How to Create a Profitable Business Idea

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How to Create a Profitable Business IdeaBreakthrough entrepreneurship is about solving problems — but it’s only half the battle. If you’ve brainstormed a business idea and have a sense of the customer pain your product can solve. The next step in your billion-dollar business generating process is to figure out if you can fill that need profitably.

To do this, you need to understand the value proposition you’re creating. Estimate the economics as best you can so as to figure out ahead of time if customers will actually agree to purchase your product or service for significantly more than it costs you to produce it.

 

Three factors make up your value proposition:

 

Production cost: What will it cost you to develop and produce your product or service?

Customer utility: What dollar amount can you use to represent the degree to which your customer will value the product?

Price: How much will your customer be willing to pay?
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The lower your production costs and the higher the customer utility, the better the value proposition will be. For example, suppose we wanted to calculate a value proposition for a grande soy latte at Starbucks. We’d need to estimate each of the three numbers so that we can plug them into the three parts of the framework.

Related: Five Painless Ways to Raise Prices this Year

Begin with production cost, which is often the number you can estimate with the most precision. If you’re selling lattes or planning to manufacture electronics, bake cupcakes or develop games that run on social networking websites, hopefully you know enough to come up with an estimate of what it will cost you to produce them. In this case, you’d probably have direct expenses, such as the cost of beans, soy milk, paper cups and those little corrugated cardboard sleeves so your customers’ hands won’t burn. You’d also have indirect costs: the tables and chairs you need to furnish the store and the marketing campaigns.

What are the true production costs for a single grande soy latte at Starbucks? An educated guess, based on our research and interviews, we’ll say it probably costs Starbucks about $1.75 to produce each latte.

That’s step one. Step two is to figure out the customer utility. In other words, what is a single cup actually worth to a customer? The utility to a mildly curious Starbucks customer who has never before tried a soy latte isn’t all that high. The utility to a true caffeine addict is higher. Maybe he or she would be willing to spend three times as much as the latte neophyte.

Related: How Your Business Can Last Longer than a Twinkie

To find out, you could ask potential customers what they think about lattes and other similar drinks. Look at what similar drinks sell for elsewhere, do interviews and conduct focus groups or offer pre-sale deals and see what level people bite at.

Let’s say the average utility to a Starbucks customer would be $5, and the estimated $1.75 production cost. Those are pretty promising numbers, and can lead us to the last estimate: what is the optimal price?

Determining how to price products optimally is a never-ending challenge. Often you’ll cycle through several pricing experiments before you figure out what works best. Usually, but not always, the higher the price, the lower the demand. The key to keep in mind is that the purchase price you set must be somewhere between what it costs you (or Starbucks) to produce the latte and the utility to the customer.

Spelled out like this, the point seems obvious — and it is. Yet, the history of entrepreneurship is filled with stories of founders who never accurately figured out these calculations ahead of time, and whose ventures died as a result.
In the case of Starbucks, since we can find one on nearly any urban street corner in America, we can see that its current calculation of the optimal price is about $3.85.

Related: Four Rules for Pricing Products

Two more points to consider: the value created and value captured. If Starbucks produces lattes at $1.75 and the average utility to your customers is $5, then Starbucks has created $3.25 of value. And if they’re selling lattes at $3.85, then they are capturing $2.10 of value. This example shows a well-balanced value proposition at Starbucks, and perhaps helps explain why the company’s stores remain popular and profitable. At least in this example, based on reasonable assumptions, Starbucks creates significant value for the customer, and it also captures a sizeable portion of that value for itself.

So why even bother with the exercise of calculating a value proposition? First, the process can help you diagnose quickly whether you’re on to something promising and potentially profitable.

Second, it shows where you need to focus your efforts to improve a marginal business idea. It can make it easier to identify where the problems lie before you get started. If your customer utility and your production costs are both high, for example, then you might need to focus your efforts on reducing costs.

If customer utility and production costs are both low, you might focus on finding different customers for whom your product might have a higher utility. Can you find customers with more pressing needs? Is there a way to make your product better without spending much more money?

Finally, if costs are low while utility is high, you could focus on how much you can increase the asking price, putting you in a position to capture more value. Hopefully you’ll make more money while also building a more interesting, stable and rewarding business.

This article is an edited excerpt from Breakthrough Entrepreneurship: The Proven Framework for Building Brilliant New Ventures (Farallon Publishing, 2012) by Jon Burgstone and Bill Murphy Jr. 
Read more stories about: Staffing Solutions, Pricing, Profits, Starbucks

Why Our Brains Like Short-Term Goals

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Why Our Brains Like Short-Term Goals

In her book, The Entrepreneurial Instinct: How Everyone Has the Innate Ability to Start a Successful Business, author Monica Mehta explores the role of brain chemistry in entrepreneurship. In this excerpt, she details goal setting.

Achieving your goals isn’t just about hard work and discipline. It’s about physiology. By understanding how the brain processes success and failure, you can jump-start your productivity to create a winning streak and put an end to failed New Year’s resolutions.

