Coming up with ideas for new businesses is fun and easy. As you go through your day, you run into all manner of minor annoyances; every time you think “I wish that …,”, can probably turn that thought into a business idea. For example, as I write this, I’m at Kelly’s French Bakery, and it’s cold in here. I wish I were warmer. And therein lies a business idea: a sweatshirt “sharing economy” service where warm people who have sweatshirts can rent them on a short-term basis to cold people nearby. Call it ShirtShare.Com. With a smartphone app, of course.
Oh, were you expecting a good idea? That’s harder.
I find that I say to myself “Oh, there’s an idea for a business!” several times a day. But, earlier this week, I had a few thoughts that I wasn’t sure qualified as actual business ideas. I realized that I wasn’t sure just how baked a thought has to be before it’s reasonable to say “that’s an idea for a business.” If you’re looking for business ideas, shouldn’t you have clarity as to what constitutes an idea?
I decided it was time to make a template for recording these alleged ideas so that I could compare them side-by-side. But, that begged the question as to what ought to go in the template. I wanted something much simpler than a traditional business plan. My goal was not to attract investment or to lay out an operating plan. I didn’t need detailed market size analysis or financial projections. I just wanted to capture the core concepts behind each business concept so that the essence of the business was clear.
First and foremost, a business idea needs to describe the product being offered. If I’m going to open a Mexican restaurant, the product is the dining experience offered by the restaurant. Second, I want to understand the target market. Who will make use of the product While a full customer archetype isn’t necessary, the picture should be reasonably clear. For a Mexican restaurant in Santa Cruz, California the target market might be “people who live within 10 miles of Santa Cruz, enjoy Mexican food, and eat out at least once a month.”
The product and market describe the core of the business, but that information alone is not sufficient to form even a casual opinion as to its merits. The next key bit of information is the (supposed) competitive advantage of the businesses. If there is no reason to think that the proposed business has some edge on the competition, it’s not worth thinking about further. For example, perhaps my new Mexican restaurant will make use of the secret, delicious enchilada recipe handed down by my great-aunt Maria. My competitive advantage is that recipe.
By fortunate coincidence, as I was considering the question of “what counts as a business idea?”, I was reading The Lean Startup. (Check out my review.) The author, Eric Ries, talks about two “leaps of faith” for start-ups: the value hypothesis and the growth hypothesis. The value hypothesis explains why you think the customer is going to appreciate your product. The growth hypothesis explains how the company will get bigger. These are hypotheses because there is no way to be sure they are true until you create a product and test them.
I find Ries’ classification of growth models particularly helpful. He describes:
- Sticky growth, in which companies expect that customers will use the product for long periods of time. The key to growth is that the company can bring in new customers faster than existing customers abandon the product. Wireless phone companies depend on this kind of growth.
- Viral growth, in which usage of the product itself attracts new customers. For example, social networks are built expecting that early adopters will invite their friends. The key to growth is that the average customer will attract at least one more customer.
- Paid growth, in which companies pay to acquire customers. The key to growth is that the average customer spends more than the average cost of customer acquisition. For example, a hotel invests in advertising to attract vacationers on the theory that the cost of advertising and the cost of operating the hotel are less than the revenue obtained from the visitors.
I think that the value hypothesis and the growth hypothesis are the remaining necessary elements to capture the core business idea. In our example, customers are going to love the Mexican restaurant because of Aunt Maria’s delicious enchiladas; it’s the yummy food, not the pricing or the atmosphere or the service, that we think is the key. And, we expect the restaurant to have a sticky growth engine; local residents will come back again and again to get more of those delicious enchiladas. (Following the Lean Startup model, we should quickly try to test those hypotheses as soon as we can!)
So, I ended up with a template that has the following fields:
- Target Market
- Competitive Advantage
- Value Hypothesis
- Growth Hypothesis
Next, I’ll be stuffing some of my ideas into that template so that I can compare them.
I’m pretty sure that ShirtShare.Com isn’t going to make the cut, though.