with low barriers to entry and few or fragmented competitor base, requiring small initial investment and able to get a MVP type product out quickly and to win investors, would be preferable to a product requiring large investment with strong existing competition. Basically you do Paypal, before you try to do Tesla.

    If you still think they are equal, look at how defensible the income stream will be (how easy is it for competitors to copy and overtake you), and then the potential for growth after the initial product - so the potential product map and opportunities beyond the initial product and initial market (eg education can be a boxed in market, difficult to break into other sectors).

    As the others have been saying, this is all detail-requiring and best done by building the business plans to help guide your decision. The point of the plan is not to get a perfect representation of the business, but to make sure you have covered all the bases and have thought through the business potential thoroughly in terms of what is necessary for success, and what pitfalls might happen along the way.
  • Posted by mgoodman on Moderator
    If Joe needs an experienced consultant to construct a couple of initial business plans, we are available. << grin >>
  • Posted by public on Author
    Sorry, I've been indisposed on other matters and just now got back to this. "mgoodman" seems to have posted what I'm afrer. You see, because Joe believes he can and will come up with innovations in simple tools and simple educational toys, Joe thinks if the market for tools is 10x that of educational toys, that data is quite sufficient to qualify as a piece of serious direction as to what Joe should do. Joe thinking is that better finanicial prospects are more likley if he engages with the market which is 10x bigger in say sales. Because Joe cannot at this time offer up say any kind of prototype, it appears that this market data - that tools market is say 10x that of educational toys marker - does not amount to a hill of beans. Anyway, I think I'll award "mgoodman" the points.
  • Posted by Mike Steffes on Accepted
    Joe seems to lack understanding of an important subtlety of innovation. An outstanding innovation in a smaller market can be more profitable to Joe than an average innovation in a larger market. In the sports world, that is why they actually have to play the games.
  • Posted by steven.alker on Accepted
    On the basis that Joe knows sod all about business and sod all about marketing (Or he would not be going about his challenge in the way he is) but that he does know about making things and filling a demand if it exists, then we do have a way forward.

    We select the market that offers him the most structured and easily accessible entry and then help him to formulate the necessary plans and handle the figures to stop him from going bankrupt in ten minutes.

    DIY is an enormous market, in the UK, dominated by giant warehouses selling everything you could think off. Innovating a new tool and trying to enter as a supplier would see him compete with the best and immediately see his trading margin cut as the DIY store themselves demands a good margin for resale. Going direct, pits him directly against the DIY stores and unless his product is unique, it pits him against the advertising might of said stores.

    Education is however a different proposition. It is a known universe. Schools, colleges, play groups and Universities are all listed both on-line and in directories with named heads of department and phone numbers..

    Assuming that he has "Schools" in his sights, all he has to do it to ensure that his product meets a need in the curriculum. Again the curriculum is published and the tools needed for it are stated, so no market research is needed. He needs however to negotiate with local teachers that his idea will meet or exceed the needs of the curriculum, so some market research was needed after all!

    Then he needs to design it so as to have a decent margin as schools demand "Educational" prices. Marketing can either be through educational re-sellers who will demand an operating discount of 30% or he can be brave and hot the road with visite so department heads.

    So, going for schools is easier in marketing terms and in penetration terms. That doesn't make it the best choice, but the most doable and most pliable to Joe's needs to prove himself as an innovator and a road warrior.
  • Posted by Shelley Ryan on Moderator
    Hi Everyone,

    I am closing this question since there hasn't been much recent activity.

    Thanks for participating!


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