Essential Lesson for Entrepreneurs: Products vs. Businesses

     So you've found the next big product.  Few things can be as intoxicating as innovation.  The vision!  The passion!  The excitement!  Your new widget will allow people to do [BLANK].  Your new social-local-mobile app will change the way people do [BLANK].  When you have your billion-dollar idea, you, as an action-oriented entrepreneur, feel an overwhelming sense of urgency.  You build prototypes, purchase domain names, and design a logo.  You lay awake at night perfecting an elevator pitch and begin designing business cards.  You've barely put the idea down on paper, and yet you're beginning to count your money already.    But where is your business plan?  To an impassioned visionary, this document seems awfully tedious.  After all, when you're in a race to get your product to market, who cares about boring administrative documents?

      When you focus solely on a product, this is all you have: a product.  You may make it to market first.  You may change the way the world does something.  As is the case with every worthwhile product in the history of capitalism, however, competition catches up faster than you realize.  If your product can be improved at all, there are already dozens of teams out there working to make your masterpiece obsolete.  If you truly succeeded in making the perfect product, there are already dozens of teams copying your idea and entering your market space.  Before you know it, the industry you created has either left you in the dust, or has become so inundated that you can hardly make a profit.

      Companies that center their existence on a product get caught in a brutal cycle of forced innovation and tightening margins.  Look at Blackberry; their smartphones truly changed the world.  This product line forever disrupted mobile technology, both in the business and consumer markets.  What happened next?  The market got crowded by other giants squeezing their margins and reducing their market share to fractions.

      When you have a product-centric business, you need cash.  Tons of it.  Not "start-up" cash.  Not "get-to-market" cash.  Not "cut-payroll-to-make-ends-meet" cash.  You need "R&D" cash, the most expensive type, and exactly what startups don't have.  Who does have cash?  The giants.  These massive companies maintain huge reserves of capital and have the engineering corps to do in one week what a startup does in a year.  They feed off of the innovation of start-up companies just like yours.

      So back to your billion dollar idea that we were discussing earlier.  Maybe we should slow things down just a little bit.  Rather than rushing to get your product to market, let’s focus instead on creating a feasible business.  Let's talk strategy.

How will you make money?

From a distance this seems like an obvious question, but it is astounding how many people start a business without a clear understanding of how they will actually make money.  I'm looking at you, social-local-mobile folks.  If you think you're going to make money from ads, think again.  Research has continued to show that people are rapidly becoming desensitized to online advertising.  With this model, you are spending your R&D budget to collect and please users who are statistically unlikely to generate any worthwhile revenue.  Does it seem wise for a cash-strapped startup to spend precious funding on something that doesn’t directly contribute to the bottom line?

Who is your customer, and why would they pick your product?

Know your target audience.  Not just "business travelers" or "college students," but instead focus on creating detailed profiles of the people in your paying customer base.  Know what motivates them.  Know how best to appeal to them.  Humans aren't rational creatures.  Rather, we rely on emotion and habit to make decisions.  Inferior products win all the time, so don't just rely on being "better." 

Is your concept scalable?

So you can make one really cool widget.  It takes ten hours to make ten widgets.  What will it take for you to make one million? What if your customers are in 10 different states?  It would be a mistake for you to say that you will just continue to add employees to meet the workload.  Simple man hours cannot scale a company.  What will it take for one employee to create one million widgets?  Is it an assembly line?  Is it crowdsourcing?  Now you’re thinking scalably.  

Who is your competition, and how can they hurt you?

You've created the next social media platform.  Some (doubtfully) unheard of combination of messages, profiles, and pictures.  It may seem unique now, but what would it take for Facebook – with its more than 1 billion users – to implement the exact same feature into their existing platform?  Then what?

How, exactly, will you innovate to stay relevant?

As we've already seen with the Blackberrys and the Twitters of the world, the minute you stop innovating is the minute you lose.  Before the world ever hears about your product, you should have a solid plan to keep it relevant for 5-plus years.  Now, how will you get the cash?  Will your revenue model provide enough money to begin innovating immediately?  Probably not if you are relying on advertising dollars.

Is it the correct time for you to enter the market?

Starting your business will require hours of extraordinary effort, and may not provide you with any income for quite some time.  Do you have enough cash saved to support yourself until you are profitable?  Are your relationships strong enough to handle your new workload?  These are often overlooked aspects of starting a business that can have devastating consequences.

     The purpose of this article is to help entrepreneurs understand the real purpose of a strategic business plan.  It is way more than just a document, and to be successful, you must genuinely embrace it.  If you have truly found the next billion dollar idea, it is now your duty to protect it.  Give it a strong foundation to stand on.  Give it a clear direction to follow.  And lastly, allow me be the first to congratulate you on your imminent fortune.