In my experience, the main reason businesses fail is not from lack of capital, but rather from lack of knowledge.
Knowledge about how to run a business is an entrepreneur’s most potent weapon. It often means the difference between a good business and a great business, as well as success and failure.
That said, one of biggest mistakes most would-be entrepreneurs make is going into business based on what they think people should buy, rather than what people really want or actually do buy.
Here's another way to look at it.
If I were given the choice between starting a business built around a new gadget, or starting a shoe store, I would go with the shoe store every time.
The reason I say this is that people buy shoes every day, and I can easily put a number on the size of the shoe marketplace. Additionally, because the global population is constantly growing, I can be fairly sure the market for potential shoe owners will continue to grow – and people will buy multiple pairs of shoes – in the years ahead.
Although this is a simple example, many inexperienced business people would opt for the new gadet business. They make this choice because they’re enamored with a potential market they can't quite measure or identify and have a false sense of security in the fact that, even though it’s new, everyone needs it and will want to buy it.
These business owners often end up bewildered when their warehouses are full of stock they can't even give away.
How can you avoid this trap in your own startup?
Here are three simple things I recommend entrprenuers do before they get into business to make sure there is viable, sustainable and growing market for their business.
1. Identify your market and customer. How big, in monetary value, is the current market for the product or service? Is it a new or mature market? Are you in a new or mature category? A lot of these questions can be answered with a few hours of online research, by approaching the relevant industry association, or by attending a trade show or exhibition.
Then develop lists to help profile the “perfect customer” for the product or service you are trying to sell.
Doing this will help you establish the best sales process for your business and will help you know if your initial assumptions about your product or service actually hold true.
2. Test and measure demand. Big companies spend lots of resources testing ad campaigns and hiring focus groups, but business owners can also conduct effective research by simply starting small and then testing and measuring everything they do.
3. Develop a list of contacts. During the planning phase of a business, if you already have a list of vendors, suppliers or even potential customers, keep building that list and start to develop a communication strategy to keep in contact on a regular basis. Today's contacts may be tomorrow's customers. More importantly, they have access to entire networks of people who may want or need your product or service.
The real goal of networking is not making a sale to your direct contact. It's about creating a relationship with that contact that leads to referrals and word-of-mouth leads later on. Protect and value your list as it can become one of your business’ greatest assets.
In the end, there is no fail-safe formula for business success, although people are always trying to find one. The best indicator is a proven market with room for growth, populated by people willing and able to pay for something unique or different that helps them make their lives better, easier or happier in some way. It's the business that does the usual in an unusual, unique or different way that wins customers and keeps them coming back for more.
* Harry Welby-Cooke is the is the co-master franchisor for ActionCOACH in Southern Africa.