What Makes a Good Business Plan: Describing the Business-Product-Market
In our last article, I explained how the business, product and market are all of one piece and need to be described as parts of a whole. That having been said, however, you are still left with the mechanical task of actually writing about them. What goes into a good description of the business, the product and the market? Here are some basic rules:
Put most of your emphasis on the existence of a market. The whole business plan can be thought of as a demonstration --- a proof --- that there are enough people out there willing to buy your product from you that you will make a profit selling it. Remember that the most important thing that investors will look at is whether there is anyone out there that will buy your product.
It is a common mistake of business plans that they overstate the attributes, glories and overall "coolness" of their product, while underemphasizing the existence of and real needs of the market to which the product is proposed to be pitched. This is not surprising, for inventors and innovators naturally will get so caught up in their new idea that they will begin assuming that its virtues will be self-evident. This is largely a harmless self-delusion, but it is a delusion just the same. No matter how great your idea is, it is not a business unless and until the public pays you real money for it. I can guarantee that an investor will not be nearly as enthralled by your idea as you are. He just wants to know if there's money to be made.
A small exercise in formal logic quickly puts the emphasis in the right place. The formal proof of the existence of a market goes something like this:
People will buy a product that fills a need.
1st Minor Premise:
There is a group of people who have a need.
2nd Minor Premise:
This product fills that need
People will buy this product
The major premise is pretty self-evident. Don't waste time and pages proving the obvious. But look at the all-important minor premises. The product is salable only if it fills a need of real people, so the existence of real people with a real need has to come first. It should generally be discussed before going into the product.
Now this is not a hard and fast rule. Sometimes the need is obvious, in which case you shouldn't spend too much time on it. This might be the case for a mature product. For example, a record company should not attempt to prove that there are people who will buy CDs of popular music. It's obvious. On the other hand, it's not so obvious that people will pay to buy music digitally downloaded over the Internet. To establish that proposition will require a bit more work. As a general matter, most companies will not have a product whose use and desirability is common knowledge. Those companies will do well to emphasize the market before the product.
How do you go about proving the existence of a group of people with a need? Here is where creativity comes in. However, one of these four basic patterns will apply in the vast majority of cases:
1. Show how many people currently perform a task or function, describe how the present methods are deficient, and explain what would be needed to make the method better.
2. Show how many people currently use an established product or service for which your product or service is a substitute or an adjunct.
3. Show the existence of an established market for a product or service like yours in another geographic area from where you plan to do business.
4. Show the existence of an established market in your geographic area served by competitors and that it is large enough to accommodate the addition of your business.
In recent years, the Internet has launched many new companies that used models 1 or 2 to describe their markets. In many cases, companies simply showed how a task routinely performed in the real world could be done better using the Internet. Admittedly, many of those companies are now learning that some brick and mortar functions do not necessarily work better on-line, but that's another story.
It is important that you show actual numbers. The size of the entire potential market is generally the starting point for determining how many customers you should expect to buy your product. Fortunately, gross determinations of market size are generally available or can be logically derived from publicly available data. Census reports and trade associations can be plumbed for relevant statistics. If your product will appeal to homeowners of a certain age bracket, you can find how many there are from demographic studies. If your service is used by a particular type of business, you can find how many such businesses there are. If you need to know how many books, records, pencils--practically anything--are purchased in a year by geographic region, the information is available. You just have to research it.
Once you have determined and described the appropriate market and its need, you must show how your product fits that need. In this regard, entrepreneurs have a little less difficulty, because they know their product better than most. However, enthusiastic innovators tend to spend more energy describing how a product works rather than how it can be used. Again, remember that the purpose is not to dazzle the reader with the ingenuity of your idea, but to prove that your product is so useful that the market (which you have just described) will greet it with open arms.
You should try to use the need of the market as the starting point for the description of your product. If you have described the market's need correctly, then your product's functionality should fit that need like a glove. Here is where editing will play a big role, for to the extent that the described needs of the market do not exactly coincide with the uses of your product, you should revise the description of that need, or of the uses of your product, or more likely both, until they fit together like matching puzzle pieces.
You may have gathered by now that in order to do this right , you really have to know your product. That means, usually, that you will have built a prototype of your product and tested it so that you can not only theorize about its functions, but can actually demonstrate those functions. Amazing things happen when you build a real working object. You see features and uses that you hadn't thought of before. Generally speaking, you should have a working model of your product before you try to describe it.
Of course, there are always exceptions. Some products are such a leap of the imagination that they create their own markets seemingly out of nowhere. Who could have guessed beforehand--much less proved--that there existed a market for the personal computer, or the $5 cup of coffee? But those are the exceptions that prove the rule. Such products and services are rare, very rare, and they generally have to get off the ground using the entrepreneur's money, not an investor's. Usually only when the concept is proved successful on a small scale will serious investors be willing to gamble that it will also succeed on a larger scale.
True, that rule was flouted with abandon in the recent Internet craze. Many Internet start-ups, maybe most, thought they had something so captivating that people someday would wonder how they ever did without it--and they got funded with billions of dollars. Now that those companies are bruised or busted, those entrepreneurs and their financial backers are paying for their ardor. In general, financing goes to those who can prove the existence of a market need and who can demonstrate a product or service fills that need. That is true in normal market times, and it is especially true today.