Nobody wants to spend a ton of money launching a new business — only to discover they might as well have set it on fire.
CB Insights (a venture capitalist database) examined what contributes to the failure of new businesses. “After analyzing 101 startup post-mortems, they found that 42% suffered from a lack of demand for the product or service being offered. They used a harsh phrase to describe this cause of failure: ‘no market need.’” (Source Harvard Business Review)
Fortunately, you can determine this market need (or lack thereof) BEFORE you spend the big bucks!
This one flaw harmed significantly more companies than well-known startup challenges such as cash flow (29%), competition (19%), and poor timing (13%), to name a few.
“Proof of Concept” or “Testing”
In the tech-based world of startups, making darn sure there is demand BEFORE spending much money is called demonstrating “proof of concept.”
In the direct response world I come from — we call it testing. Or test marketing.
Note these do NOT mean “research.” Research before launching a business is great — it can increase your chances of success. But if you could only do research or a test — skip the research and do the test!
What’s the difference?
Tests have one key difference from research. In research, you ask people what they would do and what they want. In testing — you find out if people will actually pay money for your idea (or a part of your idea). There is a huge disconnect between those who say they like your idea and would buy your product or hire you (research) — and those who will actually fork out money NOW for your product or service (testing).
In short, if you aren’t SELLING your product/service/other — you aren’t doing testing.
How you test your idea depends on what you plan to launch
Service businesses:
If you plan to launch a one-person operation or large firm in consulting, accounting, financial planning, legal, photography, writing, etc. — you can prove your concept in only one method. You must get one or two paying customers up front.
You spend only the money needed to get a URL and email address (yourname@yournewcompany.com) and any promotional materials needed. If at all possible, you don’t even set up a website until you have your first client. If you’re still working (full or part time) you don’t quit until you have your first two clients. That’s your “proof of concept.”
If you are starting a new business in an area where you don’t already know some people who might be willing to hire you, then you will need to pay for a website up front. Spend what is needed for it to look professional but as little as possible. If you can’t get clients with a small but professional website, then you probably can’t get them with a large, full-bodied website either.
Remember — spend as little money as possible until you can prove that people will (and are!) buying your service. If they won’t — don’t waste more of your money!
Product sales:
If your business idea involves selling some type of product — either downloadable or physical — you can test your idea for very little money using Google AdWords.
You have to actually create the product to test it. If this is really expensive:
- See if you can make just a part of the product that would still be attractive to customers (e.g., it could be software that does just a part of what you want your full program to do).
- Or, instead of selling multiple items (a clothing website, for example), you specialize in just vests. Or hats. Or scarves.
If you can succeed with the limited product or product line, then you can expand.
You create a website page that directly sells your product (it’s called a “landing page”). You then create a text ad on Google AdWords that sends people to your landing page. And you create “keyword phrases” — what someone who wants EXACTLY what you’re offering would type into Google search to find your product. This is typically 2-4 words, such as “luxury bath oils” or “organic cat treats.”
You buy those keyword phrases from Google, which will show your ad to anyone typing in those words. Then you see if 1) the people who see your ad actually click on it and 2) if they click on it and see your landing page — do they actually buy it?
Warnings on protecting your money!
Set limits with Google, or they could burn up a lot of your money very quickly. You can tell them the maximum you are willing to spend in a day. Once Google hits that number, they will stop running your ad for the rest of the day. Then they’ll start running it again the next day, again until they hit your daily limit.
Also — watch your Google AdWords account like a hawk — multiple times a day — for the first 5 days. You will find some of your keywords get lots of clicks and no sales. Drop those keywords — so you’re not wasting more money on them.
Your test results
If you get a bunch of clicks and no sales — stop running the ads and rethink your business idea. If you can think of a way to make it more appealing, change your landing page and try again.
However… if you still don’t get sales — you must accept that people don’t want your product/idea. And this will be the hardest thing you have ever done.
Many, many entrepreneurs refuse to believe the results and keep going — wasting their money. This includes myself. I’ve tested several ideas that got almost no sales — and made myself shut down the idea and look for something else. But… once I got very mediocre results for a paid-subscription newsletter. I was bitten by the hubris bug — just like you might be. I figured I’d launch anyway and I could “improve” my marketing until the responses were better. I knew my target market NEEDED my product. What I didn’t want to face was that even though they needed it — they didn’t WANT it. So I wasted about $10,000 over the next three months — until I finally swallowed my pride and shut it down.
Bad results? No problem!
If you’ve had one idea for a new business, you can surely think up another one or two. So if you test your idea and you don’t find enough demand for it — kill it and save your capital.
Then when you have your next new business idea — you’ll still have the money to test it. Hopefully that idea will test better and you can use the launch funds you still have to start a successful business.
You will NOT become one of the 42% of new business entrepreneurs who spend their nest egg to launch a business that isn’t wanted by the projected customers. And who then don’t have the funds left to launch the next idea they have for a new business.