Validating Your Business Idea: A Step-by-Step Guide for Beginners

Introduction

Maybe you're an aspiring entrepreneur, or maybe you you are fed up with your current situation in life, so you decide you want to start a business. Perhaps you've already thought through what feels like all you could need: the products and services, the business name, even the logo. But don't start just yet! The first step you must take before launching a business is validating your idea. Otherwise, you may end up investing plenty of resources - time, effort, money, even your emotions - and get nothing in return.

It's natural to get caught up in the excitement of coming up with your idea, or the desire to change your life, but skipping this step will only cause you problems down the line. Just like you wouldn't want to build a house on unstable ground, so too you wouldn't want to try to build a business on a weak foundation.

As you read further, you'll learn our step-by-step guide for beginners to effectively validate business ideas. Each step is designed to help you quickly find out if your idea is viable, and by the end of the guide, you'll have the tools and knowledge you need to determine if it is worth pursuing your current idea or trying something new. Without further ado, let's embark on this journey together and find out if your idea has what it takes to become a business!

Understanding Business Idea Validation

Before diving into the process, let's start by understanding what business idea validation is, what it is not, and why it is so crucial.

First of all, business idea validation is not just something you do once before starting your business - rather, it is an ongoing process that you never stop doing. As the landscape in which you do business changes (for example, markets may evolve, consumer preferences will certainly change, and new competitors will come and go), you need to constantly verify that you are well positioned to serve your customers. Having said that, as your company goes through various stages of growth, from idea, to fledgling business, to a stable and mature business, the exact process of market validation will change as well. For now, we'll focus just on the idea staged businesses.

The kind of validation we need also differs from industry to industry, and whether or not you have a brand new idea, or a unique spin on an existing one. For example, the kind of validation you need to do for starting a restaurant is very different than for a tech startup. We already know people need to eat food, so the focus in that case should be on how much interest there is in your particular type of food. In contrast, many tech startups are solutions in search of a problem - there may not be anyone interested in what you're trying to build.

Consequently, business idea validation is not a guarantee of success - it's just a first, basic, screening test to see if it is worth investing further in this direction.

And obviously, it is crucial to know as soon as possible if your investment has any chance of success. If the odds are heavily against you, it's probably worth thinking of some other ideas and seeing if those are more promising, before diving headfirst into the current idea.

With that preliminary understanding in place, what do we need to actually do?

Step 1: Analyzing the Competition

It may come as a surprise to some people to see that we start by looking at others before looking at our own idea, but there's a very good reason: no business idea is completely novel. Even in the exceptional cases where you're building something no one has ever seen before, the goal of a business is to provide value by solving a problem that your customers have, so there's already some prior market activity - it's just the fit that may not be as good.

Starting here has another key advantage: you can start to develop an understanding of what it means to compete in this market. Is your market like telecommunications, where there are just a handful of providers? Or like coffee shops, with some franchises having a huge portion of the market, but also lots of little guys? Maybe your marketplace looks like HVAC or hiring nannies, where even the biggest players have a tiny share of the overall market?

Don't worry about finding every single competitor - they'll come and go over time - you just need to find a few of the bigger ones and some rough estimate of how many total competitors there are. In general, more competitors means that there is a lower barrier to entry (it is easier to get started), and a good indication that lots of people have the problem you're trying to solve. Although it might seem discouraging to have to compete with so many companies, this is actually the best case for a beginner! It means that lots of others have made it work, so with some hard work, you can too!

If there aren't many competitors, don't be discouraged; it's not a death sentence. But you should think pretty hard about why that might be the case, and if you should keep going. Consider the telecommunications example from before: one reason there are so few of these companies is because they need to build expensive infrastructure in order to provide the service they're selling. Unless you happen to already have very deep pockets, you might simply be unable to compete with them. Similarly, many tech companies (though certainly not all) have spent years building their software before launching - you may need a big investment before you can even play in this market.

