Can you make money with your new product or service idea?
That is the big question. You need to determine this as quickly as possible. There are many ways of determining this because without this knowledge you may be in for a very big mistake.
How do you go about figuring this out?
So the first thing you need to understand is how much people are willing to pay for your product or service. This is something you need to figure out really early on. If you don’t have any competitors, you don’t have knowledge.
What are people willing to pay for it?
If is a brand new product. Then you have to go out and figure out a price that sounds reasonable. The way you figure that out is, by talking to people. They have to be strangers no family or friends. Talk to 50 to 100 strangers, about your product. Ask them what they are willing to pay for it. If you talk to 100 people on the street, I will guarantee you results. You will start to learn what people are willing to pay, and what they’re not willing to pay. So that is how you figure out your pricing for something that’s never been built before.
Obviously if you have competitors that are doing different things, then you can use theirs as somewhat of a guideline. So that’s how you figure your pricing out. It’s not necessarily hard, but it does take some time. You do have to put in the effort to make sure you can figure out your pricing.
How much are people willing to pay for your product? (Click to Tweet)
How many people are willing to pay?
So let’s just say everyone you talk to says: “I’m willing to pay something for it”. That’s a great product. If you don’t have a lot of people willing to pay for it, then it’s probably not one of those businesses in which they call scalable. It’s okay to have a business, that’s not necessarily going to sell millions of product. You can still make a great living selling hundreds of thousands of products. So don’t be too concerned about that mentally. But you have to an understanding of what that looks like as well as your business model. You have to be clear on that to plan in the future.
Secondly is how much does your product cost to make?
Super important to understand costs. If it’s a hardware product, fairly simple, you have building of materials, a BOM cost. That’s fairly straight forward. Certain materials cost X, engineering costs X, testing costs Y and shipping. So it’s fairly straight forward what a hardware product costs. You’ve got prototypes, you’ve got molding, and all those things you have to build. But it is pretty straight forward.
Now if it’s a software, or a service.
Software as you know, the up front costs can be fairly high. Once it’s built you can load lots of customers on top of that. Hence why investors and many entrepreneurs like the software business. Because you can build it once and add millions of customers. So that cost is low, sometimes 10%, maybe 5%, and sometimes as low as 2%. Just depends on the number of widgets you’re selling.
Services are a little harder to understand. Because you may have people doing a service. That’s again, a little harder. But you can figure that out by just watching people complete tasks. Understanding how long it takes to do a certain task. So if they’re cleaning houses, how long does it take to clean a house? You can then start to understand what it’s going to cost. Because you have to pay an employee to clean that house. So you can scale that out and get a pretty good understanding of that. Those costs are super important to understand.
Understand not just the product cost but also marketing cost, and operational cost for your business model. Marketing cost is what many people maybe just don’t understand or put enough money into marketing. For hardware, there’s a general rule. And again this is a very general rule. It’s a third, and a third, and a third. If you could build it for a third, and market it for a third, then you’ve probably got enough profit in the operating money in the other third to make it a real business.
With software, as I said, your operating cost is pretty low. So you have a lot of margin in there. You can spend a little more than a third for your marketing. Although, when you get to 30% 40% of your marketing costs to spend on that software product, you’re probably not doing it right. There’s probably some marketing issues you’re having.
We cannot solve problems with the same thinking we used when creating them.-Albert Einstein
Services are fairly similar to the hardware. A third and a third, and a third. Again these are very general rules, they’re not written in concrete. But it does give you a good idea. If you’re spending 50% on your marketing, to get customers you’re probably spending too much on almost any type of business.