The more times you succeed at something, the longer your brain stores the information that allowed you to do so well in the first place. That’s because with each success, our brain releases a chemical called dopamine. When dopamine flows into the brain’s reward pathway (the part responsible for pleasure, learning and motivation), we not only feel greater concentration but are inspired to re-experience the activity that caused the chemical release in the first place.

This is why the cultivation of small wins can propel you to bigger success, and you should focus on setting just a few small achievable goals. While your ambitions can remain grand, setting the bar too high with goals can actually be counterproductive. Each time we fail, the brain is drained of dopamine making it not only hard to concentrate but also difficult to learn from what went wrong.

Why We Learn More From Success Than Failure

Ever find yourself destined to repeat the same mistakes over and over again? According to a study completed by researchers at MIT’s Picower Institute for Learning and Memory, that is exactly how our brains are wired to work. Their findings determined that our brain cells only learn from experience when we do things right and failure doesn’t register the same way.

In the experiment, monkeys viewed two images on a computer screen, one that presented a reward if the subject reacted by looking right, another when it looked left. The study showed that the brain response when a monkey received an award for looking the right way improved its chances of performing well on the next trial.

The study makes important discoveries not only about the way we learn but the brain’s neural plasticity or ability to change in response to experiences. When behavior is successful our cells become finely tuned to what the animal was learning at the time while a failure shows little change in the brain or improvement in the monkey’s behavior.

Related: Virtual Assistants – 5 ways to get the most out of your VA

Set Goals Your Brain Likes

Collecting wins, no matter how small, can chemically wire you to move mountains by causing a repeated release of dopamine. But to get going you have to land those first few successes. The key to creating your own cycle of productivity is to set a grand vision and work your way there with a few, achievable goals that increase your likelihood of experiencing a positive outcome.

“Your vision is your destination, and small, manageable goals are the motor that will get you there,” says Dr. Frank Murtha, a New York-based counseling psychologist with a focus on investor psychology, behavioral finance and financial risk taking. “Without the vision you’re on a road to nowhere. Without the goals, you have a destination but no motor. They work in tandem, and you need both.”

Create a Road Map for Your Subconscious Mind

Kick off goal setting by preparing a short vision statement of where you want to go. “Vision creates a picture for the subconscious mind. Our subconscious is what makes us such good problem solvers compared to a computer,” says Dr. Richard Peterson, a psychiatrist and neuroeconomics researcher who has written two books on financial risk taking. “We can see 1,000 dimensions of a problem and sort it down to the most important very quickly.”

The subconscious is not only responsible for 90 percent of the decisions we make in day-to-day life, but is also the part of the brain that is largely in charge when we are performing creative tasks or charting unknown territory. The very act of giving your emotional brain a detailed portrait of your end goal also ensures that, even inadvertently, you will take the steps needed to steer yourself toward it.

Articulate your vision with words and a picture or two; the more detailed the better. Post this where you can see it regularly.

Related: New Year’s Resolution Tips for Busy People

Work Your Way There With Short-Term Goals

To rack up those first few wins, you’ve got to set only a few short-term goals at a time. Each should ideally take no more than three months to achieve. The goals should be realistic and specific, and incorporate your strengths. Writing them down, ideally in a place where you will see them every day, will help you stay focused.

If success releases the production of dopamine, failure can do the opposite. Setting over-reaching goals, or too many goals at once, can be counterproductive for those seeking to harness the power of the brain’s reward center. If you set four goals and achieve only two of them, it’s human nature to focus on what went wrong; even the successes you were able to accomplish fail to drum out what you weren’t able to achieve.

Remember, success begets success.

How to Solve Your Biggest Organizing Dilemma

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How to Solve Your Biggest Organizing Dilemma

Papers piling up on your desk? You’re not alone. According to the National Association of Professional Organizers (NAPO), the number one organizing dilemma for entrepreneurs is getting a handle on paperwork.

“The onslaught of incoming communication is enormous in our society,” says Sande Nelson, a New York City-based professional organizer who specializes in helping businesses get organized.  “Mail comes in from a variety of different sources, and the results of not keeping it all up can be dropped actions and piles of paper that cause more problems,” she says. “A good filing system is a valuable tool to help you get things done and grow your business. It will serve you loyally for as long as it is maintained.”

But how to get started? Here are four steps small-business owners can take to create a filing system that works for them:

1. Set it up yourself. “The biggest problem I see is letting [your] employees design your system,” says Angela Wallace, president of NAPO. “They will create what works for them, not what works for the business. And an added disadvantage: when the employee leaves, no one else knows the system. Each business owner needs to establish business systems, and then train employees to use the business system.”

If you need help designing a system, Wallace says it’s a good idea to hire a professional organizer, who can show you some best practices. However, the business owner should work closely with the organizer to create a system they can understand and maintain.

2. Keep it simple. “The key to a successful filing system for business is to keep it simple and clear,” says Nelson. She has her clients divide papers into sections that make sense for their business. Each section is broken down into categories, subcategories and subdivisions.

For example, Nelson says “Financial Information” is a section most small-businesses would have in their filing system. “Banking” would be a category within the section, and “Bank Name” would be a subcategory. Finally, “Statements” or “Policies” could be subdivisions.

