Before starting any business it’s critical that you determine it’s worth it and actually can make profit as well as create a life you want to live.
If you start a business that stresses you out and is in competition with a million other businesses where the margins are razor thin and you’re not making much money it’s not going to be worth it to get into business.
Ultimately, there needs to be a blend of passion or interest, a clear market opportunity where you can carve out a unique niche and make good money, and the ability to solve a problem effectively for a group of people you care about.
Below are some of the key steps to walk through before starting any business.
Table of Contents
1. Niche Down & Find a Unique Category/Market
The most important thing when starting a new business is that it is actually going to be worth it to start.
Being worth it means that you can make enough profit to fund the lifestyle you want to live without creating toxic stress.
Essentially, over time will you hate owning or running the business or will you enjoy and have the stamina to continue with the business because it enables you to live a life that’s good for you.
In order to make enough profit there are a few main factors to think about.
- is your product or service able to maintain healthy profit margins due to low to medium levels of competition and a unique differentiating factor in the specific niche market?
- are you able to reach 1,000 true fans in a cost effective way where they are willing to pay you a good amount for your product or service?
In order to make money the business either needs to be high volume with lower margins or high margin with low volume.
It’s generally easier to run a business that is lower volume with higher margins.
The Law of Category
In order to have less competition and higher margins it really helps to have a business that exists in a new category or that positions itself in a different way in a category.
This also helps a ton with marketing effectiveness since the marketing messages and ad spend will stand out more and be less expensive.
In the 22 immutable laws of marketing it talks about how you either need to be first in a category or to create a new category to be first in and promote the category to become first in the mind.
For example, we remember Amelia Earhart because she was the first woman to fly the Atlantic solo. Woman being a new category.
Other examples of creating a new category are:
| Old Market | New Category Created | Company That Defined It | How They Differentiated |
| Soft drinks/cola | Energy Drinks | Red Bull | Sold “energy” not soda. Small can, extreme sports branding. |
| Phones | Smartphone/computer in pocket | Apple iPhone | Created the category of a touch-screen smart-device consumer ecosystem. |
| Hotels | Home Sharing | AirBnB | Created a new category separate from hotels by using people’s homes. |
| Coffee | Mushroom Coffee | Four Sigmatic | Coffee alternative with Lion’s Mane — “upgrade your brain.” |
| Cameras | Action Adventure cameras | Go Pro | Rugged POV storytelling instead of traditional photography. |
| Blankets | Weighted blankets for stress relief | Gravity Blanket | Created the modern weighted blanket category for consumers. |
| Notebooks | Productivity Note Journal | The Five Minute Journal | Habit-forming journal with a formula, not blank pages. |
It’s important when starting anything new to determine what category your product or service is going to fit into.
Understanding Monopolies and How They Are Created
Related to carving out a unique niche or category in a market, a monopoly is when a business dominates a specific niche or market and doesn’t have to worry about competition as much.
The goal with any business should be to become a monopoly in the chosen market and to avoid competition as much as possible because too much competition decreases profit margins and increases stress. Monopoly is the definition of any successful business.
All monopolies share some combination of these characteristics:
- Proprietary Technology
- Network Effects (think Facebook gets better as more people join)
- Economies of Scale (think Amazon can cut costs and offer free shipping due to scale)
- Branding (think Apple can charge higher prices or Kleenex for tissues)
In order to build a company that is a monopoly remember:
- Every new business is small at the beginning
- Every monopoly dominates a large share of its market
- Therefore, every startup should begin with a small market and own it
Often the best markets for new businesses are small markets that are not served by other competitors or where few competitors are serving them.
2. Don’t Obsess About Scaling Focus on a Small Market
The second thing to consider after determining what category and market your new business is going to operate in is the size and scale of your business.
The key thing to remember is it’s best to start small.
It’s not helpful to obsess about scaling or growing a big company because this will be counterproductive to building a highly profitable and low stress business.
If you have the mindset of operating in a huge market with already entrenched competition it’s going to be a tough battle right from the start as other bigger businesses can just cut costs and run you out of business.
If you instead focus on a small market with a differentiated product and brand there will be less competition and you will be able to better serve and dominate that market.
