Chapter two: Is there a business opportunity?
Not all business ideas will work. In this chapter, you’ll explore the market for your potential business: who would buy the type of product or service you’re offering, if they’ll buy it from you, whether you could offer it at a reasonable price and whether you could make a profit.
You’ll also have an opportunity to decide whether there’s room for your business in the market. Whether you can produce the good or service efficiently is an important consideration.
While this chapter requires you to gather a great deal of information, there are a number of resources that can help you collect it. Economic Development Officers, industry and trade associations, your local library or bank and the Internet are all good sources of information.
Describe your product or service
Use simple terms to describe what you plan to do in your business. You’ll have more time to refine your concept as you work through this chapter and the next ones.
Ideas for businesses can come from many different sources:
- You or someone you know may be looking for something you need, and can’t find it.
- Local businesses may be looking for a supplier.
- Your friends and family may suggest that you’re very good at making or doing something that they would buy.
- Currently, your community is bringing in something that you could make, provide or grow locally.
- Another community has something that your community doesn’t have yet.
- Trade shows may offer new inventions or products that aren’t yet available where you live.
- Magazines, journals and websites often have articles suggesting new ideas.
Product, service or both?
A product is a thing that you make or package (examples: jewelry, food, lumber, clothing, housing, etc.).
A service is something that you or your employees do (examples: provide childcare, transport people and goods, sell things in a retail store, provide advice or information, bookkeeping, hairdressing, etc.).
Some businesses provide both products and services (example: an auto dealership sells cars and does repairs).
Write down your idea for a product or service.
Understanding your market
What industry will you be part of?
Your business will operate within a particular economic environment. One aspect of this is the industry or sector that it’s associated with. Some examples are agriculture, tourism, food processing, retail and information technology. Each of them is somewhat unique, with its own way of operating. First, let’s look at how the parts of an industry work together. In the next diagram, you’ll see that your business will find a place among many other businesses. All of the businesses need to understand each other and work together so they can be successful.
There are many industry categories where you’ll find Indigenous businesses and business leaders, including:
- consulting and legal services
- food processing
- hospitality and tourism
- information technology
- media/communications (newspapers, television, radio, web)
- utilities (hydro-electricity)
- natural resources (forestry, trapping, fishing)
What industry do you think your business fits into?
Here are some things you should know about the industry you’ll be operating in:
- Is this industry growing?
- Does the future look good?
- How many other businesses are in the industry?
- Do they share common characteristics?
- Are there special regulations that your industry must follow?
- Do you or your employees require a license?
- Are there specific regulations affecting this business such as environmental protection or supply restrictions?
- Do you need to inform any government or professional body about your business?
- Are there special legal requirements?
- How does this industry tie-in to your community?
There are many places to look for information about your industry. You may want to start online, by looking at industry or trade association websites. You can also go to your local library and ask the librarian for help. You can also ask someone that is working or used to work in the industry if they’d be willing to meet with you and give you their knowledge of the industry. At the end of this chapter are some links to website containing industry-specific information/data.
There are many different types of businesses that operate within the same industry. These businesses fall into four major categories – suppliers, producers, distributors and retailers. Keep in mind that these are broad categories. In today’s business world, many companies serve multiple functions; for example, you may produce quilts and sell them directly to consumers from your own retail store, which would make your business a producer and retailer.
- raw materials
- all the inputs to make a product or a service
- selling directly to consumers
- taking the products of many businesses and selling to many retailers
Based on your research, what industry will your business be a part of? What does this mean for your business?
Who else is in this business?
Within the large industry categories, there are many players. There’s almost always someone who is selling something similar to your product or service to your potential customers.
Your business may face direct or indirect competition, or both. Direct competitors are businesses that sell the same thing as you to the same customers. Indirect competitors are those that satisfy the same need, but in a different way.
Things to think about:
- Who are your competitors?
- Are they direct or indirect competitors?
- Where are they?
- How do they do business?
- What’s their approach to quality and customer service?
- How much do they charge?
- Why might customers be ready to switch from another business to yours?
Describe your competitors.
Who are the customers?
It is very important to understand who your customers will be, how many potential customers there are for your product or service, how much they spend right now and how they buy products and services.
Things to think about:
- Who will buy what you want to sell?
