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 kevinlearned@boisestate.edu
or by phone at 208-426-3875.
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