Does your idea have what it takes to make you money?
At Axios, we’ve worked with dozens of companies to develop, deploy and manage online systems and applications. From all that experience, we’ve come up with a “sanity check” to help you decide if your app is feasible – before you commit time and money.
What’s the target market?
You’ve come up with an app idea that’s perfect for your own business. But will it have broader appeal?
Can you define a market of some size with characteristics such as age, profession, geography, shopping preferences, or disposable income?
Start with laser focus on one segment before you add more segments, which will only cost more and make assumptions harder to test.
What’s is the value proposition?
What is the clear and undisputed value of the idea to your selected segment?
Ask yourself: “If my targets were to write a list of their top issues, needs or desires, would my idea address one of these?”
If the answer is “no”, you might find it hard to attract committed buyers.
If “yes”, what is your product worth to these buyers in dollar terms? Setting this figure too high may exclude some people, but setting it too low may require greater sales volumes to break even.
The cost you sell for should be based on value to the end user, not production/marketing cost. If you can’t cover costs, then the idea isn’t feasible. If the margin between value delivered and production costs is very high, expect the competition to cotton on pretty quickly and bring their own products to market.
What channels will you use to reach customers?
Channels include physical sales, a social media site, online e-commerce or an app store. Could your idea be sold through a distributor or bundled with a third-party product or service? What are the setup and ongoing costs? App stores have little or no setup costs but take a significant percentage of each sale. Physical sales channels or your own e-commerce site will have higher upfront costs but lower per-unit costs.
Make sure the target market is comfortable using your channel. A site that sells clothes to style-conscious 18-25-year-olds would be well suited to social media and group buying channels.
How can the value proposition be monetised?
It is all too easy to assume that a good and desirable idea will inevitably lead to revenue. Not so.
A disconnect between the party that receives the benefit and the party having to pay indicates a poorly thought-out monetisation plan.
Take the example of an app that allows you to order retail goods such as groceries or coffee on your way to the shop and pick them up when you get there. It’s a good idea, but who pays for it? On the face of it users get most of the value but would you pay for an app that lets you shop? Probably not, you’d expect the retailer to pay.
If you could add enough value to the retailers – by streamlining sales, reducing staff needed, or improving customer experience – maybe they would pay a per transaction fee.
So how will you make money? Do sales of your app, subscription fees, commissions, per transaction costs or any other revenue models apply? Are there ways of adding value to multiple parties and monetising each? What are the secondary options, such as advertising, collecting and selling aggregate information to market research firms or upselling other products or services?
What is the minimum viable product (MVP)?
What is the minimum useful feature set that solves one of the top issues identified for the target segment? Nothing more, nothing less.
You are sure to come across many opportunities from potential customers with comments like “if only it did xyz then it’d be perfect for us”. Don’t be tempted to change your MVP, at least not without a solid plan.
If you realise you made a mistake about your chosen segment, change focus but sell only into that new segment. Otherwise, stick to your original plan until you are at breakeven before you look at expanding to other segments.
The worst outcome is to end up over budget with a product that is not a perfect fit for any segment. If you lack the discipline to stick to a plan, or to change and refocus, then you aren’t the right person to commercialise the idea.
What does your competitive landscape look like?
At this point you should have a good idea about the target market, the product definition, sales cost and channels. It’s time to see if you have any competition.
Search the internet, is there anything that directly competes? How about something similar targeted at a different segment?
If there’s nothing at all you’ve either got a killer app or you have missed something. Double-check your ideas and assumptions.
If there’s something similar, what is your unique value proposition? How does it serve your segment better than the competition? Is it a better match to their needs, cheaper, local? You’ll need to create a compelling sales message from these differentiators. Helpful tools such as strategic group maps and Porter’s Generic Strategies are available online.
Lastly, if there is an incumbent, how easily could they target your segment? How will you deal with focused competition?
What is all this going to cost?
It’s true there have been some successful apps built on the cheap that sell millions. But in general, you won’t nail it right away.
If you can set aside $50-100k for a very simple idea, more for a complex one, then you’re in the ballpark.
Next, is your breakeven point achievable?
Research the size of the market segment in the target geographic area. What is a reasonable market penetration by percentage? How will this grow? Make assumptions.
Create a spreadsheet that plots sales by month and associated income against initial capital and ongoing costs. Allow a discounting factor for risk. Adjust the inputs associated with your assumptions; what happens if sales or growth rates are down? What if costs are up?
If variations in your spreadsheet see the idea fail to break even within a reasonable timeframe, this indicates a flawed business model. I like to see breakeven within 1-2 years at between a 25-30% discounting rate, but that’s a reflection of my risk tolerance. Be clear about your own risk tolerance.
Discounted cashflow (DCF) and net present value (NPV) spreadsheets with sensitivity analysis capabilities are easy to find online and can be adapted as required to help with this modelling.
Despite the advice above, there are some inexplicable success stories, particularly on app stores. This occurs because, below a certain dollar threshold (a few dollars), consumers will often purchase without applying their usual value tests. Curiosity alone may lead to a sale. While the value proposition is less important here, there is a great deal of luck in knowing what will pique interest.
Remember for every successful app in this space there are many failed ones. Don’t spend anything you can’t afford to lose.
Where to from here?
If your idea has survived these sanity checks it’s probably worth pursuing. If it doesn’t, rejig it to see if you can get it to work. There’s a saying in commercialisation, “fail early, fail often”.
Failing early, preferably at the ideas phase, costs less. Failing often means you’re trying lots of ideas, one day you’ll have a success. If you’re afraid of failure, entrepreneurship may not be your calling.
Consider discussing your idea with a development firm like Axios that has a specialty in commercialisation.
As a final point, it’s never too early to think about how your product/app might evolve. How will you keep innovating to stay ahead of the competition?