After researching and analyzing the marketplace and my competition, I thought I found a good business start-up idea, so I went about writing my business plan. The “experts” suggest testing or validating one’s product or business concept; and like anything, testing is always good advice – especially if you’re spend your time and money building it.
I’m not sure why I skipped the viability test. From my TOWS/SWOT Analysis (Strengths, Weaknesses, Opportunities, and Threats), I thought I found an inviting market – one wide open for improvement and an opportunity to exploit my competitors’ weaknesses. Who knows, it may have been arrogance or simply impatience. Perhaps I used “hope” as a strategy. So, going against good advice, I blew past the validity testing and into the more sexy phases and steps to building a business plan and business.
It’s difficult to model 12 months of supply and demand in a month or two – and I aint got time for 12 months of testing! However, more research and a little validating may have uncovered a problem with my assumptions. To be sure, one has to make an educated risk/reward decision and then make a leap of faith when starting a business. Too many do this at their detriment; and some do this to their success! Sometimes people get lucky.
Fortunately, my business wasn’t an all or nothing adventure. I mean, I wasn’t “betting the farm” on it. So, in the end, my leap was from the curb and into a muddy puddle. However, whether large or small, the market is always right and it’s often brutal.
Despite the positive signals from my SWOT research, I fell face-first into the puddle.
So What Went Wrong?
I believe two things may have gone wrong: Firstly, I made the assumption that two months of observation was sufficient to judge the entire year; and secondly, I did not anticipate a seasonal price war.
Given my amateurish assumptions, I’m not sure if a validity test would have made much of a difference; but, I’m sure it wouldn’t have hurt either. Let me explain.
A Cautionary Tail
I did my market research between December 2014 and February 2015 for a For-Sale-By-Owner (FSBO) Multiple Listing Service (MLS) online business. It was typical to see six-month flat-fee MLS packages selling for $300 to $400. By the time I started up in March, my competitors were offering similar six-month packages for $74 to $175. Meanwhile, I had one package priced a $69 per month and a six-month package at $350. When I originally completed the market analysis it looked like I could compete by offering a monthly service, an improved buying experience, and a more professional web site. I also thought I could use Google Adwords to drum up business. If you want to read the entire business plan, enroll in my free membership and then navigate to Nick’s Start-Up Projects.
Would Testing Have Mattered?
I’m pretty sure I would have found a fairly dead market in January, if I would have tested my concept. This may have given me pause. However, I would have assumed the summer would be a better time. I also didn’t anticipate such a hefty price war and a subsequent sharp increase in Google Adwords’ auctioning. In the Winter, Adwords were about one-thrid to one-half of the price (if memory serves me right) as they were in late March — when I started advertising. During a 12-day period, I spent $200 on Adwords and did not get one sale. I did reduce my price by 30 percent for most of the period (as a sale), but still did not see any sales.
Adwords on Google Search were selling for $9 to $14 per click. On the Google Network, I could buy ads for $3 to $4 per click. I had a click through rate (CTR) of 1.4 percent and .5 percent, respectfully. I’m told a 2.5% is really good, so I had some work to get my CTR up. Still, I’m not sure I’d have made any money with improved CTR with the Adwords so high and MLS prices so low.
I’m not sure if the competition and Adword prices will decline sufficiently in the coming months to continue the service. I may want to keep it active and monitor the marketplace. There may be a less competitive period where offering the service would make sense. Then again, perhaps the demand is so low then that it wouldn’t be worth the few clients I’d attract.
A Little About FSBO MLS
In Idaho, flat-fee MLS for FSBO sellers is regulated by the state. A real estate broker must list and manage the MLS listing for them to advertise on it. Since I’m not a typical broker — I use my license to reduce my acquisition price when buying property and to save when selling — thus the risk to reward ratio was too great to continue offering the MLS service with my broker partner or by myself. You see, as a broker I am liable for problems that occur in my listings and since the service is very limited, I’m trusting a FSBO to sell with integrity. Making $15 to $25 per month to provide the service (before advertising) just doesn’t make good business sense. At the $300-plus range, it was just within my tolerance.
Why do other brokers do it? I believe they must use FSBO MLS to generate leads for their full-service brokerage. I cannot understand why any one would offer their service for a loss unless that was their ultimate goal.
Flat-fee MLS is seasonal with wide fluctuations in price. When developing business plans, it is prudent to anticipate seasonal variances.
Testing in the Winter would not have discovered the high cost for Adwords or the extreme competition. Sometimes we have to go with the information we have, but experience teaches us that we have to account for events we do not anticipate. One should account for seasonal demand. Think about Christmas: toy sales spike form October to December 24th and then drop off.
Don’t bet the farm. If I had mortgaged my proverbial farm for a “killing” I would have been “killed” instead. Never bet more than you can afford to lose – and then be able to live with that decision later.
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