Most of the time you even see that bigger companies will acquire adjacent smaller brands just because they capture a new segment of customers that is growing where that bigger company is not able to specialize.
For example, Starbucks has acquired many smaller tea and coffee brands that carved out specific market segments.
Focus on doing great work in a specific niche category that you are interested in or have the ability to serve uniquely. If you work for the rewards your business and work won’t be as good but if you do great work in a specific category that makes you different or new the awards will eventually come.
3. Scratch Your Own Itch
In order to persist and do great work in a market you have to either care about it enough because you have been through the pain or problem you are solving or you just generally have to enjoy or be into the niche.
There are definitely cases where entrepreneurs just start businesses because they see an opportunity to make good money and have the ability to fill that gap but a lot of the time this can lead to burnout or wanting to get out of the business even if it means selling or quitting.
Entrepreneurs who do this are most of the time natural executive leaders or those who have a good amount of money to invest where they can hire an operating staff for the business.
If you are going to start something just because it is a good monetary opportunity, at least make sure the work lifestyle and market competition is good for you.
The last thing you want to do is start a business that you hate, that is stressing you out, and where you do not enjoy your life because you have to troubleshoot and manage people 24/7.
It’s also the case that if you scratch your own itch meaning solve a problem you have or get into something you love that your chance of success will go up dramatically. This is because you will put the extra effort in which will allow a better product and relationships in the business.
When you think about relationship building (especially in business) it is so much easier when you actually enjoy what you are doing and get energy talking about the business or subjects related to it. Any good business must have quality and meaningful relationships.
4. Find And Convert 1,000 True Fans
Focus on selling to 1000 true fans when starting any new business.
Kevin Kelly’s “1,000 True Fans” theory, suggests creators or small businesses can earn a sustainable living (around $100k/year) by cultivating just 1,000 devoted fans, each spending $100 annually on their niche work, bypassing mass markets for direct support through unique products, exclusive access, and strong community, a concept relevant even today for building a creative business.
It’s important to remember that you can have a really great business with 1,000 true fans who are willing to pay $100 a year for $100k. If we think in terms of numbers there are a few scenarios that lead to awesome businesses.
- 1,000 people spending $100 a year = $100,000 low stress business
- 1,000 people spending $100 a month = $1.2M business
- 500 people spending $100 a month = $50,000 m or $600k yr
- 1,000 people spending $50 a month= $50,000 m or $600k yr
- 1,000 people spending $25 a month= $25k m or $300k yr
Marketing costs will be lower if you niche down and you will be able to develop a raving customer base who genuinely likes your brand.
The worst thing to do most of the time is to sell to everyone with a general audience.
When you sell to everyone you won’t have a differentiated product, the marketing costs will go up because you are competing on ad spend with big players, and everything will be kinda just sub-par.
This also makes your marketing, product creation, and business maintenance much easier since you can have a small team that generates great profits.
Other Great Resources to Use
Below are a few different resources to use and consume when starting a business.
- Tim Ferris video on starting a business
- Business model canvas for sketching out your business model, costs, and revenue structure for brainstorming. Here is an explanation.
- Review of the 22 Immutable Laws of Marketing
- A review of Porter’s five forces model to determine the market economics and where the power is in the market
- A basic spreadsheet of estimated financials including startup costs, estimated revenues and expenses (fixed and variable), break even analysis (monthly and startup investment), a budget for year 1, and a working capital breakdown.
Increasing Your Chances of Succeeding
So in summary, to increase your chance of success for a new business there are a few main things to think about and do before getting started.
First, make sure you have a product that is easily differentiated from the current market either in terms of creating a new category or having a unique position in the market. And make sure you can explain it simply for marketing purposes where it sticks out in people’s minds.
Second, if possible make it something that solves your own problem or is related to something you are into or enjoy. This will improve your chances of success, increase your ability to build relationships, and will enable you to persist to bring a vision to fruition.
Third, focus on a small market or around 1000 true fans that you can create value for at first. This will lower marketing costs and enable you to be different and better for those specific customers before you think about scale.
Lastly, make sure you have monthly KPI reporting including your profit and loss financials as well as the key metrics that are responsible for your business success and profitability. It’s critical to check in with the numbers on a weekly and monthly basis to determine how things are trending and which levels are most impactful for a successful business.
