Evaluate Your Risk and Payoff
Dilemma: I’m hesitating to jump on a new business venture—will it be a distraction or a serious opportunity? Will it lead to profits and more customers in the future, or will it be a bust?
Thoughts of the Day:
Every business needs new opportunities to keep it from getting stale, whether it’s breaking into a niche market you’ve always wanted to try, adding some technology to better connect to or serve your clients, branching out with an office location in another city, or even purchasing a competitor. The trick is figuring out the risks you’ll be taking and comparing them to the likely payoff. Put aside a budget for these experiments; don’t be afraid to walk away if something is not likely to pan out. Try thinking in three- to 10-year horizons, including both small and large experiments each year.
A STEADY FLOW OF NEW IDEAS IS ESSENTIAL to keeping any business fresh. Some will work, some won’t; some will turn into other ideas, some will get tossed. Set aside part of every week to work on the future of your company.
In order to better evaluate risk and payoff on each idea, consider the following:
How much will I need to put in to find out if the idea has merit?
Is there an established marketplace need?
How strong is the competition, and do we offer something different?
Can the investment (vehicle, technology, staff) be re-purposed if it doesn’t go as expected?
Is the idea too far out, or very similar to other ideas that have worked?
How long will it take to pay off?
Are there investment funds available to try out the concept?
How much of the outcome depends on variables I can or can’t control?
Is someone available who can be freed up to take charge?
What barriers to entry exist, to keep me out, to keep out the next player?
Do we know anything about this?
If I’m buying an up-and-running company, is it currently making a profit?
Why or why not?
Write out an answer to every question, and then score each answer from 1-4 (1=high risk, 4=low risk). Add up your scores and divide by the number of questions to come up with an average. The lower your average score, the riskier the proposition. Below a score of 2.5, the risks increase significantly. Be careful.
Once you’ve decided to pursue an idea, you should then figure out the cost to explore and turn it into a revenue and profit generator. Think in phases: investigation, build the concept, launch, promote, break even, make a profit.
When breaking into a new market or adding a service, consider starting with a small project in order to get some experience. Line up outside resources who can help when you need it. Build a team of marketers who can take you from initial concept to online testing and then full-blown promotion. You’ll need help with planning and analysis, market research, marketing concepts, social media, and a marketing campaign.
Understand what “sunk cost” is. If you put money into an initiative, and all evidence says that it’s not going to work, call it a failure and walk away. The money you put in isn’t going to turn into a return—it’s gone. That’s sunk cost. Know when to stop pouring in more money, and when it’s time to move on to try something else.
While not every idea is going to work, all you need are one or two good ones to shape the future of your business. Part of your job as owner is to keep your eyes and ears open for new things to ensure your business stays fresh. It’s generally easier and less risky to buy a proven concept than it is to start from scratch. Keep a list of possibilities and periodically pick one to try. Based on budget and available resources, you can probably take a preliminary look at two to four new things every year.
Some years may be more fruitful than others when it comes to experimenting with new ideas. Try to have a roster of several ideas you could pursue if the time is right. Set a goal to launch one or more new business ideas every couple of years. Look at your company’s past 10 years and consider the next 10 years. How fresh or aged is your business? Use that evaluation to determine how many ideas you need to pursue and how fast you need to move to remain both up to date and proactive. [CD0815]