The 4 Characteristics of a Good Business Idea (John List)

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How can you know your idea will scale? What should you look for, and what should you avoid?

Economist and professor John A. List says that a viable business idea has four characteristics. It has a scalable audience, it’s not dependent on talented individuals, it anticipates spillover effects, and it keeps costs under control.

Read on to learn about these four characteristics of a good business idea.

The Characteristics of a Good Business Idea

According to List, a good idea is a scalable one. This is the context in which he outlines the characteristics of a good business idea. First, let’s look at what it means to scale, and then we’ll dive into each characteristic.

Scaling is the process of bringing an idea from a small audience or sample size to a much larger one. Many businesses, nonprofits, and individuals want to scale their ideas for a variety of reasons—to make more money, do more good, or simply to spread their ideas as widely as possible (or some combination of the three).

For example, if your brownies are always selling out at your local community center’s bake sale, you might consider scaling up your baking operation. By mass-producing and marketing your brownies, you’d be able to make enough money to quit your day job while also donating more money to the community center, and you’d have the satisfaction of spreading your creations far and wide.

(Shortform note: Experts note that there are key differences between growth and scaling. Often, when a business grows, its costs increase in proportion to its revenues, meaning that while the business grows larger, it doesn’t necessarily become more profitable. However, when a business scales, its revenues increase at a higher rate than its costs, resulting in much greater profitability.)

List details the characteristics to look out for when trying to figure out if your idea will scale. Trying to scale the wrong idea can lead your enterprise to suddenly and dramatically lose momentum when scaling—List calls this a “voltage drop.” When an idea loses momentum at scale, you lose time, energy, and (potentially) funds, and the project collapses in on itself.

To return to our brownie baking example, if you fail to notice red flags in your baking business model, you might drastically overestimate how many brownies you’ll sell at scale. Lacking customers, you’d be sitting on a pile of rapidly expiring baked goods that you spent time, money, and energy producing. In all likelihood, you’d have no choice but to eat your losses.

(Shortform note: New enterprises lose momentum and collapse at a high rate. Some authors estimate that as many as 70% of new businesses fail within their first 10 years. In Built to Last, Jim Collins describes the characteristics of businesses that are able to beat the odds and find enduring success. Collins argues that these companies succeed not by conservatively trying to avoid failure but by striving for ambitious long-term goals. By setting these kinds of goals, you help motivate your organization and prevent complacency.)

#1: It Has a Scalable Audience

According to List, individuals and organizations often incorrectly assume that, because an idea is popular with its original audience, it will continue to succeed when scaled to a broader audience. However, if your original audience doesn’t accurately represent the larger audience you hope to scale to, you may find that your idea fizzles out at scale.

To determine whether your idea will have an audience at scale, you need to figure out who is in your current audience. The best way to do this is to test your idea in multiple markets that include a wide variety of demographic groups. Testing your idea as broadly as possible will give you the data to determine who your product appeals to, and why.

If your idea appeals only to select groups of people, and you still want to find a way to scale it, you may need to tweak your idea to have a more diverse audience. The key to broadening your audience is figuring out the needs that different groups of people share.

While having a broad appeal can help to scale your idea, your product doesn’t need to appeal to everyone to be scalable. What’s important is that you understand your audience and only scale your idea to markets where you’re confident it will succeed.

Misleading Results

When determining whether your idea has a big enough audience to scale, remain alert to misleading results. Misleading results, or “false positives,” as List refers to them, are data that overstate the appeal of your idea.

List recommends that you replicate your tests to double-check their results, in addition to testing your idea in diverse markets. By replicating tests, you ensure that initial positive results aren’t flukes that occurred randomly or due to an unforeseen factor. If testing indicates that your idea is likely to scale well, you can retest the idea by introducing it in just a few locations before fully scaling up production.

#2: It’s Not Dependent on Talented Individuals

List advises you to look out for is dependence on talented individuals. Specifically, List argues that, if the primary driver of your success is the talent of one or several above-average performers, your idea will not scale. Ideas that depend on talented individuals fail to scale simply because it’s impossible to scale a human being—while you can continue to hire the best available talent, you can’t replicate an individual’s unique talents and abilities.

For example, suppose you’re the owner of a shop that sells hand-forged kitchen knives. You’ve succeeded thus far because of the strengths of the craftsmen you hired—they’re experienced artisans who work together to create unique, beautiful designs. Thrilled with your success, you look into opening franchises in other cities. However, when conducting interviews, you realize that almost none of the candidates meet your lofty standards—as it turns out, knifemaking is a unique skill that only a few individuals put in the time to master. Unless you’re willing to compromise on quality, you probably won’t be able to find enough staff to scale your business.

