The 5 components of a successful business idea!
I can’t tell you how many times I’ve heard people say, “Raphael, I’d love to create more income streams, but I don’t have a good business idea.” The frequency with which I heard this phrase inspired me to write this article. Although I won’t be sharing specific profitable business ideas, I’ll provide a framework you can use to vet these ideas and maximize the value you provide your customers. This technique is discussed in detail in MJ Demarco’s best-selling book The Millionaire Fastlane and is illustrated by the acronym N.E.C.S.T (pronounced “next”). Below I’ve provided what each letter signifies.
This should be the basis of any product and/or service you decide to sell. Although it may seem obvious, people will not buy a product and/or service unless it fills a need they have. If a lamp didn’t solve the problem of not being able to see in the dark, it would be worthless. If a spoon didn’t help someone eat soup more efficiently, we would have continued using forks. All products and/services in the world serve a purpose and that purpose should be strong enough to convince your customer that trading their currency for what you have to offer is a worthwhile exchange. One of the best ways to determine what a person needs is to observe their behavior throughout the day. Are they constantly complaining about a certain inconvenience or setback?
If the answer to this question is “yes”, you may have found an inefficiency in the market that you could capitalize on. Along with that, browse industry forums and look at the questions that are consistently being asked. Is there a product and/or service that you could provide to fill this need? Also, as you go about your day, be cognizant of the various annoyances you encounter. If you consistently struggle to complete a task, brainstorm creative product and/or service ideas that would make the task easier to complete? Chances are that if you’re having trouble with this task, other people are probably having a similar experience.
The commandment of entry states that it shouldn’t be too easy for your competitors to enter your space and immediately start competing with you. If the barrier to entry for your business is extremely low, then there will be a ton of competition in the marketplace. If this is the case, your product and/or service may become commoditized and you’ll end up competing on price. This often becomes an unsustainable business model because the biggest companies in the market are better able to capitalize on economies of scale and thus usually win the majority of business. For example, if you start a drop shipping business that sells yoga mats you sourced from Alibaba, the barrier to entry for your business is extremely low.
Tomorrow, another competitor could decide to pay the small set up fee for creating a drop shipping company and establish a relationship with your supplier on Alibaba. They could then add their own logo to the yoga mats and immediately begin competing with you. Now I’m not saying that your business idea should be extremely complex. You don’t have to start the next Google or Facebook to be successful in business. What I’m saying is that, if you want to create a business that will last, it’s important to keep this principle in mind as you decide on what business idea to pursue. As Warren Buffet often says, “a good business is like a strong castle with a deep moat around it.” Heed his advice and you may just find yourself on the right side of a winning idea.
Another piece of the puzzle as it pertains to creating a sustainable and profitable business is to ensure that your business is controllable. What I mean by this is that your business isn’t dependent on another business or entity to generate the bulk of its revenue. For example, owning a drop shipping company that gets 100% of its sales from Amazon is a business with low levels of control. Although the store may be extremely profitable, if Amazon suddenly decides to change its algorithm and punish your products for any reason at all, you could see your revenues plummet overnight.
On the other hand, if you owned a similar company but generated a large portion of your sales from traffic to your website, you’d own a business with a high level of control. Along with that, if your business has a high level of control, you’re able to increase your revenue more seamlessly which in turn increases your chances of longevity. For example, imagine you own an online educational platform where you sell courses on a variety of different subjects. Your website gets 10,000 unique visits per month and coverts around 10% of the traffic into paying customers.
In this scenario, there are a few levers you can pull to increase your revenue. First, you could decide to increase the price of your courses from $40 to $60. If you’re able to maintain the same traffic and conversion rate, you’ve just increased your revenue from $40,000 per month to $60,000 per month overnight! Second, you could increase your marketing efforts in order to drive more traffic to your website. If you’re able to increase your unique site visits to 15,000 without changing any of the other variables, you would increase your revenue from $40,000 per month to $60,000 per month! Finally, you could update the copy on your website to better illustrate why someone should buy your product. If your new copy increased your conversion rate to 15%, this would translate to a $20,000 increase in revenue per month! As you can see, being in control of your business is extremely powerful and should be one of the primary components you consider as you start your business.
One of the defining characteristics of a great business is that it has the potential to scale over time. This means that the business must have the ability to grow and expand to capture new customers as the demand for your product and/or service increases. For example, if you own a single hot dog stand, your business is not scaled because there’s only one way for you to increase your revenue (sell more hotdogs). The problem with having only one hotdog stand is that you couldn’t decide to sell 20,000 hot dogs in one day to increase your revenue. It’s physically impossible for you to make that many hot dogs in 24 hours and even trying would be a futile effort. However, if you owned 20 hot dog stands around the city, then your business would begin to have some scale. This is because the production volume you can deliver to the market will increase significantly and thus, you’ll be able to fill a larger demand.
On the other hand, some business models are inherently more scalable. Software products, books, blogs and online courses are much easier to scale because they don’t require a significant amount of upfront investment and the cost of growing the business is also minimal. For example, let’s imagine you own a SaaS (Software as a Service) product that provides educational sales training to multinational corporations. The size of your operation is only limited by how many customers you can bring onto the platform. Since a software product doesn’t require a significant amount of time, money and resources to upkeep, you can ramp up your online marketing efforts to increase the sales of the product. By doubling down on your marketing efforts and driving paid traffic to your website, you’re able to significantly grow your user base in a relatively short period of time. This will result in increased revenues and help move you closer to achieving financial independence!
One of the most important pre-requisites for developing any sustainable passive business venture is that it’s independent of time. This means that your business doesn’t require you to trade your time in order to generate revenue. For example, let’s imagine you’re a doctor who owns your own private medical practice. The business itself may be very lucrative but it’s extremely time-dependent because it requires you to be there to make money. If you don’t see any patients throughout the day, the business isn’t going to generate any revenue.
On the other hand, owning an online supplement store that receives thousands of unique site visits per day and converts a portion of those into paying customers is an example of a business that is time-independent. As long as you have the proper systems in place and you periodically make adjustments when necessary, you’ll consistently convert traffic into paying clients. This will happen regardless of whether you’re sleeping, eating breakfast, working out and/or engaging in any other activity that is not related to the business. Therefore, when evaluating potential business ideas, consider the passivity of the business and favor ideas that are less time-dependent.
Pro tip: Regardless of which business model you choose, there will probably be a significant upfront time commitment required to bring your idea to life. However, businesses that are inherently independent of time will increase in passivity over time.
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