Product Development Handbook
Chapter 1: How to Find the Right Business Idea
Focusing on the Customer Problem
We need to change the way we think about finding business ideas. Instead of finding a business idea to build a business around, we need to focus on finding a customer problem that we want to solve. Let me explain.
People often say, “I want to start an app like uber” or “I want to start a website like Facebook.” These are solutions. You should dig deeper into what problems these solutions actually solved.
In 2009, Uber solved the customer problem of transportation within the same city. Before Uber, customers had pain points like
- They had to call a taxi company or try to hail them on the road
- Friends and family couldn’t track user’s ride for safety purposes
- It was hard to do credit card transactions with cabs.
Uber’s solution solved these pain points by
- Having a convenient app that shows you nearby cabs that you can book with a single click
- Mobile payments through the app were easy and simple
- Your friends and family could track your whereabouts during the ride.
In 2004, Facebook solved the customer problem of remaining in touch with your friends and family. Before Facebook, customers had pain points like:
- They had to use phones, emails, IMs to stay in touch with friends and acquaintances. Generally, all these 3 solutions were part of different services.
- People would move, resulting in their contact info being changed, and the people they couldn’t update, they will lose touch.
Facebook’s solution solved these pain points by
- Having a central profile system where people could check updates on their friends, IM them, audio and video call them.
- Having a central profile that didn’t change when people moved, so they didn’t lose touch with their friends and family.
To summarize, we need to focus on the Problem Space before we focus on the Solution Space.
Problem Space vs. Solution Space
As you can see in the image above, we need to start with Problem Space and then move into Solution space. Let’s dive into it.
Solutions like iMessage, Gmail, Facebook, and WhatsApp are focused on solving customer problems, making it easier for people to stay connected with their friends and family.
Solutions like Uber, Lyft, Public transit, taxies are focused on solving the transportation problem for the users.
To summarize, before you decide on a business idea and start a business, decide on what customer problem you want to solve. We go over the process to do that in the next section.
Short Term vs. Long Term Competitors
The concept of Problem Space vs. Solution Space brings to the topic of what are our real competitors.
For Uber, other taxi services might be their short-term competitors who compete on customer acquisition, customer retention, etc. However, for Uber to survive long term, they need to compete with older traditional transportation models. Why should someone take an uber instead of taking a subway or a bus? Why should someone not ask their friends for a ride or walk to places.
The same goes for examples like Amazon and Instacart. Amazon is dominant in the E-commerce space, but they have avoided the monopoly-related regulation from the government because it still makes a tiny percentage of traditional commerce. The majority of the general population still do shopping in-person (at least before Covid).
For Instacart, their long-term competitor is people’s habit of going to grocery stores in person. Why should people choose to pay Instacart fees when they could walk to the nearby store.
This all ties to you because sure, you should be aware of the market and your short-term competitors. However, you should solely focus on solving customer’s pain points and providing value to them for long-term success.
Finding the Right Business Idea to Pursue
In this section, we will go through how to find the right business idea to pursue. In Step 1, we will brainstorm possible options based on 4 factors, and in Step 2, we will prioritize these options based on 2 frameworks. Let’s get started.
I suggest you do this exercise side-by-side while following this guide. Below are the results of me doing this exercise on myself. You should see similar results as shown below.
- Step 1: Brainstorming Possible Options based on 4 factors
Factor #1 – Passion (Solving Problems You’re Passionate About)
The first factor is Passion. Here, brainstorm and list all the problems that you’re passionate about. For me customer problems that I’m passionate about are:
- Helping people stay connected with friends and family
- Improving transportation
- Improving health and well being
- Coding education
Now on the right-side column, you can see the list of possible solutions that you could build to solve these problems.
For example, to solve the customer problem of health and well-being, I can build solutions like selling health supplements, starting online fitness classes, and more. For helping connect friends and family, I can make a social networking site, build a chat app, and so on.
Note: in this exercise try to avoid thinking about the solution. We first need to figure out which problem to work on and validate that with the customers. We will focus on solutions later when we know we are solving a problem people care about.
