How to Assess Your Product Viability

This article is an excerpt from the Shortform book guide to "The Personal MBA" by Josh Kaufman. Shortform has the world's best summaries and analyses of books you should be reading.

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Do you have a product idea in mind? What are some things you should consider before committing your idea to development?

Successful businesses engage in research and rigorously test the product viability before they commit to developing it. This process helps them test their assumptions about how profitable the venture will be and prevents them from investing time and resources in projects that won’t pay off.

Here are five questions to ask yourself before developing potential products and services.

#1: How Much Will It Take to Get It Out There?

The first factor you should consider when evaluating your product’s viability is how much it will take to get it out there into the market. Consider how much time and money you’ll need to invest to create, market, and distribute your product or service. What resources will you need? How much research and development will it take to get it right? Estimate both your fixed costs, such as rent and salaries, and your variable costs, such as supplies and usage-based utilities.

Guidance on Assessing Your Resource Needs

If you’re unsure where to start on this question, Osterwalder and Pigneur (Business Model Generation) offer more in-depth guidance on assessing your resource needs. They suggest three steps:

First, outline all of the resources you need to create and deliver your offer to your customers. All resources fall into the following categories:Material: raw materials, buildings, factories, vehicles, and machinery

Monetary: cash, credit, and stock optionsIntellectual: brand equity, copyrights, patents, and knowledge databasesHuman: experienced staff members and specialists

Second, define the resources that you don’t currently have and make a plan for acquiring them. Will you attempt to own, lease, or borrow them?

Third, once you have a clear idea of all of the resources your product or service requires, outline your expenses. Your expenses will include at least one of the following characteristics:

Fixed costs: salaries, rents

Variable costs: costs that vary in proportion to the volume of goods or services produced

Economies of Scale: bulk purchase rates lessen cost per unit ratesEconomies of Scope: a single resource or activity supports multiple operations or services

Additionally, all of your costs will fall into two categories: Direct costs—specific expenses related to your offer, such as paying to manufacture your product—and indirect costs—general costs that keep your business operating such as paying rent, utilities, and salaries. Knowing the difference between these costs will help you to identify your overall business expenses.

#2: How Will You Finance It?

Consider if you’ll need to borrow money and what risks this will involve. If you intend to seek out investors, how much control will you lose and how will this affect your business decisions?

The Pros and Cons of Seeking Loans and Investors

If you’re not sure what the benefits and risks are of borrowing money or seeking investors, the following advice from financial experts will tell you what you need to know about these two common sources of funding.

The advantages and disadvantages of taking out a loan: Loans offer three main benefits: They’re easy to apply for, the interest payments are tax-deductible, and they improve your credit score when you maintain repayments. 

However, they also include many drawbacks: They require personal assets as collateral, you have to pay back the loan plus interest even if your business fails to generate revenue, and you’ll pay a higher interest rate for each additional loan you take out—because the more money you owe, the lower your credit score and the riskier you appear to lenders.

The advantages and disadvantages of relying on investors: In addition to providing large amounts of capital, experienced investors offer three main benefits: They provide valuable support and advice, networking and collaboration opportunities, and publicity for your business. 

However, finding investors is a long and difficult process. Further, managing to secure investors comes with costs: You have less control over your business decisions—the more money you raise, the more equity you have to share with your investors. You’ll also be under pressure to rapidly scale your business so that investors receive a return on their contribution. Moreover, you’ll have to follow complicated procedures, such as setting up a board of directors to govern your business.

#3: How Much Demand Is There?

Consider how many people would want your offer and how much they’d be willing to pay for it. Calculate how many sales it will take to recoup your investment and make a profit.

How to Research Market Demand

Marketing experts offer practical advice to help you come up with concrete answers to Kaufman’s question.

First, adopt the following three strategies to gather relevant data on market demand for your product or service:

Use SEO tools to analyze how many people are searching for similar products and services. Sign up for social listening tools and refer to public reviews about existing products to understand how people value them.Find out what your competitors are charging for similar offers.

Second, consider how demand for particular products and services can fluctuate according to various factors so that you can understand shifts in the data—for example, why interest in your offer peaks during certain months. 

Availability—things in short supply usually experience increased demand. For example, fuel shortages prompt consumers to hoard gas and they willingly pay more to do so. 

Seasonal—some products and services experience demand during certain times of the year. For example, people only tend to search for tinsel and baubles during the Christmas period.

Economic and natural events—unexpected downturns or natural disasters impact the popularity of certain products and services. For example, restaurants experience less demand when people have to self-isolate due to a pandemic.

#4: How Much Competition Is There?

Consider how your product compares to what competitors are offering. The more competitors there are, the more you’ll need to differentiate your offer and battle for customer loyalty. 

How to Analyze the Competition

Business experts expand on Kaufman’s ideas by explaining that you should specifically seek out your competitors’ strengths and weaknesses. They suggest four ways to learn more about the competition:

Attend professional conferences and trade shows: Visit competitors’ booths to see what they offer and how they interact with customers.

Analyze their website and SEO strategy: In addition to visiting competitors’ websites, use SEO tools to analyze the keywords and Adwords they’re buying, their site traffic, and website ranking.

Examine their social media presence: Find out what platform they use, what type of content they post and how often they share it, how many followers they have, and how responsive they are to customer queries and concerns.

Sign up for their newsletter: This will give you in-depth knowledge of their email marketing strategy—what kind of content they send and how often.

Use this information to refine your idea until it matches or outperforms what’s currently on the market. For example, if you notice that your competitor is slow to respond to customer concerns on social media, plan ways to strengthen your own social media approach so that you can provide better customer service. 

#5: How Much Potential Is There to Expand Your Offer?

Consider if there are ways to build on your offer to generate future sales and profit from your investment. Can you adapt your offer or provide complementary products to fulfill additional needs?

(Shortform note: Business experts offer additional insights into why you should start planning ways to expand your offer. Your current business idea is likely to appeal to one type of consumer with specific needs. If you offer variations or complementary products and services, you’ll inevitably attract a wider range of consumers. This will increase your overall sales, provide financial stability, and allow you to compete more strongly in your industry.)

How to Assess Your Product Viability

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Darya Sinusoid

Darya’s love for reading started with fantasy novels (The LOTR trilogy is still her all-time-favorite). Growing up, however, she found herself transitioning to non-fiction, psychological, and self-help books. She has a degree in Psychology and a deep passion for the subject. She likes reading research-informed books that distill the workings of the human brain/mind/consciousness and thinking of ways to apply the insights to her own life. Some of her favorites include Thinking, Fast and Slow, How We Decide, and The Wisdom of the Enneagram.

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