How to test your business idea before blowing a fortune

You've got an idea for The Next Big Thing in business, but will it work?

Before spending a fortune on launching a business, test your business idea to make sure it will work and to spot issues before they become expensive problems.

Testing a business idea before launch can save you a fortune in the long run.

While it can involve upfront costs, such as market research or building a prototype, you don't need to spend huge amounts to validate your business idea.

Testing gives you the chance to iron out wrinkles and tweak your idea based on feedback, helping to set your start-up business on the path to success.

Why you should test your business idea

Many start-up businesses fail because their idea wasn't good enough to capture customers' imaginations and get them to buy.

Too often, new business owners sink their savings into an idea that wasn't viable, leaving them facing financial challenges when their start-up fails.

You should test your business idea to:

• Understand the market - what type of customers would buy from your business, where they are located and what problem will your business solve for them.
• Set pricing - learn how much to charge and how much customers are willing to pay.
• Refine processes - if you're making a product or shipping to customers, trialling ideas can identify manufacturing, supply and delivery issues before launch.
• Attract investment - testing your business idea involves researching the market and understanding costs, pricing, volumes and margins. These are all vital for a business plan designed to attract investment.
• Tweak your offering - testing prevents you from getting so close to your business that you can't see the flaws. Honest feedback means you can tweak your product or service to better meet customer needs.

How to test your business idea

There are lots of strategies for testing a business idea. From quick and cheap feedback from family and friends to constructing prototypes and running customer focus groups, it's possible to pick and mix approaches depending on your business and budget.

Don't feel tempted to spend a fortune on testing. New platforms, such as Instagram, offer quick ways to trial an idea.

“My kids always tell me I should do questionnaires on Instagram, which is what they do,” reveals Victoria Griffin of Goji Hair in Cardiff. “My girls won't launch a new product unless they've put one out on an Instagram survey, and they create the fashion item based on what their followers say. It's really quick and a whole new way of doing things.”

The secret to testing is to gather data and evidence.

From potential customers' opinions to investigating shipping costs, every test you do can help build a better understanding of what's necessary for a successful start-up.

1. Define the concept

The first stage of business idea testing is to write down exactly what your business is.

Explain how it works, who will buy from you and expectations such as pricing and customer numbers. Writing down the concept forces you to work through your assumptions.

These are the key things about your business that you should test.

Many failed start-ups take their assumptions and run with them, often realising they were incorrect when it is too late.

Assumptions to test in your business idea:

• Customer problem - what problem does your business solve? How widespread is the problem, and how willing are customers to pay for a solution?
• USP - what is the unique selling point of your business? How will you communicate that? Are customers able to clearly understand and value it?
• Costs - what costs are involved in providing your products or services? Are there economies of scale?
• Market size - how many people can your business realistically sell to? What is the size of the potential market? What share of this market can your business get?

2. Know your market

Market research can be woefully overlooked.

This is especially true if you fall into the target market.

It can be tempting to launch a business that meets your own needs without investigating a wider demand.

There are two key ways to test your assumptions - desk-based research and customer interviews.

Desk-based research

This involves using sources such as the Office for National Statistics (ONS) to get concrete figures on customer numbers.

The ONS is a treasure trove of accurate statistics and can help you define your target market or spot emerging trends, for example, how the internet has affected how customers shop.

Other organisations, such as YouGov, provide free information on consumer shopping trends to validate your business idea.

Customer interviews

Whether this is a survey via social media or phoning up potential clients, take the time to interview your customers.

Create a list of detailed questions designed to understand their needs, what they think of your idea and how much they would pay.

Ask open-ended questions, such as 'why?' to get more detailed answers.

Read our guide on how to determine your target market

3. Research competitors

Unless you're launching a truly unique product or service, chances are similar businesses are already operating.

Become a mystery shopper and examine how they operate, what marketing activity they do and how they price products.

You can use Companies House to research competitor accounts to see how profitable they are, along with examples of the types of costs and liabilities they incur.

Other sources offer valuable insights.

Check out Glassdoor to get an idea of how their employees feel about the company, or read review sites such as TrustPilot to see what their customers say.

This can be a good way of spotting common complaints.

Use the information to tailor your product or service to address those complaints and potentially win customers from competitors.

Google is an excellent resource for finding competitor information.

Use it to find company reports, read press releases and see which competitors rank highly in search results or buy ads.

Read our competitor research guide for start-ups

4. Create a prototype

A prototype doesn't have to be a physical product.

You could create a basic website or online store that offers the bare bones of your idea so potential customers can try it out and give feedback.

Create a 'coming soon' form on the web page explaining your business - called a 'landing page' - and buy a few keywords related to your business on Google to attract potential customers.

You can measure how many customers visit the page and sign-up to get an idea of likely demand.

Create mock-ups of your product.

You can create models using crafting materials to working prototypes that are close to the finished product.

Detailed prototypes allow you to test production assumptions.

Create brand boards showing designs, logos and labelling, for example, and show them to potential customers to get their feedback.

Read our guide to creating a brand

5. Talk to experts

There are plenty of experts willing to lend a hand and share some of their hard-won experience in launching businesses.

From Start Up Loans mentors to LinkedIn groups and industry bodies to local business development organisations.

Seek out mentors and potential investors and get their feedback.

Start Up Loans offers all applicants guidance from a business adviser, and all loan recipients 12 months of free mentoring support.

Some may have helped launch similar businesses and be able to spot potential problems.

Some can provide guidance in market size and check your assumptions.

Talking to investors is a great dry run if you later plan to pitch your business for investment.

6. Can it scale?

A critical test of any business idea is whether it can scale from a small start-up to a larger business.

Examine how you'd expand the business, such as increasing suppliers and opening up in new areas.

Evaluate costs such as local rent in new locations and savings made by ordering more products in bulk.

Use these to forecast how much money your business would generate - and need - if it grew.