One of the most important rules I’ve learnt from Warren Buffet in entering new online markets is to TEST before you INVEST. In basic terms, don’t start investing tons of money and time into an online business until you have sufficient data on the market.
For starters, good ideas don’t necessarily equate into viable opportunities. You need to have the ability to gauge market reaction to your idea. All that really matters is the consumer reaction to the offer. Whether it’s a B2B or B2C transaction, the consumer is the high court and their ruling comes in the way of a sale… Or no sale. Hence your opinion of the idea is ultimately judged by the consumer’s purchasing decision.
Case in point is my dear friend Matt (real name protected out of respect). Matt had an incredible idea to offer a software tool to brick and mortar businesses that would allow them to easily conduct transactions online. The concept seemed feasible and the targeted niche that Matt went after was in dire need of this tool.
For close to a year he toiled away at his project. Blood, sweat, and tears went into this project, all with the blind hope that the market would react in a very positive way.
When launch day came he had it all figured out. Per his calculations, in a worst case scenario, he would still be able to score millions in revenue from capturing just 5% of the market. After all, it isn’t that hard to capture 5% of the market… Or is it???
With a shoestring budget left over for advertising, he launched his campaign…
Week 1, no sales…
Week 2, no sales…
Week 3, no sales… Denial sets in, optimisation occurs, back to testing…
Week 4, no sales…
Week 5, no sales…
Week 6, no sales… Further optimisation, back to testing…
…… no sales.
My heart bleeds for entrepreneurs that fall into the “good idea” trap. The brain damage caused by wasting time on a project that is doomed for failure is enough to cause a man to go insane.
Matt could have saved himself from the cluster headaches had he spent more time testing & conducting a thorough due diligence of the market. He would have quickly identified that the idea would have no market traction, allowing him to test different ideas… With no money left over and exhausted from the failed venture, the only question that remained was if Matt could bounce back? TBD…
BTW – I’ve personally fallen into this trap, and so know from painful and expensive experience!
Now I only enter markets that have pavement laid by previous entrepreneurs. Their dollars provide a great litmus test for what works, and what doesn’t. That allows for my team to come in and add innovative ideas on top of proven business models.
Below is a simple 4 step test I created to test different online businesses. I hope it works as well for you as it has for me:
The 4 Step Test Before You Invest
Step 1: Run An Affiliate Offer To Test The Market
Jump on all of the affiliate networks to pull offers that are in the market you want to enter. Test out different ad campaigns to gauge the consumer response.
Pay close attention to the amount of traffic that exists that backs out below your targeted CPA. If the offer pays a $20 CPA and you can back it out south of that, then there’s a good chance that if you created your own offer, you would be profitable. Offers almost always pay out CPAs that are south of their costs.
Beware of CPL offers as the traffic is deceptive. There’s a lot of behind-the-scenes metrics involved in understanding the true value of a Cohort Group of leads. i.e. I spent $26k on AdWords for 1 campaign last week that generated leads. The revenue generated in that business from month 1 acquisitions was considerably higher than my spend. Did the traffic back out?
Answer: I don’t know.
The leads that my team converted were not all from the $26k that we spend on AdWords. In order to properly discover whether this campaign makes financial sense, we would have to track the exact amount of money spent on a group of leads, how many of those leads converted, the CLV of those converted leads, operational expenses, etc. Only then would we know whether or not the leads backed out.
Step 2: Split Test Landing Pages to Gauge Market Reaction
Once you have data on the traffic channels that work, you need to discover whether you have the ability to compete. You’ll need to go head-to-head with the affiliate offer you tested by running traffic on the same channel. That way you can compare apples to apples.
If the offer you’re creating is a credit card submit, simply do not process the cards, just collect then void. The thing that you’re looking for is the ability to competitively convert.
If you’re building a lead gen campaign, pick up the phone and call the lead back. Have a series of questions available to measure the likelihood of a response. Then crunch the numbers to determine what it would take to make the campaign successful.
The main reason why I got so focused on direct response marketing was because I could not afford anything but a strong direct response. Going up against well capitalised opponents felt like David vs. Goliath. Underdogs win simply by outworking their opponents!
Step 3: Do Your Due Diligence
Once you have intelligible data, conduct a thorough due diligence of the market. Make sure you identify and clearly understand the following:
– Market Size
– Stage of Market
– Capital Requirements
– Patent Searches
– Replication Factor
– Domains Available
– Opportunity Costs
Step 4: SWOT Analysis
Last but not least, you’ll need to run a SWOT analysis. Taken directly from Wikipedia:
SWOT analysis (alternately SWOT Matrix) is a strategic planning method used to evaluate the Strengths, Weaknesses/Limitations, Opportunities, and Threats involved in a project or in a business venture. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieve that objective. The technique is credited to Albert Humphrey, who led a convention at the Stanford Research Institute (now SRI International) in the 1960s and 1970s using data from Fortune 500 companies.
Setting the objective should be done after the SWOT analysis has been performed. This would allow achievable goals or objectives to be set for the organisation.
- Strengths: characteristics of the business, or project team that give it an advantage over others
- Weaknesses (or Limitations): are characteristics that place the team at a disadvantage relative to others
- Opportunities: external chances to improve performance (e.g. make greater profits) in the environment
- Threats: external elements in the environment that could cause trouble for the business or project
Identification of SWOTs is essential because subsequent steps in the process of planning for achievement of the selected objective may be derived from the SWOTs.
First, the decision makers have to determine whether the objective is attainable, given the SWOTs. If the objective is NOT attainable a different objective must be selected and the process repeated.
Users of SWOT analysis need to ask and answer questions that generate meaningful information for each category (strengths, weaknesses, opportunities, and threats) in order to maximise the benefits of this evaluation and find their competitive advantage.
I sincerely hope that this post sheds some light on how to build an online business without losing your shirt. Calculated risks lead to better decision making.
Make sense? Good. Now get to work, or better still… Get Us To Do The Work!