How to Choose a Great Business Idea and Be Sure to Avoid the Bad Ones
One of the very most critical decisions you will ever make in starting your own business is, for all too many entrepreneurs, never really a decision at all.
Many entrepreneurs never really think critically about what business to go into—they just do it. Maybe they have a little experience in one business, maybe they read an article somewhere about someone who made a lot of money in a particular type of business, and maybe it sounded like a cool and interesting thing to do.
And then all too often these entrepreneurs end up with a bad business idea that they are doomed to struggle with – if it survives at all.
I should know. I’m Bob Adams, Harvard MBA and serial entrepreneur. And I know how easy it is to get lured into starting a business that is a very hard business to succeed at!
If you want to quickly discover what business is great for you, I suggest you take my quiz below.
What business you decide to go into isn’t just going to end up being a decision about how you spend your workday.
In some businesses, you are going to be likely to make a lot more money with a lot less work.
Furthermore, what I suggest you think about most is this: What business are you most likely to succeed in or even survive in? Some types of businesses are much, much more likely to be successful than others.
So at the risk of generalizing, I am going to paint some broad brushstrokes of what I think most people’s chances of success are in different businesses.
Before you think that my broad rules of thumb don’t apply to you, perhaps because you have some related experience or a good idea, I offer to you that, on average, the type of business you choose to go into will have more impact on your chances of success than even factors such as your experience or how unique you consider your idea to be.
To be sure choosing the right business idea is just one important factor in how successful your business will be. Another important success factor is how much effort you spend in learning how to start and run and business. And still another key success factor is how carefully you plan your business.
But nonetheless if you start with a weak business idea you will stacking the odds against yourself. But on the other hand if you choose an easier to succeed at business idea, then you will be putting the odds of success in your favor. And with the failure rate for all new businesses in the US at 20% for the first year, you want to do everything you can to make sure your business succeeds!
You can check out my key success factors to get an idea of some of the most important things you will want to be sure to do.
Service Business Ideas: The Best Bet for Many People
Especially if you are not sure of what type of business you want to start, I would recommend starting a service business. Service businesses tend to be local, and competition from national firms tends to be less severe than for product or Internet firms. For example, national firms usually don’t have a significant cost advantage. And the personal touch of a local owner can be a significant advantage in a local service business.
Service businesses typically require less capital to start and operate than product businesses, because you don’t have to finance inventory. Often, you can ask customers for immediate payment by credit or debit card upon completion of the work, so you don’t have to get involved in extending credit. Hence many service businesses you can start with a very small investment and possibly even no investment at all. And you can operate most services as a home based business, saving a lot of money on overhead.
Some service businesses you can start part time, possibly even keeping your day job. I think there is a lot to be said for starting a business slowly, even on the side, as you carefully plan it out and test your marketing.
Service businesses can have very high profit margins and you should be able to reach break-even much sooner than with other types of businesses. For example, I helped my sister set up an employment agency and we reached break-even in just 90 days.
Product Business Ideas: High Risk, High Reward
If you’re aspiring not just to be wealthy, but to really hit the big time, a product business may be your best bet.
Note that I say “product business” and not “manufacturing business” because today you typically want to contract out the manufacturing. Manufacturing itself can take huge amounts of capital and is best left for specialized firms.
Although product businesses can lead to super riches, the risk and failure rate is very high. You will almost always be competing against larger national or international firms. If you become successful, other firms will try to duplicate your success. Even if you have a great product, just getting into the distribution channel can be very difficult. Then, if you are successful and are booking lots of profits, you still may be running negative cash flows as you finance growing inventories and receivables.
You may have an idea for a product that you want to turn into a business. It could be an awesome success or it could be a complete failure. You want to really carefully try to determine in advance if your product business is likely to succeed. Often complete new products don’t work at all, whereas a “twist” on an existing product is less usually less risk and still be highly successful.
That being said, creating your own product is an incredibly fulfilling experience. Several friends from service businesses told me from time to time how much they wish they were in a product business.
My previous book publishing business, Adams Media, is a product company. Thinking about the contents of each book, how to position it, how to package it, and who to market it to was all fun work. But seeing the finished product and seeing consumers using it was a great feeling.
Rental Business Ideas: Good Profit Potential
Rental businesses are not as easy of a way to make money as you might think, but there are many rental firm owners who have made a lot of money. It takes time to develop a steady patronage and iron out the operational issues of running the business.
To be successful, you have to rent a lot of items, because the rental fees on even expensive products like cars or boats can be relatively modest. On the expense side, you have marketing costs, repair, and maintenance, to name a few. Liability insurance can also be high. Even if you get people to sign a release, you can still get sued on the basis of having rented out faulty equipment.
Then you have the issue of theft. The summer I ran Bob’s Rent-A-Bike, I had seven bicycles stolen. One day, one of my rental agents (the owner of a small motel), called to say that although no bicycles were stolen that day, someone had walked off with the unlocked 20-foot-long, 30-pound chain that I gave him to lock up the bicycles at night!