Factor #2 – Knowledge (Solving Problem You Have Existing Knowledge In)
The second factor is Knowledge. Here, you should focus on brainstorming problems that you have existing knowledge of.
It’s true that with any business you would need to educate yourself constantly. However, you should still have an existing foundation in it. For example, I don’t have existing knowledge in medicine or insurance. For me, it would be harder to start a healthcare or insurance business.
Please do this exercise on yourself. Here are my results. I have existing knowledge in Business Education, E-Commerce, Marketing, and Product Management. I brainstormed possible solutions as writing books, building training, and learning portals to solve these problems.
Reminder: this section is about brainstorming possible customer problems based on 4 factors. Please check the next section if you want to look at how we prioritize these and find the right business idea for us.
Factor #3 – Revenue (Solving Problems That People Would Pay Money For)
The third factor is Revenue. Here, we brainstorm problems that people would be willing to pay for. This could be based on existing knowledge or more profound research.
For me, the problems that customers would be more inclined to pay money are Ecommerce and Improving Health. Commerce and Online Commerce are evergreen businesses where people always spend money on. The same goes with Fitness. People spend money on gym memberships, fitness programs, supplements, cooking classes, doctors, and more.
Factor #4 – Solving My Own Problem
The fourth factor is solving your own problems where you will be the customer of the solution you’re building.
This is important because you need to do Customer Development for any business, which is understanding customer pain points and continuously getting feedback from them. If you’re your own customer, you will have a better understanding of the customer’s perspective.
Paul Graham is a huge supporter of this. He’s the co-founder of Y-Combinator, a VC firm that helps found billion-dollar businesses like DoorDash, Instacart, Dropbox, and many more.
For me, If I build a solution for Improving Health or Improving Business Education – I will definitely be using it often. I suggest you do the same and think of solutions that you would be using yourself often.
Step 2 Method 1: Prioritization and Decision Using Fixed Weight Equation
In the previous section, we brainstormed all possible business problems based on 4 factors. In this section, we will use a prioritization framework called Fixed Weight Equation to make a decision – which of these business ideas to pursue.
We will be assigning every brainstormed business problem from Step 1 a score. This score will be based on the 4 metrics mentioned in Step 1. I suggest that you do this exercise in parallel as well. By the end of this exercise, your scoring table should look similar to this.
Factor #1 – Passion
The first factor is Passion, which means how passionate I’m for the problem space. This is important because let’s say if you’re business is going through a crunch, your passion is what will keep you going and prevent you from giving up. Passion is a significant motivating factor in building a business.
Being passionate about a problem space also means would you enjoy working on that problem if money wasn’t the motivating factor? Yes, we need the business to pay bills but enjoying the day-to-day work is important.
For example, some folks are passionate about Health & Fitness problem space, some folks are passionate about Stock Trading & Finance, some are passionate about E-Commerce, etc.
Factor #2 – Knowledge
The second factor is Knowledge, which means how much existing knowledge do you have about the problem space, the market, and potential customers?
This is important because the more knowledge you have about the space, the less research work you would need to do later. This is compared to other areas where you have no prior knowledge.
For example, I personally should not start a Crypto Currency startup because I very minimal knowledge in that space.
Ideally, most ideas related to this factor would be based on what you studied in College and what knowledge you picked up while working at a company.
Factor #3 – Revenue Potential
The third factor is Revenue potential, which means how much financial opportunity is in the market.
Let’s talk about how to figure this out about space. Start with researching businesses that are solving the same or similar problem. For example, if you want to start an Online Fitness company, begin with researching other Online Fitness companies.
After you have identified similar companies in your space, research their fundraising history, how much VC money they have raised. You can do this by using tools like Crunchbase and AngelList. You can also dig into the financial statements of publicly traded companies.
You could also get the idea from their user numbers. If a business has millions of users, that means the business idea definitely has some revenue potential. To figure out how many users a business has, use tools like Alexa or SimilarWeb.
Factor #4 – Will You Be Your Own Customer?
