A few weeks ago a software entrepreneur made an appointment to visit with me at the Idaho Small Business Development Center. She brought a mock up of the web pages that encompassed her idea. She wanted my opinion as to whether or not the idea was worth pursuing.
This is a common occurrence. Someone gets an idea for a very cool new piece of software and the next step is to mock up a design. For some, the next step is to hire programmers and begin the process of development. But, I think the correct next step is to determine the business potential.
Here are the questions I asked my client to her determine the business potential of her idea:
1. What is the problem being solved? In order to have a successful business, her product or service must address a problem in the market place. Unless there is a real problem for which people will be willing to pay money to solve, the company will fail, no matter how unique or beautiful the software expression.
For example, in the case of Group-on, the problem addressed is: businesses would like a cost effective and measurable way to reach new customers.
2. How big is the problem? How many people or businesses have this problem. Unless there is a sufficiently large number of potential clients, the problem while real, may not be worth solving.
For example, Pinterest has discovered there is a very large number of people who are interested in posting pictures to the Internet, and for whom Facebook does not present a satisfactory solution.
3. How will the company acquire its customers? Sometimes referred to as the “go to market strategy,” this crucial question is often trivialized. I often hear answers such as “social media” or “it will go viral.”
The fact of the matter is it is difficult to identify, target and communicate with the market, especially when you are new, have no brand presence and little money to spend on marketing.
Many successful businesses will identify a channel already talking to the target customers and then tap into that channel. For example, dealsaver.com, a Group-on competitor has partnered with the Idaho Statesman to bring its service to local advertisers. The Statesman’s sales force is already calling on businesses so it is relatively easy and inexpensive for that sales force to also pitch Dealsaver to the Statesman’s customers.
4. What will it cost to acquire a new customer? Software companies can be very profitable once the software is developed, as the cost of selling another copy is virtually zero. However the business has to find the customer and convince them to use the product. This typically takes money--sometimes lots and lots of money. In order to have a profitable business, the cost of acquiring a customer must be less than the revenue the customer will bring to your company.
For example, the rumor is that Amazon initially sold its popular Kindle devices for less than its cost. But, so long as the loss Amazon took selling a Kindle, along with the other costs of acquiring and serving the customer is less than the revenue the customer will spend on e-books, the completed transactions will be profitable.
I recommend all software entrepreneurs think deeply about the above questions and the possible answers before they begin to spend money developing their dream product. If the answers to the above are not favorable, developing the software is likely to be an exercise in disappointment, and quite possible a financial disaster.
_____________________________Dr. Kevin Learned is a counselor at the Idaho Small Business Development Center (www.idahosbdc.org) at Boise State University where he specializes in counseling with entrepreneurs seeking equity capital. He is a member of the Boise Angel Fund, and is a principal in Loon Creek Capital (www.looncreekcapital.com), which assists angels in forming angel funds. He can be reached by email to email@example.com or by phone at 208-426-3875.