Finding a good business idea is a challenging task before starting a business. First, you might generate ideas from previous work experience, hobbies, skills, or small-budget market research. Then, your next task is to filter them. And, it is also a challenging job.
There are many business ideas, but not all of them are commercially viable. For example, your business idea might offer a substantial market size. But, unfortunately, the market does not promise high growth. Your market is not promising because the market has matured.
In other cases, your business idea may already meet all the criteria for a good business idea, but an established business has worked on it. So, you have less chance to compete and survive in the market.
What makes a good business idea? Here are the criteria:
- Solve the problem
- Unique selling proposition
- Substantial demand
- Adequacy of resources
Any business, when it is not profitable in the long term, will close. So, a viable business idea should be profitable in the long run.
Profitable means a potential business idea to generate more revenue than it costs. For new businesses, costs include research and development costs, production costs, and other operating costs. Revenue should also compensate for the cost of resources such as time and effort expended by the business owner.
Profit is the most important aspect of business in the long run. Start-up businesses may incur losses at the start of their operations due to substantial costs. And at the same time, their revenue is not enough to cover it.
As businesses mature, revenue streams begin to increase, and operating costs become more efficient thanks to factors such as an increased customer base, experience curve, and economies of scale. As a result, the business generates more profits.
Profit is also an important aspect when the owner wants to grow the business. The business has increased retained earnings, which can be used as internal capital to fund expansion. Likewise, stock investors or creditors see the company’s profits before giving their funds to the company by buying company shares or bonds.
Innovation can be defined in several ways. First, it is possible to create new and unprecedented products. Products such as computers or mobile phones in their early inventions are good examples.
- An innovative product may also result from developing a new product from something that already exists. An example is manufacturers launching laptops as a replacement for personal computers for more mobile use.
- Another innovation is to improve existing products, for example, by introducing a new laptop variant.
- Another alternative is to launch the same product by changing consumers’ minds and perceptions about how the product should be used. For example, a watch manufacturer promotes its product not as a time-keeping device but as a style accessory.
Innovative products drive consumer interest, increasing their chances of buying. It also reduces promotional costs. For example, first-time buyers satisfied with the product are happy to recommend it to their closest people.
Solving the problem
Entrepreneurs launch products to meet consumer needs and wants. The emergence of a need could be because consumers are having problems. Existing products cannot solve their problems. That then raises business opportunities to work on.
Problems can take many forms. Expensive prices for existing products are a problem, forcing consumers to spend a lot of money. Outdated quality and poor product features are also a problem as they limit the useful life and usability of the product.
A good business idea solves those problems. And, by offering solutions, new products are in demand by consumers because they want their problems solved.
Unique selling proposition
A unique selling proposition is a unique aspect of a product, differentiating it from competitors’ products. It makes a product stand out from its competitors; it could be price, features, or quality.
If the new idea is similar to other products, there is no reason for consumers to buy and prefer it. Moreover, consumers bear the costs and risks when switching to a new product, i.e., the product may not live up to their expectations. For this reason, many consumers are reluctant to try new products.
Successful companies have a unique selling proposition. For consumers, it becomes their reason to buy and try new products.
The business idea must have a substantial market demand. It allows your new business to grow, generate more revenue, and lower costs. Market size is important to increase customer base, grow sales, and achieve economies of scale.
On the other hand, a small market size makes it difficult for your business to increase profits. As a result, you realize it is difficult to achieve economies of scale and lower costs.
Another related criterion is a growing market. When the market promises the potential for further growth, your business can continue to generate revenue. As a result, your business has a chance to scale operations, allowing for more cost savings.
Adequacy of resources
Starting a small-scale business often relies on start-up capital from your own pocket instead of external financing. It also consumes various other resources, including your effort and time. It also requires support such as production methods, distribution channels, and employees.
And realizing a business idea requires sufficient resources to be successful. Therefore, ensuring you have or can muster sufficient resources to start a business is important. You might consider this when selecting a sensible business idea to run.
Resilience to market dynamics
The market and competition in it are dynamic. Therefore, a good business idea should enable a business to thrive in a changing market environment. And, in this case, competition is one factor to consider.
For example, you plan to work in a market where competition is fierce. That, of course, reduces your chances of growing and winning the competition. As a new player, your business may not have enough resources to compete with other established businesses. W. Chan Kim and Renée Mauborgne call your chosen market the Red Ocean. You are competing in an existing market and going head-to-head with competitors.
Alternatively, you can choose Blue Ocean. Your business idea introduces a new business model by which the competition is irrelevant. And, you’re targeting a market where other established businesses haven’t worked yet.