Choosing what business to start is one of the riskiest and most important decisions you’ll make as a business owner.
But it isn’t the easiest decision to make.
How can you decide which business idea is the best? What factors should you consider when choosing a business idea? What steps should you take to ensure that the business idea is both profitable and viable?
These are common questions that entrepreneurs should ask when starting a new business. So, if you find yourself struggling with these questions, then you are on the right path.
There is more to choosing the right business idea than luck, optimism, or instincts, although those may matter too.
In this post, I will show you the factors that you should consider and the right guidelines to follow in choosing the best business idea.
Let’s begin with the factors that you should consider when choosing a business idea.
What Factors Should You Consider in Deciding on a Business Idea?
1. Skills, passions, and goals:
- Passion: Many people who feel stuck or imprisoned in their business feel that way because they chose a business that they have insufficient or no passion for.
As important as it is to find a profitable business, it is equally important to choose a business that you have some passion for.
When your business isn’t going as smoothly as you may wish, passion is what keeps you going.
So, when deciding on a business idea to start, ask yourself this question- ‘Do I have any passion for this business idea?’
2. Skills: When you have determined that you have some passion for the business, the next step is to evaluate your skills and capabilities.
Do you have any special skills that make you more capable (than an average person) of running the business you have in mind?
Do you have distinguishing expertise and abilities?
Passion is essential in choosing a business idea, but having the right skills and expertise will put you in a better position for success.
Consider this: Someone who is passionate about cooking and has fantastic cooking skills will be better positioned for success by choosing a business that concerns food and cooking.
If such an individual decides to start a building or business consulting company, the odds of success are lower.
3. Goals: When deciding between business ideas, an important factor to consider is how the business idea matches your personal goals, both long and short term.
If you choose a business idea that moves you away from your goals or doesn’t directly help you achieve those goals, then it may result in future regret and dissatisfaction, which, sadly, is the case for several entrepreneurs.
To avoid regret and dissatisfaction, make sure that your business idea is leading you, or is capable of leading you to meet your future goals.
For example, if your goal is to serve the best food locally, or be the highest-rated restaurant, then you shouldn’t be starting a beauty salon but start a business that focuses on your long term goals.
Many people start businesses based on market trends. Although trends are a great estimator for the success of a business and its profitability, it is not enough to ensure the success of a business.
Setting up a business with clear goals in mind not only motivates you more than trends do but positions you better for success in business.
By now, you know which skills you have that put you in a better position for success.
But what about the skills you don’t have? This is where you need skills and expertise from external sources.
What external sources can you get the expertise you need?
- Connections: Do you already have connections with people that have the skills you need? When deciding on a business idea, an important consideration is how accessible external skills are to you. Do you have to incur high costs to get the external skills you need?
Having valuable connections with people that have the skills you need increases the chances of success.
When you have a friend or some other close relations with someone that has the right skillset that you need, then the costs of the business are lower, and you can start your business at a faster pace.
2. Other Alternatives: What if you don’t have many connections with people that could be of help?
There are many other affordable alternatives for collaboration.
- Build connections online: You can build valuable connections online through social media platforms like LinkedIn and Facebook.
Reach out to people that you want to collaborate with, and who knows? They may be interested too.
There are also many online forums with like-minded people who might want to want to collaborate. Look out for forums like that, and you can find people who could be of valuable help to you.
- Hire services online: There are lots of low-cost hiring services online that make the right skillset readily available to you.
2. The Target Market:
The target market is very important in deciding what business idea you want to start. To be successful in any business, you need to know who your potential customers are.
What people will be interested in your product or service, and what are they looking out for?
You also need to know what trends are changing and how you can satisfy your customers better.
Some of the factors that you should put into consideration when defining your target market and getting to know them better are:
- The Market Size: The smaller the size of your target market, the lower the estimated profits will be compared to a larger market size
So, when choosing a business idea, think of how many people actually need it and are within your marketing reach.
For example, if your business idea is a game shop, the target market will consist mainly of young people.
Setting up such a business in a location where older people are more geographically concentrated means you have a lower market size compared to setting your business up in a place that is dominated by younger people.
2. Market Demand: You also need to consider the market demand. Is there a demand for the product that you plan to sell?
When choosing a business idea, don’t get captivated by an “awesome sounding” idea but find out if people are willing to pay for the service or product that you are offering.
Is the available demand sufficient to provide you with enough profits to run a business? There might be some demand for the product, but is it enough to cover the running costs of the business and even make profits?