- How do they prefer to buy it?
- What do they use it for?
- How important is it to their lives or their business?
- How much do they pay now?
- What would make them switch to your business?
- How do they find out about new products, services and businesses such as yours?
- Are your customers individuals or businesses? Are they large or small companies?
Where you can go to find information about your customers:
- ask your customers
- visit their websites
- ask industry experts
- research various media sources (magazines, newspapers, etc.)
- trade associations
- trade shows and conferences
Describe your customer.
How big is the market?
The next step after looking at your potential customers is to put a dollar amount on how much potential customers spend or might spend on the kind of product or service you plan to sell. To do this, you need real numbers.
If you plan to sell supplies to paper mills:
- How many paper mills are within a reasonable service / delivery area to your location?
- How much do they spend right now on supplies and what is the quantity they buy?
If you plan to offer childcare services:
- How many families with young children are there in your community or neighbourhood?
- How many families already use childcare services?
- What do they pay for these services?
- How many other families can afford to pay for childcare?
Conducting market research
You may choose to hire an expert to determine the market size for your product or service, but this can be a costly expense. You can conduct your own market research by looking at data that is available online. Government data, trade association data, market research reports, censuses, and customer surveys can provide information on your potential customers and their spending habits. Start by determining a realistic geographic boundary for your business and identify all potential customers within it. You can always expand the boundary later on.
What will make your product or service unique?
A successful business is one that attracts buyers because it offers something that makes it stand out. Are you able to tell customers how you’re different and why your product or service is better? Here are some reasons that customers may choose to buy from you:
- Convenience – you’re nearby, open longer hours or your product/service is easy to use
- Value – customers see that you offer a better relationship between quality and price
- Quality – customers can see the difference between your product or service and those offered by others
- Additional benefits – your product comes with extras that others don’t offer
- Identification – people want to buy from someone they know or admire
- Conscience – you have a commitment to values that customers like, such as producing “green” or eco-friendly products or giving a percentage of your profits back to the community
- Service – you provide quality service to the customer even after they’ve made a purchase
- Guarantee – you promise that the product or service is exactly what the customer expects and make a commitment to replace it, return their money, or give some kind of assurance that your product or service is reliable
Describe what’s unique about your business and its product/service.
What share of the market could you get?
Determining the potential success of your business idea requires you to have an idea of how much of the market your business could get.
- If possible, estimate how much market share each competitor has now by dividing their annual revenue (or sales) by the total annual revenue (or sales) within your industry.
- Estimate how much of the market you can attract. Let’s say you think you’ll be able to attract 25 per cent of the market. If the total sales in that market are $1,000,000, you can calculate that your share of the market will be $250,000 per year.
Another way to calculate your potential success is to use your knowledge of what customers will pay for your product or service and then think about how many sales you need to make to cover your costs and make a profit (determining costs is discussed in the next section). You can then look at the market to see if it might be possible to make enough sales (gain enough of a market share) to generate a profit.
Helpful tip: Can you explain your research and calculations to a friend or family member? You’ll need to have a strong argument for why you think your estimates of your potential market share are reasonable when you take your business plan to potential lenders and investors.
Things to think about:
- Is the market large enough for your business?
- Is there room to make the necessary sales?
Is this a viable business?
Will the money you make from selling your product or service (the revenue) be greater than the cost of making or providing that product or service? The following section will guide you through some calculations to help you determine if your business idea is viable.
What will it cost to create or provide your product/service?
The different ways that businesses create or provide their product/service mean that they have different costs. In this section, you’ll conduct research to find out what it will cost to run your business.
Whether you offer a product or service, there are basic costs associated with owning and operating a business that don’t change, regardless of level of sale. These are called fixed costs and might include the following elements. Review the list below and enter the estimate of your fixed costs.
Fixed costs for my business:
- salaries and employee benefits
- rent or mortgage payments
- utilities (electricity, gas, oil, water, etc.)
- telephone, internet
- equipment, tools, fixtures
- professional fees (accountant, lawyer, etc.)
- loan interest and bank fees
- property tax
- total fixed costs (add A to J)
There are other costs that will change depending on how much you produce and/or sell. These are called variable costs and might include the following elements. Review the list below and enter the estimate of your variable costs.
