Yaneek Page | How to validate a business idea
QUESTION: I wish to congratulate you on the great work you are doing for business operators and hopeful self-employed persons like me. I have been a dedicated and hard-working teacher for almost all my adult life, but I am tired of the misery and stress of being in the classroom. I find it almost physically painful to go to work each day because the students are difficult to deal with, and it is harder to teach in such a hostile environment where many students lack interest in learning. In the past, I was afraid to start a small business on my own, but with where things are with the work and low pay, almost anything would be better than this. My question is, do you think a student school shuttle service is a good idea for a self-employed business?
— Discouraged teacher
BUSINESSWISE: I’m sorry that your circumstances have deteriorated to the point that you see an exit from the profession to which you were so dedicated as the best option at this time. The good news is that a shuttle service for students could be a very promising business idea if you are able to plan and execute properly.
Start-up businesses in Jamaica traditionally have a very high rate of failure, with most failing five years after opening. Two main reasons businesses fail are because:
? Entrepreneurs tend to pursue necessity-driven enterprise rather than opportunity-driven enterprise, so they start business because there is a personal need to be their own boss and make money rather than a viable opportunity in the market; and
? They are unprepared for the challenges of running a business, which requires business knowledge, access to finance, building the right team, systems, and access to the right networks.
You can reduce the risk of failure by focusing on real opportunity and careful planning and preparation. There are several criteria typically used to evaluate whether an opportunity or business idea is worth pursuing, which I will outline below so you can review and make your own informed decision.
Profit potential: Profits are important for sustainability and future growth. Therefore, as you prepare and validate your financial projections in relation to this start-up, the pricing model, break-even analysis, estimated profit and loss or income statement, and projected cash flows should weigh heavily in your decision making.
Ready demand or need for the service: Once you can establish that this is a service that is needed by your target market, and that there is urgency in that demand, they are promising signs that the business idea is viable.
The ability of the target market to pay: It is not enough that your target market has a need for the service. It is equally important that they have the ability to pay. For example, there are many Jamaicans currently in need of housing solutions, however, the challenge they face is the inability to pay for that need. It would be great to canvas your potential customers (perhaps from your existing school and with help from colleagues in other schools) so that you start with an extensive database of prospective customers.
Viable market size: There have to be enough prospective customers who need the service and have the ability to pay to justify your entry into the market.
Price elasticity of demand: Given the current volatilities in the global oil market, one of the most critical success factors for a school shuttle service will be price elasticity of demand. In simple terms, you want to ensure that your target customers are willing to pay more for your service amid rapid and drastic increases in gas prices.
Favourable landscape analysis: A favourable landscape analysis means that when you have done a comprehensive review of the current competitive landscape for this service, the data will indicate that there is an opportunity for new players in the market. Also that there is a trend towards growing rather than declining demand for the service.
Barriers to entry: Another important consideration are the barriers to entry that exist within the transportation industry. At this time, the barriers to entry are relatively low, which is not necessarily a good thing because competitors can easily enter and exit the space. This usually results in a competitive landscape that is unregulated and where many players try to compete on price rather than value.
The upside is that you can easily differentiate yourself by adding great value with technology for better scheduling, safety, and enhanced communication with students and parents. If you add to that consistent on-time service, well-trained staff, and exceptional customer experience, you’ll be a cut above the rest.
High customer lifetime value: Having customers with what is typically referred to as a high customer lifetime value is essential in this industry. This means that your business model will lean firmly towards contracts for service that span at least a year for each customer rather than having a fickle customer base that uses your service on occasion.
My recommendation here would be getting customers who are willing to make a commitment for the school year and preferably morning pick-up and evening drop-off. If you are able to secure profitable contracts with the schools as institutional customers, that would give you a considerable advantage.
Scalability: The ability to expand is paramount. Scalability would include the size of the sales universe, or the value of the entirety of the market opportunity available currently, access to financing for this type of business, and the ease of recruiting qualified human resources to staff the business.
Also the ease of acquiring the assets required to execute the business model, which in this case, would likely be the vehicles in the short term and several locations in the longer term, particularly if you are looking at big-picture expansion.
Now that you understand some of the main factors used in evaluating a business idea, you can determine whether the shuttle service meets, and hopefully, exceeds the threshold for launch. Note, however, that starting a business is not easy.
It is a very high-stress job that is time-consuming and exceptionally demanding on your mental health, physical abilities, and general capacity as a human being. It often takes years of nurturing and dedication of your complete self as a business leader and manager to build a business.
Added to this is the reality that the likelihood of failure and financial loss is extremely high. This is as important as how viable the business is, so please be guided accordingly. Good luck and one love!
Yaneek Page is the programme lead for Market Entry USA, a certified trainer in entrepreneurship, and creator and executive producer of The Innovators and Let’s Make Peace TV series. yaneek.page@gmail.com