5.0 Profit Potential
How to Start a Business >> Each section contains key Action Items located within the downloadable Action Guide >> Click to Download Action Guide.
5.0 PROFIT POTENTIAL
You should now have received important feedback from all of your industry research, competitive research and target market research.
What’s your gut instinct? Do customers want your product or service? Did you find prospective customers are willing to pay for your product or service? Did you find an average price that potential customers are willing to pay for your product or service from your target market research?
You have determined that your product or service can truly be offered to customers and they will pay for the product or service, however, can your product or service really be profitable?
Profit is created when the customer’s price for your product or service is higher than the cost to produce and deliver your product or service. The basic difference between the two is your profit.
5.1 How will you produce your product or service and how much will it cost to produce?
You have determined demand for your product, however, can you truly produce or deliver your product or service to customers?
Ideas can be great on paper, but they may not have the ability to be produced at a reasonable cost that can produce a profit. Some cannot be produced at all.
Can your product or service be produced with the features and benefits that are most important to your customers?
You must now begin to think about how your product or service will be produced.
Are there local suppliers or manufactures that can help produce your product?
Did you uncover where your competitor produces their product?
Did you uncover how much it costs your competitor to produce their product?
If so, you might already be convinced that your product has potential. If that’s the case and you’re ready to continue developing your product or service, then you may want to read the How to Write a Business Plan and Business Plan Presentation Action Guides.
If you still need to research the development, production and delivery of your idea, then you want to start thinking about how your product or service can be fulfilled.
If you have a product or service that’s already on the market, you should be able to conduct searches that will reveal production facilities for your products.
Are there other products on the market that might be produced in a similar way?
Look at their packaging and see if you can find a company name on the package.
Look for a patent number on the box that can be researched to uncover a company name or a manufacturers name in the www.uspto.gov government patent records database.
- Can you call the company to find out how they make their product?
- Do they manufacture their own product?
- Could they produce your product for you?
- Do they have another company who manufactures their products for them?
- Can you find out who manufactures their products for them?
If a company has a competitive product and you want to discuss having them produce your product, consult a lawyer first! You might be able to license your product idea to them, so make sure that you are legally protected before disclosing your idea to them.
- Can you Google your product or service type to find industry suppliers and manufacturers?
- Can you call your industry or trade association to search for suppliers and manufacturers?
- Can you call your local “economic development center” for a list of local manufacturers?
- Can you check with your local librarian to locate national and international manufacturers?
Please note that a Non-Disclosure/Non-Compete Agreement can work well with potential suppliers and manufacturers who do not have competing products.
Begin thinking about each of the components needed to fulfill or sell your service to customers. Think about every component necessary to bring your product or service to life.
- Do you need staff?
- Do you need machinery?
- Do you need an office?
- Do you need telephone service?
These items make up some of the costs for individuals seeking the delivery of a new service.
One of the MAJOR setbacks for early stage entrepreneurs is opening an office too soon. A lot of work can be accomplished with just a phone and the Internet. Renting office space, buying furniture, getting phone lines and other expenses all drain your cash supply, so be careful. In today’s world, a great website might be your best investment for a great image.
ACTION ITEMS: Complete the Action Items in your Action Guide.
USE the lessons within this section to write out how you will produce your product or service:
How will it be produced?
How are others producing similar items?
WRITE down each of the costs to produce and fulfill your product or service?
As you uncover each of your costs to produce and fulfill your product or service, you must now add all of your numbers together and begin to find out what it will cost to deliver the product or service to your customers. Imagine how many customers could purchase your product or service in a month, a week or a day. As you think about your costs to produce and fulfill your product or service, begin to formulate the “average cost” to fulfill or produce your product or service for one customer. How do your costs look compared to the average price that your customers are willing to pay for your product or service?
Your numbers won’t be perfect at this early stage; however, you can begin to understand the “profit” potential for your product or service.
Generally speaking, the more product or service that you produce and deliver or sell, the lower your costs will become to produce or deliver the service. Therefore, as you increase your customer volume you should then pay lower costs for your product or service and begin to see greater profit potential.
