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Wednesday, September 9, 2015

3 Factors leading to a valuable business

Are they a must have or a nice to have?
Product ideas are always great to the inventor and they often see the idea through rose colored glasses.  Inventors occasionally transition to entrepreneurs and create startups to exploit the inventions. It seems easy to focus on creating a first class product that looks and works great.  After all, the concepts and vision were likely part of the path leading to the invention. However, the ability to create a viable business requires knowing more than how to create a first class product that looks great and works well.

Products must be designed to meet the needs of specific consumers, i.e. the target market.  Those consumers will decide whether the product meets their needs and if they wish to pay the defined price.  The actual payer is not always the consumer and often referred to as a third party payer; for example, your health insurance is a third party payer.  Your doctor may decide you need a procedure or drug, but the insurance company, the payer, may dictate the price of reimbursement or even refuse to pay.  If they refuse to pay, you may decide to skip the procedure because you do not want to pay out of pocket.  As a different example, the doctor may feel that a certain product or procedure would result in a loss of revenue to the practice for some reason, so the doctor selects an alternative for your consideration.  Finally, you may decide to not follow the doctor’s advice, so no transaction takes place.  The market and pricing have potential to be altered by the forces the business is unable to directly control.

These dynamics are similar for many products.  Therefore, consider the following three factors in the business planning early in the process.

Payer:  Who controls the funds for the product?  It is this group or person that will be important to whether the product sells well or not.  If the payer is not the recipient of the service or product, they will have a strong influence on the market and costs.  This is especially true when the payer is a not-for-profit or government style of entity.  You cannot assume that they will pay just because your product is great.  You will need to demonstrate why they benefit by purchasing the product at the desired price.  It is often a little easier when the customer is the person paying for the product.

Market:  The consumers receive the products and the payer pays for the products.  The percentage of customers receiving the product multiplied times the cost of the product is the market.  If this number is too small, finding investors becomes a problem.  Even if you get the business running, low revenues from sales will make it difficult to survive.  Thus, your assessment of the market is an important consideration. 

Need:  Developing a product that is a “must have” versus a “nice to have” can impact sales.  You may elect to not upgrade your phone if your old one works well because you do not need a new one now.  However, you will go to the grocery to buy food because you cannot live without eating.  Defining a market where the customer must have the item can make a significant impact on sales. This is even improved when the product is a consumable and repeat sales are involved.

  Taffy Williams is the author of:  Think Agile:  How Smart Entrepreneurs Adapt in Order to Succeed to via Amazon