Four ways to test your business idea

Nothing is as energising to an entrepreneur as having a great idea.

Whether it’s a business idea, a product idea or an idea on how to revamp your process – it can inject your motivation.

However, don’t be too quick to run with your ideas. Some ideas aren’t so great.

The initial excitement with an idea can blind you to potential pitfalls. Instead, focus on the benefits of your brainchild and start devising a strategy to deliver on its promise.

When your idea meets unexpected hurdles, it shocks you back to reality – at which point it’s likely to crash and burn.

If you have a great idea, you must open it up to criticism before you get started. Getting different perspectives – from mentors, business coaches, or members of your team – can help you determine whether the idea is good enough to implement.

Taking too long to evaluate an idea can lead to analysis paralysis – where your idea starts looking too complicated to implement.

Let’s take a look at some of the best methods for analysing ideas. They can save you from rushing blindly into implementing bad ideas or killing your good ideas with analysis paralysis.

Decision tree

A decision tree analysis is a graphic representation of various alternative solutions that are available to solve a problem. This method involves visually outlining the potential outcomes, costs, and consequences of a complex decision.

It’s particularly helpful for analysing quantitative data and making a decision based on numbers.

A decision tree is fairly easy to create. You can create one in these five simple steps:

• Start by stating your idea: such as developing a new product
• Add chance and decision nodes: What are the potential outcomes?
• Expand until you reach endpoints: keep adding decision and chance nodes until you can’t do it further
• Calculate tree values: estimate the expected value you’ll create, whether large or small, for each decision.
• Evaluate outcomes: with the expected outcomes for each decision, determine which decision is best for you based on the amount of risk you’re willing to take.

Use an idea checklist

Many successful entrepreneurs have a checklist that they use to evaluate their ideas. Simply put, this is a list of questions that help you analyse the strengths and weaknesses of an idea.

There are plenty of checklists online that you can modify for your use.

Here are some questions that your checklist must have:

• What are the advantages of your idea? What are the flaws or disadvantages of the idea?
• Is there a real need for the product?
• Is your idea unique or a new combination or adaptation?
• What short-term gains can you expect? What long-term gains can you expect?
• Are there any potential issues your idea might create?
• How simple or complex will the idea’s execution or implementation be? Could you work out several variations of the idea?
• Does your idea have a natural sales appeal? Is the market ready for it? Can customers afford it? Will they buy it? Is there a timing factor?
• What, if anything, is your competition doing in this area? Can your company compete?
• Have you considered the possibility of user resistance or difficulties?
• How soon could the idea be put into operation?

COST-BENEFIT ANALYSIS

A cost-benefit analysis (CBA) is a tool that can help you estimate the cost and benefits of implementing an idea.

This simple, yet effective method is often used by project managers and business owners.

Ideally, the benefits should always outweigh the costs. If the cost is 50 per cent of the benefits and the payback period is not more than a year, then the idea is worth pursuing. This method is especially suitable for evaluating smaller or mid-size projects that don’t take too long to complete.

In such cases, it helps you optimise the benefit-cost ratio of your idea. Long projects are usually affected by actors, such as inflation, interest rates, etc., that impact the accuracy of the analysis.

AWARENESS TRIAL AVAILABILITY REPEAT (ATAR)

The ATAR formula is used by marketers to forecast sales volumes, sales revenue and profit contribution for new products. This method asks four questions that help determine the strength of the proposed idea:

Awareness: Who is currently aware of the proposed product?

Trial: Who is interested in trying the product?

Availability: Who has potential access to the product?

Repeat: Who is willing to purchase the product repeatedly? Each of the four components is expressed as a percentage of the market.

The percentages are multiplied together to derive a smaller percentage – which is the percentage of the market that will become the product’s ongoing customer base.

By forecasting your sales using the ATAT method, you can determine whether an idea is worth investing in.