In this section, you are learning some of the basic theories of “supply and demand” and “economies of scale.” In simple terms, greater demand for a product or service reduces the supply. With less demand, supply often increases. Generally, the greater the “scale” of a business or volume, the cost to produce will decrease.
5.2 Can you combine your product or service with another product to produce it faster or better?
In 5.1, you may have uncovered similar products or services that could be combined with your product or service to create a new customer offering. If this is the case, you may be able to reach customers faster or more efficiently by partnering with another organization that has a similar product or service.
Imagine if your product could be an “add-on” or packaged with an existing product. The established product or service already has customers and could enable a fast and efficient entry into the marketplace for your product or service.
Furthermore, imagine a local business that attracts the ideal customer for your product or service. Could you consider approaching the business owner to carry your merchandise?
Could you rent additional space from a business that might reach the same customers?
Be creative and think of ways to enter a business from a whole new perspective. Owning a business can be great and it can a nightmare, so limiting your exposure and testing the market through partnerships could be a great win/win situation for you. Keep in mind, with good sales of your product or service, you could always branch out on your own and then open a separate location. Always be creative in your approach.
If your product or service is very unique and your “intellectual property” has not yet been legally protected, you will want to consult a lawyer before approaching any potential partners.
5.3 Is your product or service in a market that is growing or declining?
The world is ever changing with new markets appearing and old markets disappearing.
Think back to the days of the “audio cassette” or the “video cassette” and you instantly recognize that new products and services replace old products and services.
What does the market for your product or service appear to be doing? Is it growing? Is it declining? How will your product or service be affected in a declining market?
The growth rate of most industries can be acquired via the Internet and at the library. You may choose to utilize fee-based reports as well.
Fee-based Reports
ACTION ITEMS: Complete the Action Items in your Action Guide.
GOOGLE “(your industry) growth rate” or try “(product or service) growth rate” and see what search results appear. Just keep researching each link and you will find lots of data. Is your industry growing or declining?
5.4 How much will it cost to reach paying customers for your product or service?
Reaching customers is one of the most challenging and rewarding aspects of building your business. In Lesson 4.3, you determined the five best places to locate your ideal customer.
On an ongoing basis, can you continue to reach your idea customer?
It is one thing to reach a customer, but it’s another thing to sell a customer. In fact, Jeffrey Gitomer is one of the best sales gurus in the nation and he says, “Customers don’t like to be sold, but they love to buy!”
- How much will it cost to reach your customer?
- Will you have to pay a sales representative?
- Can you pay the sales representative a percentage of the profits instead of a salary?
- Can you reach your customers through unique partnerships with other companies?
- Can you reach your customers in person?
- Can you reach customers through direct marketing flyers, ads, postcards and newsletters?
- Can you reach your customers via the telephone?
- Can you reach your customers via e-mail?
- Can you reach customers via the Internet?
ACTION ITEMS: Complete the Action Items in your Action Guide.
WRITE down the additional costs that will be incurred to reach your customers.
5.5 Do you believe your idea has the potential to generate ongoing profits?
Congratulations!
You have now made it through hours and hours of research to uncover the potential of your idea! What’s your gut instinct? Do customers want your product or service? Did you find lots of competition in the market? Did you find prospective customers are willing to pay for your product or service? Did you find that you could produce your product at a reasonable cost to produce a profit? Did your preliminary research suggest that you could reach numerous or unlimited customers at a reasonable cost?
If you’ve made it this far and you truly have conducted the research necessary to uncover the potential of your idea, then you now have a basic understanding of how to start a business.
By NO means will this research guarantee success for your business; in fact, there are no guarantees with any business anywhere. This Action Guide simply conveys the additional research and development needed to bring your product or service to life.
ACTION ITEMS: Complete the Action Items in your Action Guide.
Do you believe your product or service has the potential to generate ongoing profits?
____ Yes
____ Maybe
____ No
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