Related: How Long Do You Really Need to Keep Your Financial Documents?

3. Use easy-to-remember names for files. “One bad habit entrepreneurs make is saying, ‘I can’t remember what I called that file so I’ll just make another with the name I think of now,'” Nelson says. “This action heralds the death of a filing system.”

Since files can often be labeled correctly more than one way, Nelson suggests making an index of file names. If you’re still worried you won’t remember the name, Nelson says you can add other possible names for a file to your index, cross referencing them with the actual file name.

4. Maintain your system weekly. Once you have your system in place, Nelson says to maintain it by going through mail and papers at least once a week and filing them immediately. She recommends throwing out junk mail without opening it and shredding things like unwanted credit card offers.

“Establish a regular time each day or week to sit down and handle paperwork,” she says. “Only routine handling will keep the beast at bay.”

Wallace agrees: “Be vigilant about what you keep. Do you need to keep it? Can you get it someplace else? Only keep what you really need for only as long as you need it.”

Related: 

Get Organized! Cleaning Pros Offer Tips

Are you a start-up entrepreneur bogged down with basic admin work?

 

image credit: Shutterstock

What Really Motivates Employees? (Infographic)

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It’s no secret that happy, satisfied employees are a key ingredient to a successful company. But what really motivates people? Traditional thinking follows that the more you pay someone the more loyal and satisfied they are in their job.

But, the truth behind employee motivation is a more complicated mix including praise, autonomy, and leadership opportunities. Take a look at the infographic below for more on the many factors involved in motivating employees.

Related: Inside Employee Motivation: Does Money Really Make a Difference?

Read more stories about:Staffing Solutions, Virtual Assistant, Management, Motivation, Managing employees,

How to Find the Time to Finish Your To-Do List

Use these six steps to set a course for achieving your goals.

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It’s pointless in my view to worry about time management and balance. I’m not interested in balance. I am interested in abundance in every area. I don’t want to sacrifice one in favor of another.

Successful people think in terms of “all,” whereas others tend to place limits on themselves. They may believe that “If I am rich, I can’t be happy” or “If I thrive in my career, then I won’t have time to be a good father, husband, or spiritual individual.” This way of thinking is usually flawed, and neither time management nor balance can resolve it. Quit thinking in terms of either/or, and start thinking all and everything.

 

If you start with a commitment to success and then agree to control time, you will create an agenda that accommodates all you want. These six steps can help you get started.

1. Set specific priorities. I can’t do this for you, of course. Everyone’s priorities are different. But if success is a goal, then I would suggest you spend most of your time doing things that will create success. Success for you could involve a variety of people and things: finances, family, happiness, spirituality, physical or emotional well-being — or, if you’re like me, all of them. And remember, it can be all of them.

Related: 10 Time-Management Tips That Work

2. Get everyone around you to agree on priorities. You’ll need buy-in from your family, colleagues, associates, employees. Without it, people with different agendas can pull you in all sorts of directions. My schedule works because everyone in my life — from my wife to the people who work with me — knows what is most important to me and understands how I value time. This agreement allows us to handle everything else that comes our way.

3. Track how you spend your time. Most people have no clue what they do with their time but still complain that they don’t have enough. If you don’t know how much time you have — or need — how can you expect to manage it?

Logging your time, perhaps in a journal, will help you see all the ways in which you waste it — the little habits and activi¬ties that in no way contribute to your success. Look at any action that isn’t adding wood to your fire — think online poker, television, napping, drink¬ing. Brutal, isn’t it? Yes, but if you don’t manage your time, you will waste it.

4. Create a schedule based on your priorities. When our daughter was born, my wife and I built a routine around our daughter’s sleep schedule and our priorities. We agreed that I would get up one hour earlier and take my daughter on an outing. I have qual¬ity time with my daughter before I go to the office, and my wife has extra time to sleep.

When we get back, my day is mine for work. Because I get my daughter up so early, we can put her to bed before 7 p.m., and my wife and I have time together as a couple.

5. Look for ways to maximize your time. The only way to increase time is to get more done in the time you have. Consider the expression “time is money.” What does it mean to you? How can you treat time to make sure your time is money? Think carefully about what’s the most important thing that you should do with your time.

One way to get more done with your time is to simply find ways to increase your productivity. Another approach: Make it a race, a challenge — make it fun.

Related: How to Avoid Entrepreneur Overload

If I get 15 phone calls done in 15 minutes and you get 15 calls done in one hour, then I have essentially created 45 minutes for myself. If I hire someone and pay that person $15 an hour to make 15 calls every 15 minutes, then I just duplicated my efforts — and my time becomes money.

6. Continue to modify your priorities. Things will change through the course of your life. You achieve and set new goals. Different things and people enter your world. The busier you become, the more you have to manage, control, and prioritize.

When I became a parent, my daughter gave me another reason to create success — not an excuse to avoid working. Our schedule will continue to change as my daughter grows up. But we are controlling our time rather than just haphazardly trying to manage it.

 

Related: Staffing Solutions , Virtual Assistant