This factor means will you be using the solution you’re building on a consistent basis? Will you be a regular customer of your own business?
This is important because by being your own customer you will have a higher understanding of the customer mindset since you would be one yourself.
Note: This should still not prevent you from consistently talking to your customers and learning from them.
Let’s quickly go over the exercise by using my data as a reference.
For factor #1 Passion, the problems I’m more passionate about (like E-Commerce, Consulting & Communication), I have assigned them high scores like 9 or 8. For spaces I’m not super passionate about like Fitness and YouTuber, I have assigned lower scores for myself like 6 or 2. Note: your scores will look different from mine.
For factor #2 knowledge, I’m not super knowledgeable about fitness and online entertainment so I assigned them 2 and 2. Whereas, I have relatively decent prior knowledge in E-commerce, Consulting, and Communication so I have assigned them higher scores like 9, 9, and 7.
For factor #3 Revenue Potential, most of these ideas have high revenue potential so I have assigned them high scores like 8 or 9.
For factor #4 Being your own customer; For ideas like E-commerce, Consulting, and Fitness I would be consuming my own product, so I assigned them high scores here. I’m not a huge consumer of online entertainment so I assigned it a low score for myself.
Now, when you sum each idea across 4 categories, we put the sum in the 5th column. As you can see the top 2 options for me turn out to be E-Commerce (score 36) and Consulting (score 35), closely followed by Communication (score 31).
I suggest you score your ideas the same way I did above. Then you should see the top 2/3 high-scoring ideas and make a decision on which one to build a business around.
For folks who are like me and appreciate more visualization in their decision-making, you can also put the scores in Excel to get graphs like this.
This visualization confirms our current understanding that the top right ideas in the chart are worth pursuing more. The graph also helps me understand better how much better the top options were at scoring than the rest of the options. For example, Communication (score 31) might not seem too different from Consulting (35) but it’s almost 13% lower.
In the next section, we will cover another prioritization technique called Variable Weight Equation.
Step 2 Method 2: Prioritization and Decision Using Variable Weight Equation
In this section, we will use a prioritization framework called Variable Weight Equation to prioritize the ideas we brainstormed in Step 1.
As part of this framework, we assign weights to the 4 factors based on their importance. For example, if you feel that being knowledgeable about the business space is more important than being passionate about it – then you can assign a multiple of 2 to the knowledge column and multiple of 1 to the passion column.
Note: Feel free to have custom weights for these 4 factors based on their importance to you. In this example, I have assigned a weight of 1 to Passion, 2 to Knowledge, 2 to Revenue Potential, and 1 to Being Your Own Customer.
To summarize, this means that having previous knowledge about the space and revenue potential would be twice as important as being passionate about it and being your own customer.
Note: I have done this exercise on myself here. I suggest you do this on your data in parallel.
Now, based on the equation mentioned above, let’s assign scores to my options.
I have kept the identical scores I assigned them in step 1, but the final score gets multiplied by the weight we assigned the column. After that, we sum the final scores for each idea in the 5th column to get the top-scoring ideas.
As visible here, E-Commerce (Score 53) and Web Consulting (Score 54) came out to be top-scoring business ideas I should consider pursuing. I suggest you do the same exercise to your list of ideas.
Benefits of Variable Weight Equation
- As previously stated, you get to give more importance to factors you think are more important when choosing the business idea.
- When we used Fixed Weight Equation in Step 2 Method 1, all factors weighted the same and few ideas, and their scores looked way closer to top ideas than they should have. Sometimes, this could affect our decision-making. However, when you do Variable Weight Equation, you can see more granularity in the options and their scores. For example, using Fixed Weight Equation, the option for Communication seemed pretty close to the top 2 options. However, if you follow Variable Weight Equation, you can see the gap is much wider from the top 2 options.
Just like in the previous step, I plotted the scores in an excel sheet to get a graph. This can be useful in your decision-making by visualizing the difference in scores for top ideas to the rest of them.
Starting with a Niche
In the previous section, we figure out what business idea to work on. In this section, we will cover the concept of Niche. Let’s get started.