Service based businesses are easier to start, but harder to grow. Still, it's easier to grow when you have money coming in from customers than when you have to make a big bet before seeing any results. In any case, the most important part of this step is to confirm that there is demand for your product or service - the more, the better!

Step 2: Conducting Market Research

Now, armed with a few competitors, we'll want to do some market research. This involves looking at what problem these companies are solving, what problems consumers have (they may not be the same!), as well as broader items like industry trends and consumer preferences.

Let's start with the most obvious: what problem are the other companies solving. For this, you can browse their website, check out their social media, and see what other people are saying about them. You should also try out some of their products! Take as many notes about the experience as you can: what kind of messaging do they have? What offers and products are they promoting? If it is an in-person business, what is the environment like? What kind of people are shopping there? How does the experience make you feel? Write down any thoughts or ideas that come to you - no matter how silly!

Next, we can look online for industry trends and consumer preferences. Depending on your industry, there might be professional reports already published by reputable companies like Statista, or books/articles that you can find using resources like Google Scholar. If not, you can also try online spaces like social media, Reddit, Twitter/X, etc. What you're looking for here are signs that the demand is growing over time, and that people are somewhat unhappy with the products and services that already exist. A happy customer is unlikely to buy from a different company! Note down what people are unhappy about: things like quality, price, customer service, and more recently, even politics, are common reasons why consumers might be unhappy with what already exists. These can all be great ways to differentiate yourself and attract loyal customers.

After doing the above - make sure you do those things first, because they're much faster and often cheaper! - you can move on to talking to potential customers. This can be one of the hardest steps, because you may not have an easy way to reach these people. If you can, talk to friends and family first, otherwise, social media is a great place to do this research. Reddit, Twitter, LinkedIn, and maybe even Facebook are good platforms to try. Here's a little secret: although this will be difficult, once you find a place that works, you'll also have found a place you can find potential customers to sell to later!

Don't worry about doing things at scale at this point - try to find between 25 and 50 people that have bought a similar product or service, but were unhappy about at least one part of it. The goal for this step is to see how much demand exists for your product or service, and how easy or difficult it is to find potential customers.

This step might take a while! Depending on how experienced you are in reaching out to people, you might want to give this step between 1 month (if you're an expert) and 3 months (if you're a beginner). When time is up, if you haven't found between 25-50 people, you should strongly reconsider your idea. That doesn't mean give up on it, but explore other related options. You can leverage the research you've already done, and odds are you'll come up with at least a few similar things you can try.

Step 3: Testing Your Business Idea

Now we're on to the fun part! This is where your creativity can really shine through and what makes your business unique. This is an iterative process, where at each step we want to do the least amount of work possible, and then get it in front of people for feedback.

It is a very common mistake to start building at this point - you don't need a logo or branding or anything like that. If you want to build a software product, you must not write any code at this point. All you want to do right now is pitch your idea to the 25-50 people from before, and see what they think. It's really important not to spam or bother them, so follow up with just a few people at a time, and be respectful. Start by asking them about what parts of the existing solutions they are unhappy with, and understanding their pain points and problems. Then, you can tell them about your idea, how you would do things differently, and why you think it would be better for them. Listen closely to what they say, but also try to read between the lines. Most people don't want to be rude and will try hard not to hurt your feelings even if they wouldn't be interested in your product. Your job is to get as much honest feedback as you can.

After you've spoken with a few people, you can now start with building a Minimum Viable Product (MVP), which is a greatly simplified version of your product that includes only the bare minimum necessary. For a software product, this might be only a mockup or wireframe (we still haven't written any code!); for other businesses like a restaurant, it might be a single recipe (not perfected or anything, just a rough approximation of what you want to build). For service based ideas, this could be a written outline of what steps you'd take to deliver the service. You shouldn't spend more than a week on this.

Now, go back to the people you've spoken to, and get their feedback. You can also reach out to a handful of additional people from your list of 25-50. What do they like, what do they dislike?