Are people demanding this product because they think it is useful, or is the demand mostly based on trends? Better still, can the product you have in mind be marketed to be seen as necessary? If your business idea is demanded because of its usefulness and the value that can be gotten from it, then it stands a higher chance of lasting for a long time.
Also, you want to make sure that the demand for your business idea is stable. Is it based on short-lived trends, or will it last beyond the peak periods?
If the demand for your business’s products is based on momentary trends, then what happens after the trends die down?
This is why you should go for a business idea that has a stable demand for its products.
3. Market Trends: As I’ve previously hinted, not only the current position of the market matters but also the trends over time.
The market trends of a business show the direction that the industry is moving towards. The trends could indicate business success or failure.
If the market demand for the product is increasing steadily over time, this is a positive indicator for the success of your business idea.
However, if the trends show that the demand for this product is constantly decreasing, then this might be an indicator of business failure.
To define and adequately understand your target market, you need to carry out market research which will reveal a lot of valuable information such as:
- The size of the market
- The age structure of the market
- The geographical concentrations of the market
- Significant changes in market trends and customer behaviors.
3. Your Competition:
There is hardly any such thing as a brand new idea. You already have competitors in almost every, if not in every business you can imagine.
If that is the case, how can you make your product or service the best in the market? The answer is pretty straightforward- make it better than your competitors’ products.
This is why it is vital to know more about your competitors before embarking on any business. Do you have the resources and the expertise to outperform your competition? What can you do better? What unique benefits can you offer?
Getting enough information about your competition is essential to the success of your business.
But what do you need to know about your competitors?
- Market Shares: How much of the market does your competition control? What percentage of the target market is dedicated and loyal to your competitors’ products?
If your competition already has a huge chunk of the target market as their loyal customers, then it will inevitably be harder and more costly to gain a good market share.
2. Concentration: Another factor that you should consider is the concentration of suppliers (of the same or similar product as you) in the market.
How many competitors do you have? What chance of success do you have over them?
The more competitors you have in a market, the smaller your market share will be, and although the odds of success are not entirely ruled out, it will be more challenging to be successful.
3. USP (Unique Selling Point): For your business idea to be successful, you need to show your customers that your services are worth their money and unique too.
What distinctive features or benefits do you offer above your competition? What is your unique selling proposition?
Trying to focus on everything at once greatly retards your growth, contrary to what you may think. This is why having a unique selling proposition is essential.
Ask yourself, “What differentiates me from my competition?” What aspect of the market’s expectations are you focusing on?
For example, you can decide that your Unique Selling Point is speedy delivery, lower prices, or durable products. Then you can focus most of your resources on meeting your USPs requirements exceptionally.
But what is your unique signature in the mind of customers?
4. Gaps: When deciding on a business idea, look out for gaps in the currently available products or services in the market.
Are there unfulfilled needs that you can satisfy with your business idea?
Taking a more streamlined approach to fulfilling customer needs produces a higher success rate than taking a broader approach.
Look for specific needs that you can meet with your products and services.
4. Financing and Breakeven:
Many new entrepreneurs overlook the costs that may be involved in running their business, leading to failure.
Before choosing any business idea, find out about all the costs involved in running the business.
Get an estimate of the profits too, and make sure that in choosing a business idea, you can manage the costs to achieve profits.
The breakeven point of your business is a perfect indicator of a business’s potential for success too. How many units of a product or service do you need to sell to cover all your costs?
Do you have enough customers to cover your costs and breakeven? Do you have sufficient funds to finance your business till its able to return profits?
These are factors that you should consider when choosing a business idea.
Quick tip: By doing a business plan, you have a more unobstructed view of what your costs and estimated profits are. It’s a good idea to do your business plan first, before deciding on whether or not to embark on a business opportunity.
In Summary, some important financing factors that you should consider before choosing a business idea are:
- Estimated Costs: Find out what the approximate costs are. Try to be as accurate as you can and do thorough research on the business before embarking on it.
Can you manage the startup costs? How long will it take you to cover these startup costs? What methods of financing will you use while you haven’t covered your startup costs? What are the running costs? How will you manage them without profits?
These are questions that you can ask yourself before embarking on a business.
- Estimated Profits: Just like costs, you also have to find out what the profit estimates for your business idea are.
Find out if there is a demand for your product and if people are willing to pay for it. I.e., find out if it is profitable.
Break down your profit estimates into months and compare them with your costs to find out when you will break even.
If your estimated profits are smaller than your estimated costs, then this is a red flag for the business idea.
- Financing Possibilities: Another financing factor that you should consider is the financing possibilities available for you.
