Speaking virtually at Winston Starts: SPARK Speaker Series, CEO Louis Foreman, shared five questions every entrepreneur or inventor should ask themselves before spending money on an idea.
How to Make Money from a Product Idea: Enventys Partners CEO Offers Advice
Businesses and entrepreneurs don’t fail because they lack passion or ideas. They fail because they run out of money. Starting a business on the back of an idea is a marathon, and it’s one that requires strategic planning to succeed.
In August, we shared six questions to ask when evaluating a product idea. Today, we’re going deeper because having an idea is one thing, but building a business around it is another entirely.
So how do you know if your idea is a cash cow or a dud? With more than 10 registered patents of his own, Enventys Partners CEO, Louis Foreman, recently spoke to Winston Starts, a startup incubator in Winston Salem, N.C., and offered five key questions to consider before you invest your own money or someone else’s.
1. What makes your product or service unique?
The world is already full of products and services that are filling the needs of customers. You have a great idea? Wonderful. What makes your idea something customers want to buy over everything else they’re already using? Consider the four Es:
- Efficient: Customers are looking for products that make their lives easier. Does your idea make it easier to do something? Does the task take less time or effort if they use your idea?
- Environmentally-friendly: The trend towards eco-conscious is here to stay. Is your idea more environmentally-friendly than others that exist? Does it help people live greener lives?
- Enjoyable: Sometimes the best ideas exist just for fun. People are willing to splurg on fun.
- Economic: Is your product offered at a better cost?
2. Who is your customer?
If you’re tempted to say “everyone in the world”, don’t. It’s impossible to market or manufacture a product for everyone in the world. Even if you could, not everyone can afford your idea. Paint a picture of your perfect customer using categories like age, income, education and geographic location.
You can begin to quantify the size of your market if you can say specifics. For example, the perfect consumer or user of this product is a male, 24-30 years old, college-educated, making $45-$75K a year and living in the southeast.
Explicitly identifying the target customer makes it easier to find them, talk with them about the product and market the product to them.
3. How is the customer going to react?
Once you determine who you’re targeting, you’ll need to decide if those people actually want your idea. Surveys are a great tool for learning this. Consider sending surveys using online tools or to community members who match your target customer.
Ecommerce makes it easy to understand the potential market for your idea. Go online and read reviews of similar or competing products. If everyone loves an existing product being sold you’ll know competing will be an uphill battle. But, if you’re entering a market where customers hate existing options, you’ve got a better chance of winning market share.
Surveys and research should help you determine the following:
- Where will your customers make the purchase? Is it something they can buy online? Is it something that requires expertise or installation from a brick and mortar retail store?
- How much will your customer pay? Determine what the customer is willing to pay. If the cost of the product outweighs the inconvenience of living without your solution, customers won’t purchase. A lot of times people will bring exceptional products to the market but the cost of the technology is more than the problem it is solving.
- How often will your target customer buy it? Is your product something meant to only be purchased once? Is this a ‘one-and-done’ purchase or will it require repeated purchases (i.e. ink cartridges or razor blades)?
- What type of purchase is this? Is it planned, where your customer has a need and they search for a solution? Is it aspirational-like, “When I get that new job I’m going to buy that really nice purse or that new watch.” Or is it more spontaneous? When you’re in the store, see an end cap with the ‘Snuggy’, and think, “Wow I gotta have one of those because who doesn’t need a blanket with sleeves?”
4. How much money will it take?
Avoid the biggest pitfall startups face by mapping out initial investment costs and a long-term pro forma budget. Look beyond the cost of development and to a realistic potential return on investment. The initial investment will cover research, product development, prototypes, filing patents and other legal fees.
Forecast Potential Scenarios
Once the cost of developing the idea is understood, make a pro forma income statement to understand the potential return on investment. Forecast projections over a 12-month span that reflect a best-case scenario, a worst-case scenario and a most-likely scenario.
If developing a pro forma budget is outside your expertise, reach out to an accountant for help. Ultimately, you’re trying to determine if there is enough potential reward, and over what timeline, to justify the risk.
5. Where will the money come from?
Bringing an idea to life without capital is like deciding to take a road trip from New York to Los Angeles with $100 in your pocket and a tank of gas. You won’t make it very far without knowing how you’ll get all the money needed to complete the journey.
- Start with friends and family: If you can’t convince the people in your inner circle that your idea is worth the investment, it’s going to be hard to attract anyone else.
- Banks: They provide liquidity to assets that you already have and will provide capital as long as you have collateral.
- Private equity or venture capital: Worth considering if you’ve already established a good amount of traction with your idea. These sources can provide larger sums of capital, but will require strong proof of concept and potential ROI.
- Small Business Administration (SBA): The SBA can provide loans to help your business. Capital will be provided around asset-based purchases like real estate or machinery.
If the numbers don’t add up, don’t do it.
Answering these five questions about your idea will put you in a better position to determine if there’s a potential for profit. The beauty of entrepreneurship and innovation is there’s no statute of limitations. Maybe it’s not today, but it’s tomorrow or 10 years from now. Whenever the time, the product and the market opportunity are right, that’s when you’ll want to strike.
If you’ve determined your idea is worth pursuing but need help bringing it to life, get in touch to see how we can help you reach your business goals.
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