You'll want to keep repeating this process of asking for feedback, spending time revising your idea based on that feedback (don't spend more than a week or two on revising each time), and then going back to your potential customers and seeing what they think. Just be mindful not to ask for too much time from the same people, and try to keep in touch with everyone on your list.

The goal of this step is to get to a point where people are asking you to buy the product or service from you. Of course, you don't need everyone on the list to want to buy, but the more you can get from this iteration step, the better. It is really important not to set or suggest any prices yet (we'll do that in the next step!); for now, we only want to see that there is demand for the product at any price.

Once you get to this point, you've crossed most of the challenges in building a product, but we're not out of the woods yet.

Step 4: Assessing Financial Viability

After all that hard work out in the real world, we need to take a quick detour into the theoretical space. Our effort has shown that there is demand for our new idea, and now we need to figure out if we can supply it. There's two aspects to this: the financial side and the skills side.

To start, let's explore the skills side: we need to know if we can actually build the product or service we were describing to our potential users. The bad news is that there are bound to be skills that you're lacking. The good news is that there are tons of educational resources online, many of them free, that can help you build out the skills that you need. However, that can take time. You'll want to estimate how long it would take to acquire the skills needed for building just the simplest version of your product or service. In most cases, you'll be able to find a simple enough version of your idea that you can develop the skills you need for it. For example, if you aren't very technical, you might be able to use no-code tools or AI to help you build. Once you have a plan of action, try to build a small part of the MVP and see if it seems reasonable to do.

On the financial side, we want to understand if this would be a sustainable business. At this stage, you shouldn't worry about how much money you'll make in profit, but you do need to make sure that you won't lose money in the medium to long term. Oftentimes it makes sense to give discounts to early adpoters, especially if they helped you in the earlier steps, both as a sign of appreciation towards them, as well as because your product is still very early and rough to use! There are lots of ways to set your prices, and it varies from industry to industry what the best practices are. But in every case, an easy first step is to just ask your customers what they think a fair price would be. If the number they suggest is too low, talk with them about what other features you could add that would make it worth more to them. Remember: your goal here is that you need to be able to charge enough money to turn a profit! You'll know you have a winner if you can get some of these potential customers to give you money now, for example with a small down payment.

Lastly, keep in mind that financial viability needs to be regularly re-assessed. You'll want to revisit and adjust your plan, especially after you start operating the business for a little bit and have some actual data to work with.

Step 5: Building the First Version

Finally, we can move back to reality and start to actually build the product we've developed over the past few steps! You should etch into your mind the phrase, "Good enough is good enough" for this step.

Use free versions of other products and tools to help you build. AI assistants like ChatGPT and Claude are great to bounce ideas off of, find tools and resources, and sometimes even do some of the work for you.

Since we've already proven out the idea at a high level, we can and should take a bit more time with this step. The key is to do the least possible amount of work, iterate, and get feedback as quickly as possible.

Make sure to show your progress to your early adopters - this will increase their confidence and trust in you, and give you the crucial feedback you need to build a better product.

And with that all done, you'll not only have a fledgling business, but also the skills needed to find potential customers, learn what they need, build a solution, and sell it to them!

Conclusion

Building even the simplest business may be straightforward, but it is certainly not easy. You'll need to do a lot of experiments. Things will rarely work on the first try. You'll fail. But if you stick with it, you'll not only build a business you can be proud of, but you'll also build your own skills and character, of which you can also be proud!

So long as you are cautious to listen carefully to the feedback you're getting, and actively integrate it into your various attempts, you're sure to eventually find something that works.

As we've seen in this guide, many of these steps are not one-time events, but rather continuous processes that are necessary for growth.

In conclusion, take the necessary steps to validate your business idea. Equip yourself with the skills, knowledge, and tools to assess demand, and build supply. By doing so, you will not only increase your chance of success but also build a business that solves your customers' problems. Remember, every successful entrepreneur started with an idea, but it was learning from the feedback of the validation process that turned those ideas into thriving businesses. So, take the plunge, validate your concept, and embark on your journey with confidence!