Are people willing to invest in your business? Are there loan opportunities or other forms of financing available for you? What is your Plan B if you run out of funds at any point in business?
If your business idea doesn’t have many funding opportunities, then this may indicate that the risks are high, or it is not a profitable venture, which, again, is a red flag.
5. Growth and Expansion Possibilities:
For every business, growth is a very important factor. Before choosing any business idea, make sure to check for its growth potential and expansion possibilities. What indicators should you be looking out for?
- Time requirements: Try to find out how long it will take for your business to grow and to be able to find expansion opportunities. Also, what is the rate of growth and expansion? Can you keep up with it?
If your business can only begin to make profits or gain customer loyalty after a couple of years, then you may be wary of choosing such a business idea. But also, if your business grows at a rapid rate, can you keep up with the production demands?
It is a good idea to go for a business idea that has a moderate to high-profit margin, opening up expansion possibilities for you.
But remember to keep the growth rate in mind. A fast-growing business is like a double-edged sword. If you can keep up with it, great. If not, it is advisable for you to make financing plans for times of tremendous growth or save the idea for a later time.
Because let’s face it, there’s no expansion without financing. And the best way to finance your business is by the profits you make. It’s not the only way, but I would say that it’s the safest and best way.
So if a business’s estimated profits aren’t enough to cover up the costs, then growth and expansion possibilities are negatively affected, and the business idea is not one that you would want to go for because of the level of risk involved.
Generally, go for a business that has an amount of risk that you can manage.
- Quality Requirements: In case of quick growth, can you manage the demands while maintaining excellent quality? Can your production remain efficient at high production levels?
If responding to the higher demands and fast growth causes you to incur more costs or compromise the quality of your products, then you may need more resources in the future to keep up with demand. If the costs exceed your budget, then the business idea may not be the right business idea for you at the moment.
- Good location: Your business’s site is very significant to the growth opportunities open to it. A small location means that you have fewer opportunities for physical expansion.
For your business to be able to expand physically, there needs to be enough room for expansion.
So, when choosing a business idea, find out the costs of getting enough room for future expansion as well as the costs of securing the current location, especially if you plan to scale in the future.
Are there possibilities for future growth in your business?
Do you plan to scale your business?
Can you manage the costs of getting a more extensive and more flexible location that accounts for future business growth?
It is crucial to bear in mind that you should do in-depth business research before deciding on a location.
Because you’ll only know if your business idea has possibilities of growth in the future by doing thorough research, and the information that you get from this business research helps you decide on whether you should make plans to scale in the future or not.
In turn, your decision to scale determines what type of location you choose.
6. The Right Team:
Sometimes the skills and ideas you have as an entrepreneur are not enough to help you achieve the dreams you hope for; you need a team of like-minded people that you can work with.
There are certain things that you should find out before making the final decision on a business idea as regards the right team.
- Do you have all the skills you need to operate your business effectively?
- Will future scaling result in a need for more specialized skills?
- What are the costs of obtaining the specialized skills (team) that you might need?
- Do you have the resources to hire the right team?
“The right team” does not only refer to people who have the right skills as sometimes expertise is not enough to ensure that your business succeeds. There is more to the right team members than just knowledge. What should you be looking out for when selecting your team members?
- Passionate members: As much as expertise is essential, passion, and dedication to the job are equally important in choosing the right team members for your business idea.
Go for people who are not only highly experienced but passionate about the jobs that they are responsible for.
Passionate members are more likely to think outside the box and bring in new ideas and solutions to problems.
And that’s exactly what you need for your business. People who can work with you to ensure that your business succeeds.
- Creative: When choosing team members for your business, go for people that are innovative and creative.
You’ll find that creative people don’t just want to stick to the norm but push the boundaries and think outside the box.
You need to have creative team members that can join you in brainstorming for new ideas and solutions to existing problems because sometimes you need fresh perspectives to find solutions to your business’s problems and to work more efficiently.
Although every business idea has some potential both to succeed and to fail, some businesses are more prone to failure than others creating the need to analyze the success potential of every business before going into it.
In this post, I’ve shown you what factors you should consider in choosing a business idea. Carefully scan your business idea under the factors I have provided in this post and decide if you should go on with it or save it for later.
Is there anything I missed out in this post? I would love to know; please leave a comment below. If this post was helpful to you, share it with anyone who might find it useful too.
In the next post, I will give you some guidelines on choosing the best business idea out of all the enticing options.
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Esther Alu, the Founder of TheAceBusiness.com is an entrepreneur who writes step-by-step guides for starting several business ideas. She is constantly learning and discovering effective ways to help her readers launch and grow successful businesses.