Another huge issue in the rental business can be cyclicality. When the business is booming, it can be great. When the economy turns, it can be a disaster. I know a highly experienced construction equipment operator who couldn’t pay his bills and nearly went under during the last economic downturn. Eventually, however, he survived and became hugely successful. Another friend did very well renting out Dumpsters in the construction industry even though he had no experience whatsoever when he started.
One great aspect of the rental business is that you can usually get a bank to finance a good portion of your rental equipment. The public companies in this space tend to be highly leveraged.
Hotels and motels are really another version of the rental business, and my comments above apply to them, including the significant cyclicality in rates they can charge and profitability.
Consulting Business Ideas: A Great Business
Especially if you have lots of in-depth specialized experience and industry contacts, consulting can be a great business. The consultants I have seen who have been most successful tend to move into consulting late in their careers and had well-established reputations, niche expertise, and lots of contacts, and didn’t mind working alone. Through my book business, I also got to know a number of consultants who I believe switched from a corporate job to independent consulting a little too early in their career. They hadn’t developed a really deep niche, didn’t have enough contacts, or just weren’t happy working alone.
If you don’t have a lot of experience, I think you still can succeed at consulting. But, until you develop deep expertise, I think you should focus on lower-priced packaged options, that is, for a certain fixed price you will offer a certain package of consulting.
Just like any other type of freelancing, being an independent consultant is a business. You will be much more successful if you go through the many steps I advise for any other business, including creating a highly detailed and well-though-out business plan, writing out your strategy, protecting yourself through a consulting LLC, testing and experimenting with your marketing, and so on.
Retail Business Ideas: Increasingly Difficult
Retail is a lot tougher than ever before, and it’s getting more difficult every day! Why? In addition to the huge discount department store chains like Walmart continuing to take market share, the so-called category-killer superstores or big box stores continue to threaten smaller retailers in all kinds of categories. Then on top of that, you have the Internet companies, like Amazon, which are more than willing to run their business at a loss today in hopes of making it up at some point in the distant future.
It’s not impossible to compete with the mammoth retailers out there—the success of the various “Dollar” store chains shows this—but it is very, very difficult. You especially need a very carefully developed strategy that clearly differentiates your business and gives shoppers a clear reason for choosing your store.
Don’t be tempted to start a retail store just because you find a cute, affordable space to rent. Location means everything in retail, and a good location usually costs a lot of money. I would spend several days sitting in front of a potential retail location with a counting device, counting cars and pedestrians walking by, before I’d even think about signing a retail lease. Then if you do get a great location, take full advantage of it with great signage and an enticing storefront.
To get started with even a very small retail storefront you’ll need money for probably for at least 2 months of rent, inventory, any build out and some cash in reserve. So for most retail stores you are going to want $50,000 to $100,000 to get started. And even for the very tiniest of retail store fronts you’re going to need upwards of $10,000 to start your business.
At one point I tried to retail new Polish bicycles out of my house. They were decent bikes at a great price, but no matter how aggressively I advertised them or how low I went on price, I just couldn’t capture the sales levels that the local bicycle shops were enjoying. So for selling new bicycles I think I would have done much better with a real commercial storefront location.
E-commerce Business Ideas: Tougher Than It Looks
Opening up a retail business online—or an e-commerce site, if you prefer—what could be easier? Just throw together a website and wait for the orders to roll in, right? No, it just isn’t that easy. First and foremost, it is much harder than you might think to get visitors to come to your site.
For starters, getting a new website to rank in the first page of search engine results of the more popular keywords on the larger search engines is a formidable task indeed. Yes, you can buy advertising to drive traffic to your site, but it is very expensive. Then, even once you have driven traffic to your website, it can be very hard to convert visitors to sales.
When I operated the website CareerCity.com, we would get tens of thousands of visitors a day, all interested in finding jobs. But despite a lot of promotion on the website, we were lucky to sell even a few paperback books on job hunting techniques.
Overall new e-commerce businesses have a shockingly high failure rate. In the US a reported 90% of all new e-commerce companies fail within the first 120 days. Hey, I’m not telling you this to try to scare you away from starting a business! I’m telling you this for two reasons. First you need to realize that e-commerce is much more difficult to succeed at than it looks and that there are many other types of businesses that are easier to succeed at. Secondly, if you do decide to start an e-commerce business you need to really carefully develop your strategy and your business plan.
Secondhand Store Business: A Safer Bet in Retail
If you really want to go into retail, particularly in a category dominated by superstores, you will be a lot better off opening a secondhand store. You may be able to operate with no investment in inventory by only handling goods on a consignment basis—that means that you never actually own the merchandise. Instead, you display the goods and pay for it only after you have sold it.
But even if you are selling on consignment you need to get a healthy markup. You want about 15 percent of the sales price if you are selling high-priced items like cars or boats, and more like 50 percent if you are selling less expensive items like children’s clothing.
Although I found it difficult to sell new bicycles out of my house, I found it a snap to sell used bicycles. In fact, the summer I started Bob’s Rent-A-Bike I found I could buy used bicycles at the beginning of the summer, rent them out all summer long, and then sell them often for more than I paid for them at the end of the summer!
Another summer, I was able to build a significant business buying and selling used boats out of my house. I even sold a small Boston Whaler powerboat to the famous author Norman Mailer.
