Back of the envelope method to assess a business idea

September 18, 2018

one of the things that i do is jot down every idea that springs to mind when thinking about products to build.

after a while this list starts to get big, really big. so i needed a way of filtering out all the bad ideas.

when you do this for a long time, you tend to have a lot more bad ideas than good ones. so i came up with a set of rules i use to evaluate whether an idea is worth pursing or if i should dump it.

these are not hard and fast rules, but rather a quick way to surface ideas that could be interesting. it may not work for you, but it works for me when i'm deciding which SaaS products i should build.

1. demand

do people want whatever you're going to build? this is a pretty obvious one. there are a couple of ways to see if your idea passes this test:

  1. ask potential customers whether they would pay for it
  2. put up a landing page with a simple email submit and send some paid traffic to it. see if people sign up.
  3. check if there are other products out there which are similar to what you're doing.

2. market size

how many potential customers could you sell to? If you're selling to banks in the UK, then your potential market size is less than 1000. However, if you're selling to social media marketers, then you market size is 100,000+ customers.

3. pricing

what is the average price that a customer is going to pay for your product? With SaaS products, pricing can range from $9 - $1000/m, depending on who you're selling to.

work out what your customers can pay, then use this to flesh out a price.

4. customer acquisition cost + lifetime value

how much is it going to cost you get a paying customer? if you're going to use paid ads, this is quite easy to calculate when you're tracking everything.

if you intend to get customers through content marketing, it's harder to track, but do-able. you've got to factor in the time & cost to produce your marketing content.

once you've acquired a paying customer, how long are they going to stick around for? if you're billing monthly, the LTV = price x months customer sticks around. if the LTV is less than your CAC, you won't be profitable unless you find ways to reduce your CAC.

5. development cost

how much is it going to cost you to build out the MVP and deliver the product. for SaaS products, delivering a service is almost free.

if you're a technical founder, can you build out the entire product yourself? this will save you a lot of upfront cost.

if you're non-technical, can you hire a developer to build it for you and how much is that going to cost? if it's going to be out of your budget range, you could always roll up your sleeves, learn basic web-development and build it yourself.

6. uniqueness/differentiation

how does your product compare to the what's already out there? are you doing something new, is your product easier to use?

your product doesn't need to be totally unique, but it does have to be different. there are dozens of car makers, they all essentially make the same product, so they largely differentiate with brand, and target market.

if you cannot differentiate your product, it's going to be hard to sell it. you can differentiate on features or target a certain niche.

for example if you're build a social media marketing tool, rather than going after social media marketers, go after a small sub-section, like professional food bloggers who use social media.

7. speed to market

how fast can you create the first iteration of your product. there are a couple of factors that should be considered:

  1. if you're non-technical, how how will it take to find a good developer?
  2. how long will it actually take to build the product. estimates are hard, and you'll most certainly underestimate how long it's going to take.
  3. if your product is an integration for a third party platform, does it have an approval process and how long does it take to get approved?

8. third party dependency risk

does your product depend on other services to operate? for example if you're building a instagram scheduling tool, you are entirely at the mercy of insta's APIs and their terms of service. if they change their ToS or APIs, your business might be in trouble. this has happened in the past

the less your product depends on other platforms/APIs to operate, the less risk you take on

10. operating cost

once the product is built and has paying customers, how much is it going to cost in overheads per month? make sure that your ongoing costs scale linearly with customers.

if you've got a free plan, how much is it going to cost you to support those customers? and does the revenue from your paying customer cover the cost of having free customers.

Scoring your idea

as you evaluate your idea against each criteria, assign a score between 0 - 10 based on how well it meets each point.

sum up your scores, and if it's over 75, then it might be worth pursuing. anything less than 50 means that you should reconsider whether the idea is a good one.