If you have an idea and you want to start a business successfully, this post is for you. I am going to show you 5 key factors that you have to take into account to turn your idea into a profitable business .
These lines are only a small part of my book «Practical guide to analyze business ideas», a book that allows you to analyze and validate your ideas before investing time and money in them. You are going to enjoy it a lot! It is a bestseller on Amazon in its category. Since I don’t want to distract you now, I leave at the end of the post a link to the book and a sample so you can read the first pages.
5 key factors to build a business successfully
You may be wondering right now who I am to tell you how to build a successful business. Let’s see if I can convince you: I am a person who is passionate about reading, learning, teaching, writing and sharing everything he learns with others. If you want to know more about me, visit my LinkedIn profile or my biography.
Before continuing, I am going to tell you very quickly why you will love this post. A few months ago I finished an MBA that inspired me a lot and sparked my interest for stories about startups and entrepreneurship. I read dozens of books, hundreds of articles and managed to decipher part of the DNA of the companies that are revolutionizing the world.
I discovered the 20 key factors that differentiated leading companies from mediocre ones, and so the «Practical guide to analyze business ideas» was born. And you know what? The book became Amazon’s best seller in its category! Here you have it 👇
My book became a best sellet in its category
In this article that you are reading, I rescue from this book 5 key factors that you must take into account if you want to start a business successfully . I applied them to the sale of my book and turned it into a bestseller. Do you dare to do the same with your project? Let’s go for it!
Solve a problem and make people happy
Almost all companies fail (more than 90% according to statistics). You know why? Most ot them put on sale a product or service that nobody wants to buy .
If you don’t want the same thing to happen to you, your business must solve a real problem or make people happier . Think about it for a moment. We like to buy things that have a relevant impact on our lives. We want to have more time for our personal life, improve our social status, meet people, earn more money, work more efficiently, buy the house of our dreams … If you want to succeed, aim for one of these goals.
Try now to ask yourself the following questions:
- Do my potential customers have a real problem and I can help them to solve it?
- Are they going to be happier thanks to me?
- Do I add value to their lives?
Take a look at Netflix : millions of satisfied users enjoying movies and series online, from home (comfort), anytime (convenience), without having to go to the cinema ( which is expensive), without the need to download content from the Internet (which is illegal), with great quality (due to current technology) and at an economical price. It is a very complete proposal, right? Don’t you think that people are a little happier thanks to this service?
Netflix has a value proposition that brightens the lives of its subscribers
And now a slightly less sophisticated example: dog walkers. It’s a great idea! We are used to them now, but can you imagine the first person who came up with this business idea? He identified a real problem that people had and solved it in a very smart way. Bravo!
Dog walkers are the perfect example of how to solve a problem with a simple value proposition
If you build your business on a need of people or improve their lives, you will succeed. If not, you will have to work harder to launch your project.
You need to have a competitive advantage
Jack Welch, who for many years was CEO of General Electric, once said: “If you don’t have a competitive advantage, don’t compete” . Write it down in all your entrepreneurship notebooks. If you are not better than the others at something, how are you going to seduce your clients?
Michael Porter, one of the great gurus of business strategy, has identified two types of competitive advantages: being a leader in cost or differentiation.
If you choose to be a cost leader, you must be sure that you can create your product or service at a lower cost than the competition, thanks, for example, to economies of scale, reduction of some factors of the offer, have a highly standardized product, etc. Your bet will be a low-cost model, like Ryanair’s.
Ryainair’s model is a clear example of cost leadership
If your strategy is based on offering an exclusive or different product to your clients, you are opting for differentiation . The focus is, in this case, to be the best at something. The French fashion brand Chanel does not compete on price, but offers exclusivity, quality and design to its customers.
Chanel does not compete for price but for exclusivity
If you are wondering now if you can build a successful company that is a leader in cost and also achieves differentiation, the answer is: yes. But it’s very complicated. This strategy is called best-cost strategy and is available to very few. Ikea, for example, is a cost leader and, in addition, offers exceptional services: super-flexible return policy, reference catalog, attractive designs, wide offer, etc. It attracts customers both by price and by service.
Coming back to your business, remember that you need a competitive advantage to conquer the market. We have seen that you have two options to build a successful business: cost leadership or differentiation. If you stay in the middle, without a clear strategy, you will most likely fail (like 90% of the new companies).
You have to keep in mind that, today, most markets are saturated. Competition is fierce and companies struggle to attract customers by lowering prices and, consequently, lower and lower returns. Think, for example, of telephone companies: they are red oceans, full of sharks, in which it is almost impossible to evolve a business. Therefore, competing on costs can be a risky undertaking. So what is the alternative? The blue ocean strategy .
The blue ocean strategy, in case you don’t know it, proposes that instead of competing in saturated markets, you should focus your effort on creating new spaces in which competition does not exist or is not very relevant. For this, it is necessary to innovate in value, which consists in eliminating or minimizing components that do not add much value (reducing costs), and increasing and creating factors that do make a difference (increasing value).
The Cirque du Soleil is one of the most used examples to define a blue ocean. How was the circus model in the 80s? A highly competitive business, with high costs (animals, transport, logistics …) and with lower and lower profitability. The public was no longer interested in this type of show.
The Cirque du Soleil broke the rules of the traditional circus and created its blue ocean
The Cirque du Soleil was born with a totally different and disruptive proposal. They reduced or eliminated many factors of the traditional circus, such as humor, danger, animals (lower costs), and at the same time they introduced new variables that added much value to the viewer: a theme or common thread for the show, music, dance, a more select environment, etc. They transformed the traditional circus into a show for children and adults that, today, has no competition. The Cirque du Soleil created its blue ocean.
