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Market Daily

How to Ensure the Effectiveness of a Business Idea

The process I recommend for evaluating or validating a business idea begins with defining your basic assumptions, followed by identifying the underlying assumptions on which your beliefs were based, and then testing them one at a time.

The first question shouldn’t be “how to implement my idea?” but “what do I need to know to confirm that the problem is real and that customers are willing to pay for my solution?”

Before writing a business plan as a first step in building a business, my advice is to go through the lean start-up process and do some substantive testing on your business idea and solution. It’s much better to find out that you need to change the answer before investing time and money in a business idea that no one else needs.

Whether you are starting to create a business model outline to define and validate your business idea so that you can unravel all your leap of faith or you have a nugget of an image and don’t know. Where to start you have to start—the process by first validating your business idea.

Why should you validate a business idea?

Most of the products you know and love weren’t originally designed to be what they are today.

Instagram was an app intended for you to check in to a place.

YouTube started as an online dating site called “Tune In Hook Up.”

Facebook was born as “FaceMash,” which allowed Harvard students to compare other students’ photos and choose the most popular one.

Everyone pivoted along the way learning new things about how customers used their solution until they found the one that customers liked and supported. Once these companies were able to show interest in their idea, they could seek venture capital and adapt their solutions to the products we know today.

The process that most businesses should follow is as follows:

1. Compose a business plan.

2. Starting a business.

3. Inviting investors or take out a loan.

4. Utilize the money to develop and grow your new product or service.

5. Provide your solution.

Validate the market acceptance of your answer.

This system is the secret trick for financial ruin, and that is why, in my opinion, many companies fail. Instead, I advise my clients to reverse or rearrange the process.

1. Confirm that your business solution idea resonates with customers.

2. Build a prototype solution based on your validated assumptions.

3. Finalize a business model outline and business plan.

4. Invite partners or investors

5. Use money from the investor or partners to complete your solution.

6. Build a business to sell and scale your solution.

The process of validating a business idea

While the flowchart looks so complicated that some of these sales funnels encourage many marketing and sales gurus, the process for validating a business idea is just three steps. Step one is to define your hypotheses. Step two is to identify the assumptions on which your beliefs were based upon. Lastly, the third step is to run some experiments to test your ideas one by one.

The 3-Step Experiment Method

1. Exploration

This is where you conduct interviews with customers to find out or check their weak spots. For example, we suggested our school principal:

Find Facebook groups that deal with the problem of sending children back to traditional classes and create a survey. We also suggested going to the supermarket with a notepad and asking parents what they thought about sending their children back to school.

The exploration phase is the cheapest way to test your hypotheses, so I recommend my clients try all of their original problem hypotheses.

An innovative tactic I’ve come across to lead the exploration stage of a product with potential customers starts with creating a fake Craigslist ad for a similar product type. When a person calls in response to the ad, they open up and say the product was never actually available. Still, they could ask them some related questions while preparing to launch a similar product and notify them to keep their progress. Out of their knowledge, none of the callers were pissed about the lure and changing tactics and agreed to answer their questions.

2. Pitch

This is where you discover whether the customer is willing to trade something of value, usually cash, for your solution. On the one hand, it is merely asking for a person’s email address as it is a kind of currency and not something someone is giving away for free. On the other extreme, they ask a full price commitment from the customer. In between are many different options for testing your speech.

A very successful submission method uses the 3-page website where the first page is a long sales page, page two collects credit card information, and page three indicates that the stock is exhausted. For the 3 page website, you should purchase some targeted Facebook ads to promote your long-lasting sales page to gain traffic.

Another option is a pre-sale where you offer people the opportunity to purchase your product or service at a reduced rate if they are willing to guarantee their purchase with a down payment. Always remember that the goal at this point is to see if they will pay for your business.

The third option is to launch a rewards-based crowdfunding campaign to make sure people are willing to trade money for your solution.

3. MVP

Here, you deliver part of the solution to only a few potential customers with insufficient technology until you find out why they fall in love with your answer. MVP is an acronym that stands for Minimally Viable Product.

Your MVP must have enough value for a customer to use, guide how to give a solution looks and works, and generate enough data that you can use to fine-tune the outcome of your solution.

Instead of developing an app, you can demonstrate the product with a variety of simple screen captures. You can use Google forms to collect data from users, and instead of using code to provide the solution, you can manually prepare the output. The key is to test your hypotheses without doing all the technical work to make a working product.

Test your hypotheses

You have to leave the security of your office or home and perform exploration experiments with real people.

If you’ve validated all of your initial problem assumptions, you can develop your solution hypothesis. For the principal of our school, we have come up with an idea for a solution similar to this:

Re-creating a series of old one-room school buildings where a small group of students of different ages meets in the same classroom each day with a single supervisor (not necessarily a teacher), and multiple teachers connect remotely with a subgroup of students in several classrooms to give lessons. Older students would be called in to help younger students complete classwork.

If one of your experiments shows that your central hypothesis is invalid, you have two options. You can readjust your basic assumption and think of a pivot, or you can decide to drop the whole idea. So no matter how you walk through all of your solution assumptions and they’ve all been validated against your metrics for success, it’s time to present your whole business idea in a business model outline if you have need investors or partners or to create your solution.

Opinions expressed by Market Daily contributors are their own.