(Shortform note: As List notes, organizations that rely too heavily on individual talent often struggle to keep finding such talented employees. However, dependence on talent can also leave you susceptible to other scaling pitfalls. Specifically, experts note that successful business founders frequently struggle to apply their entrepreneurial talent to long-term management of their firms. If your company got off the ground thanks to the pluck of a gifted founder, the same founder may become an obstacle to scaling, unless they develop management skills or switch roles.)

Just as talented individuals cannot be scaled, systems designed by exceptional people cannot always scale. List notes that technology developed and tested by especially talented people can sometimes fail to scale when implemented across an entire organization. This happens because tech experts don’t struggle with the same kinds of problems as average people. When new technology is only tested by the experts, those experts might fail to notice design flaws that hamper wider, less adept audiences. Testing new technologies with an audience that accurately represents the average intended user of your product can help mitigate this effect.

(Shortform note: Not only do talented developers tend to create technology that regular users can’t grasp, but those experts are also often ill-equipped to educate others on how to use their products. According to some authors, the greater your skill in any given discipline, the more difficulty you’ll have teaching laypeople about it. In Team Topologies, Matthew Skelton and Manuel Pais recommend that you create dedicated teams of educators tasked with training the rest of your workforce to efficiently handle even complicated pieces of software. Otherwise, your productivity may suffer while untrained users struggle to work things out for themselves.)

#3: It Anticipates Spillover Effects

As you try to scale your ideas, consider the unintended consequences of scale, or as List calls them, “spillover effects.” List notes that, at scale, ideas often produce unintended effects, both positive and negative. Failing to account for the potential negative effects of scaling can prevent you from successfully scaling your ideas.

List notes that unintended consequences of scale often occur because markets naturally tend to stabilize after being disrupted—because of this principle, when a new product enters the market, it may experience an inflated level of success due to its price point, its novelty, or other factors. However, as suppliers of similar products adjust their prices and offerings, and consumers adjust their spending and expectations, a new product’s initial advantages can diminish, leading the new product to gradually lose steam as the market readjusts around it. As a result, ideas that initially seem to be scaling well may wind up struggling in the long run.

The Unintended Consequences of Workplace Social Dynamics

Unintended consequences of scale can also stem from certain workplace dynamics. As you scale your organization, you’ll inevitably have to hire more employees. With an increasingly large workforce, the relative costs of social problems such as demoralization, poor communication, and employee turnover can become increasingly severe due to the effects of scale.

It’s also common to run into unintended consequences of scale when adopting a new network or system at your organization. Generally, even if a new system is more efficient and effective in the long run, your organization will experience lower productivity as individuals adjust to it. At a smaller organization, these setbacks may seem relatively minor. However, at scale, even slight changes in productivity can be costly.

The Unintended Consequences of Wage Transparency

A common source of unintended consequences is the organizational policy around wage transparency. According to List, wage transparency can have a variety of positive and negative effects depending on how it’s implemented in your organization. To avoid the negatives and benefit from the positives, List recommends taking a considered approach to wage transparency.

List conducted a study on the effects of wage transparency to better understand which practices produced the best results. In the study, employees worked harder when they knew how much their managers were being paid, as they aspired to get promoted and earn those wages for themselves. However, when employees knew how much other workers at the same level were being paid, they became resentful and demotivated if any of their peers were earning more than them. Based on the results of this survey, the best approach would be to let employees know what the average employee makes one step up the ladder—that way, your workforce will have something to aspire to, without knowing what their peers make in enough specificity to become resentful.

#4: It Keeps Costs Under Control

Runaway costs occur when per-unit expenses unexpectedly increase as your organization scales. Generally, as you scale up a product, your unit cost should decrease, since you’ll be able to take advantage of increased efficiency and lower component cost, while overhead costs remain the same. However, if your idea’s unit cost increases as you scale up, it may not become profitable, leading your idea to fail at scale.

To avoid being blindsided by runaway costs, when calculating your costs and setting prices before launching a product, overestimate your costs to account for the unexpected. By overestimating your costs, your business can remain profitable even if you end up having to spend more money than you’d like.

List also recommends doing whatever you can to lower your overhead cost before your product launches. By lowering your overhead, you’ll be able to introduce your product to the market at the lowest possible price point, which will allow you to target a wide audience. Additionally, the lower your overhead costs, the sooner you can make them up and begin to profit.

The 4 Characteristics of a Good Business Idea (John List)

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Elizabeth Whitworth

Elizabeth has a lifelong love of books. She devours nonfiction, especially in the areas of history, theology, and philosophy. A switch to audiobooks has kindled her enjoyment of well-narrated fiction, particularly Victorian and early 20th-century works. She appreciates idea-driven books—and a classic murder mystery now and then. Elizabeth has a blog and is writing a book about the beginning and the end of suffering.

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