Nintendo also developed its blue ocean with the Wii. When the market was focused on developing more sophisticated games with better graphics, for a very specific audience, Nintendo put the Wii on the market and opted for simple, familiar and dynamic games. With this model, they reached a new group of people who were not interested in traditional video games and their sales skyrocketed. A great success.
Think now about your product or service: can you reduce your costs by eliminating a component in your sector that is not important in your proposal? Can you simultaneously increase the value you generate for your customers, increasing the weight of other components or adding new elements? If so, you are innovating in value and walking towards your blue ocean, a space without competition in which you can grow fast and with high profitability. That is a tremendous competitive advantage!
Aim for a giant market
If your product or service solves a problem that people have, makes people happy and, in addition, you have a clear competitive advantage, you are on the right track, but you are missing some fundamental details. One of them is the size of your market. It must be big, huge, giant! If you don’t go for a big market, your growth possibilities are very limited and, sooner or later, your business will hit the ceiling formed by a reduced target audience.
To estimate the size of the market, you can use the TAM SAM SOM model (total addressable market, serviceable addressable market and serviceable obtainable market). This method is based on calculating, first, the total size of your sector, then the size of the market you can access and, lastly, the share you can obtain.
The main thing is that, even if it is approximate, you make sure that the market you have access to (SAM) is large and you can reach it easily.
For example, if you have an online store where you sell baby clothes, the size of your market is large. It doesn’t take a lot of calculations. Note that this does not mean that you are going to sell a lot! You cannot forget the two previous points, especially your competitive advantage. Without it, it doesn’t matter if your audience is huge.
A very interesting alternative that you can consider is to focus on a market niche. Imagine that you are an expert in trail running and you decide to set up an online store of specific products for this discipline. You are targeting a niche: instead of trying to cover all sports, you focus on one that you know well, allowing you to offer a more professional and close service to your clients.
A niche is a segment of the market in which individuals have homogeneous characteristics and needs. Niche strategies, despite targeting a smaller market size, can be a good option when, for example, you cannot compete in the entire sector with the dominant companies. Your knowledge of the niche will be your competitive advantage against the big ones.
Design a scalable business
The scalability of your business is a fundamental factor and must be among your strengths. A scalable business grows fast and does not need constant investment during its growth. Sounds good, doesn’t it?
For your business to be scalable it is necessary to aim a large market, offer a very standard value proposition, use distribution channels that facilitate growth, rely on scalable key resources, automate tasks and outsource your key resources.
A consultancy is a little scalable business: if you want to grow you need to continue investing in personnel, in an increasingly bigger office … Its key resources are not very scalable. However, if you publish an online course, once prepared and published on the platform, you can sell it again and again without the need for additional resources. In this case, the key resources are superscalable.
An online course is a scalable business, while a traditional offline course is not
If you personally make artisan products, you have a poorly scalable company, since to sell more you will have to manufacture more and that will require more hours of work (poorly scalable resources). If, on the contrary, you set up a platform to connect artisans with craft buyers, once the platform is created, you will be able to grow quickly and increase your profitability without having to invest in the main resources (although, of course, you will have increasing expenses in marketing , technological evolution of the platform, etc.).
Have you already wondered if your business is scalable? If sales increase, do costs increase proportionally? If so, your project is not very scalable and growth must be accompanied by a constant investment in resources (this does not mean that your project is bad, but that you will need more effort and money to grow). If, on the contrary, you can grow with a moderate investment, you have a business prepared to scale quickly and exponentially increase its profitability.
Don’t forget about finances
Everything we have talked about so far needs to be supported by a powerful monetization strategy. Remember that no matter how successful your project is, if it is not monetizable it is not a business, it is a hobby. If what you want is to build a successful business, you must define how you are going to earn money with your value proposition.
Business vs hobby
Another important point is to make an effort to reduce your costs to the maximum in order to be more competitive than other companies in your sector. You can, for example, buy the necessary raw materials at a low cost, optimize the manufacturing process of your product, improve logistics operations and reduce delivery times, improve after-sales service or invest in innovation.
Income is the other essential part of the profitability equation. Businesses that favor customers to buy on a recurring basis are more interesting than those where point purchases are more frequent. You should also analyze if there are other complementary products or services that you can sell to your customers: it is easier to sell a new product to a customer than you already have to find a new buyer
Finally, never forget to calculate your cash flow. Cash flow is the difference between collections and payments, that is, between the entry and exit of money from your business. It is calculated over a certain period of time (3 months, for example) and is an indicator of the company’s liquidity.
If the cash flow is positive it means that the collections are higher than the payments, or what is the same, in the current account of the company more money enters than it leaves. This is really good! It means that your activity generates treasury (money) and you can pay your short-term debts without problem. If, on the other hand, the cash flow is negative, your payments exceed your collections, so that less money enters the account than you need to pay your suppliers (and other debtors). Negative cash flow is synonymous with illiquidity and can end up ruining your business.
If you want to build a business successfully: solve a problem, make people happy, create a powerful competitive advantage, aim to a large market, design a scalable model, and never lose sight of your finances. With these ingredients the success of your business is almost guaranteed.
As I said at the beginning of the post, what we have seen here is only a small part of my book «Practical guide to analyze business ideas» . With this guide you can analyze and validate your ideas before investing time and money in them. I encourage you to read the first pages! By the way, the book is in Spanish. English version coming soon!