Restaurant Business Ideas: High Risk and Unpredictable
Restaurants have a sky-high failure rate. Steady, loyal patronage may take years to build, and it can be very difficult to rapidly accelerate the process, even with elaborate marketing campaigns. Owners of successful restaurants usually have extensive restaurant experience, work endless hours, and either rely on their large close-knit families for assistance or have a special knack for attracting, retaining, and motivating good kitchen help and waitstaff. On the other hand, to emphasize how hard the business is, many owners of failed restaurants also possess these so-called “success traits.”
I spent an entire year planning to launch a restaurant chain, only to finally conclude it was a bad business to invest in. Every single location is a fresh and risky bet. You typically spend a ton of money for the kitchen and dining room build-out, but the landlord still owns the building. City regulations are getting increasingly burdensome. And employee theft can be very high in this business. Then there is the overhead. The water bill alone for a typical restaurant can run into the $50,000 range.
Sandwich Shops: An Excellent Food Business
If I were going to enter the restaurant business, the first segment I would focus on would be the lunch business, and specifically a healthy, high-quality sandwich shop.
In addition to the chains that have succeeded in this segment, I have seen individuals do very well. I have seen some people who owned or managed full-service dinner restaurants who switched into the lunch business and were very pleased with the profit potential, the smaller investment, and particularly the reduced operating hours and headaches.
Wholesale Business Ideas: Easy to Start, Hard to Succeed
If you are thinking about opening a wholesale business, think twice! Although it’s typically easy and quick to be able to reach a high level of sales in this industry, you’ll find it a lot harder to earn a decent profit margin or perhaps even stay afloat at all. Most wholesale businesses operate on very thin profit margins that are possible only because of highly sophisticated and efficient operating procedures, tight credit and collections control, and most of all, a large volume of sales over which to spread overhead.
Exclusive Distributorships: Often an Exceptional Opportunity
Let me distinguish between the two. A wholesaler typically sells the goods of many different manufacturers and competes head-to-head with other wholesalers often offering highly similar, if not exactly the same, products, driving gross profit margins to razor-thin levels.
An exclusive distributor, on the other hand, typically has much higher gross profit margins and may sell goods to wholesalers as well as directly to retailers or end industrial users. Sometimes the exclusive distributor imports a foreign product.
For several years in the book industry, I distributed the books of several other publishers in the U.S. I received roughly 27 percent of the wholesale price, including paying for the sales force, whereas the book wholesalers were operating on margins in the 10 percent range.
What’s the upside to an exclusive distributorship? In the mid-1950s, the brother of my grandmother’s third husband was co-owner of a small car repair garage in Brookline, Massachusetts, when he agreed to import a funny-looking new small car into New England. It was called the Volkswagen, and he retained exclusive regional distribution rights for decades to come, making a lot of money in the process.
Starting Your Own Blog: Tough to Make a Living
We all know that the traditional print media—newspapers and magazines—have been devastated by online advertising competition, so why not focus there? Isn’t everyone starting an online blog? How hard can it be? Well, it’s easy to start an online blog. But it is nearly impossible to make any significant money at it.
There are currently more than 200 million online blogs worldwide. And there’s not enough advertising money to go around. Most blogs don’t even carry ads. But plenty do. However, most blogs that do carry advertising only receive a dollar or two in revenue a day.
Earl is running one of the most popular travel blogs out there. To monetize his blog, he sells his own tours and does affiliate marketing.
Typically, they are getting ad revenue through an ad-serving platform. The ad-serving platform may keep around 35 percent of the revenue. Furthermore, the ad rates that advertising space is sold for on blogs through ad servers tends to be very low. So a blog may be a good way to show off your creativity, but less a good way to try to earn even a part-time income.
Franchise Business Ideas: Usually a Solid Bet – But Not Always
Especially if you don’t have business experience, buying a franchise can be a good bet, but it is no panacea. Some franchises do fail. You can check out my presentation on franchises.
Buying an Existing Business: Often the Lowest Risk Alternative
Buying an existing business will, on average, dramatically increase your chances of succeeding in business. But buying and valuing a business is not usually a simple process, and there are plenty of things to watch out for. I have a number of presentations on buying, selling, and valuing businesses.
Evaluating Risk in Small Businesses Ideas
Any business you go into will involve some risk, but some businesses are inherently much riskier than others. Make sure you carefully decide which type of business you want to go into and are aware of the most common risks in that type of business. Then, think about the risks and reward potential of the specific business you are considering. There is a common adage of “no risk/no reward,” but smart businesspeople try to reduce risk any chance they can.
Takeaways You Can Use
- Retail start-ups are very difficult.
- E-commerce is tougher than it looks.
- Rentals and consulting have decent potential.
- Service start-ups are a good bet for most people.
- Product starts-ups offer high risk/high reward.
For More Business Ideas
Check out BusinessTown’s most popular article, The 300 Best Small Business Ideas. This comprehensive multi-page article offers expert advice on every single business idea. Includes home based, online, steady income, low cost, product and service ideas. Better yet virtually all of the businesses included in this article are great businesses to start – and I discuss the pros and cons of each one.