Variable costs for my business:
- raw materials
- vehicle expenses (gas, etc.)
- total variable costs per unit (add rows L to Q)
- number of units to be sold
- total variable costs (multiply R by S)
It’s important to understand ALL of the costs involved in running your business. Using your total fixed costs and total variable costs, calculate your cost projection:
Fixed costs + variable costs = total costs
Helpful tip: If you’re unsure of the type of costs your business will have, an accountant or business advisor can help you work through the charts above.
What do you expect your revenue to be?
There are a number of ways to conduct revenue projections to determine the amount of money you think your business will generate. Here are two different ways of thinking about it:
Average price per unit multiplied by number of units you expect to sell per month or per year equals revenue
$25 for each flashlight X 500 flashlights sold per month = $12,500 in revenue each month
Number of potential customers multiplied by amount they spend multiplied by your share (%) of the market equals revenue
100 customers get cleaning services X $400/month X 10% share of the market =
$4000 in revenue each month
Profit is the amount of money you’re left with after you’ve taken care of all your costs. Using your projected revenue and your estimated total costs, calculate your profit projections:
Projected revenue – estimated total costs = gross profit
If your gross profit is a positive number, you may have a business that will work. If it is a negative number, then it’s time to have another look. Consider whether you can reduce your costs or increase your sales.
This is a very simple approach. Depending on the size and complexity of your business, you may need to be more detailed in your calculations.
Helpful tip: An income statement template may help you determine whether your business will work. At the end of this chapter, you’ll find links to sample templates that will guide you through the cost and profit projections for your business.
Business opportunity checklist
Now it’s time to decide if you have a good idea for a business. Consider the following statements and determine whether they apply to you.
This is a good business idea because:
- customers will want to purchase the product or service
- customers have the money to pay for it
- I can make a good case for why people will want to buy from me
- I can produce the product or service efficiently
- there is a reasonable profit
If you’ve selected each of these points, congratulations! You have a great business idea and are ready to start planning.
If you haven’t done so already, write down your business idea. Include as much detail as possible. This will help you prepare a business plan in the next chapter.
Case Study: Indian Maiden Maple Syrup
Courtesy of the Purdy Crawford Chair in Aboriginal Business Studies at Cape Breton University.
In June 2005, Mary Louise Bernard, owner and operator of Native Trail Tours in Cape Breton, Nova Scotia, shared the Mi’kmaw legend of how an “Indian Maiden” discovered maple syrup with tourists from Ontario. Enchanted by her story, one tourist asked “Where can I buy this Indian Maiden syrup?” Mary Louise knew a Mi’kmaw maple syrup product did not exist, but wondered whether there may be a business opportunity.
To learn more about Mary Louise’s efforts and consider the steps you would take to develop your idea into a plan and turn your plan into a business, please visit the Indian Maiden Maple Syrup ‘A’ case study.
Who will you tell about your decision to start a business?
Starting a business is a major life decision. You’ll be more committed to it once you’ve started to tell your family, friends and customers about it. The people you tell can then start thinking about how they can help you.
Think about who you’ll tell about your business:
- family and friends
- Band Office
- community members
What will you tell them? How might they be able to help you?
Sometimes your business idea is too big for you (and your team) to handle alone. There are many different ways that people, communities and businesses can work together to achieve the best results. Collaboration and cooperation enables people with different ideas and experiences to come together for the benefit of a shared project or goal. Using the many skills of others can help your business idea become a reality and can help your business become successful.
There are many examples of Indigenous businesses and communities that have worked together or with non-Indigenous businesses. The different ways that people and businesses can work together is explored in Chapter 3.
Where to find support and more information:
Support for entrepreneurs on how to evaluate their idea for a new business.
Information to help business owners design their own research instrument, which can be used to gather market research information from their customers or others in their marketplace.
Information on how to conduct a market research project.
Find statistics specific to your chosen industry. This information can help you better understand your industry and help you keep up-to-date on the latest trends that could affect your business.
Learn about the major industries in Ontario and gather Ontario-specific information on the market size, the costs of doing business, taxes, and major suppliers in your industry.
Templates for analyzing marketplace competition, calculating start-up expenses, and determining your business’ break-even point.