Business Niche is specific segment of a bigger business problem that is focused on specific group of people.
Let’s go through some examples.
- Let’s say you decided to build a social network. One example niche could be building a social network for a particular city. Facebook which is also a social network initially started out as a Niche focused on only 1 college (Harvard) and 1 City (Boston).
- Let’s say you decided to start a taxi business. One example niche could be focusing the business for specific routes of the city. Uber initially started out as an airport taxi service only for San Francisco airport.
- Let’s say you want to build a food delivery service. One example niche would be focusing on specific neighbourhoods of the city. DoorDash which is a food delivery service, started off focused on specific areas of Palo Alto.
This can be summarized as:
In the next section we will talk about how having a Niche is beneficial for your business.
How is Having a Niche Beneficial For My Business
Having a Niche helps your Business in the following ways:
Increased Focus & Visibility Among Customers
When you’re starting a business, it’s easy to get distracted. If you focus on too many markets at the same time, it will distract you from your core market.
Let’s talk about an example. Let’s say you want to start a marketing agency and run marketing campaigns for other businesses. However, this is too big off a market.
You can segment your market into a niche based on company size, for example small start-ups, medium sized companies or fortune 500 companies. You can also segment your market into a niche based on industry type: fitness industry, education industry, E-commerce etc.
This is important because let’s say a law firm searches for a marketing agency. Now would they go with a marketing agency focused on law firms or would they go with a general-purpose marketing agency. That’s why it’s important to know your Niche.
Once you have enough traction, you can expand outside of your Niche. For example, Uber started out as a taxi service. Then they expanded to car-pooling, food delivery and more.
More Value to Customers
When you focus on a niche, you focus on a specific problem for specific group of people.
The more specific your niche is, the less competitors you will have. Less competition means customers have limited companies solving their problems. When there are less solutions in the market, there will be even less good quality solutions.
It’s an opportunity for your business to easily provide high value solutions to the customers.
Less solutions in the market means customers don’t have enough companies paying attention to their problems. When you solve problems for them, you gain their empathy, and these early customers will become champions of your business later on.
It’s better to provide exceptional service to 100 customers than trying to provide good enough service to 1000 customers.
Building strong customer relationships is also good for the business. Strong customer relationships translate into high customer retention rates and higher revenue.
Better Profit Margins
Since there is less competition, you won’t need to compete with your competitors on pricing. Race to the lowest price to undercut others results in bad business for everyone involved and it distracts you from providing high value products to the customers.
More Business Opportunities
When there are limited solutions available to the customers, they would have higher number of underserved needs and pain points. The more underserved needs customers have, more business opportunities for you.
Supported by Real World Data
As mentioned in the previous section, popular businesses like Facebook, Uber and DoorDash all started as a Niche and then expanded later.
Note: you can always expand your business to other niches later. It’s only important in the beginning until you get significant traction.
How to Find a Niche For Your Business
In this section, we will go through 2 example business problems and their possible niches you could pursue. Let’s get started
Let’s say you want to start a Health & Fitness business.
The 1st niche could be providing fitness classes to users. This would include conducting one-on-one or group classes, preparing workout plans, giving constant feedback to customers and more. You can do this in-person, virtually or live stream it online.
The 2nd niche could be selling fitness supplements. This would include selling protein powder, nutrition bars, multivitamins, creatine and more.
The 3rd niche could be selling fitness equipment. This would include selling dumbbells, barbells, squat racks, treadmills and more.
Let’s look at another business problem. Let’s say you want to start a professional training business for software engineers.
The 1st Niche you could be teaching how to code websites from scratch. Your customers would be young professionals from non-tech background who want to transition to a tech career.
The 2nd niche could be building educational content for existing software engineers. This would include teaching new technologies like new web frameworks, teaching new domains like crypto, teaching job interview skills and more.
To summarize, I would recommend you research your possible niches for your business problem. Then use the prioritization techniques mentioned in the previous sections to decide which niche to pursue. (Fixed or Variable Weight Equations).
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