Monday, May 12, 2008

I Love My Idea. You should too ...

An important driving force behind every entrepreneur is their passion and their unadulterated love for their idea. Without this passion there won't be a company based on it. But the same passion and falling in love with one's own idea leads to belief that everyone else will see this and will lead to automatic success. Success in the market place depends not on the idea but on the value proposition to the customer segments being targeted and how you execute the strategy better than the competitors.

Let us look at this from the prospects of a low tech business franchise, "meal-assembly". Forbes magazine has a well researched report on this industry. Sean Kelley of wrote this on the "Assemble your meals in our kitchen" franchises:

A common new business pitfall is the entrepreneurial tendency to become enamored so with a “solution” that one forgets to make sure it’s preceded by an actual need… and a need great enough to support multiple competitors who are also enamored with said solution.
Let us do some market analysis on this concept and whether it is attractive to invest in:
  1. There are absolutely no barriers to entry. Anyone with a cookbook could enter. This leads to extreme fragmentation.
  2. There is no differentiation among the multiple offerings. The brands did not have solid footing and did not connect with the customers.
  3. The targeted segment is very narrow (if not non-existent): mostly women who are busy to do their own groceries and cleanup after cooking but would like to serve "home cooked" meal to their family.
  4. A typical franchise gets about 50,000 people area franchisees of competing brands do operate in this market, limiting the available share.
  5. The value proposition is not well defined. It saves the women grocery shopping and cleanup but they still have to book a time and drive to these places to cook. But people cannot avoid trips to grocery stores for everything else.
  6. How much are the customers willing to pay for the convenience? The prices these places charge are higher for the value they add, a 2-3 serving of Chicken Lasagna costs $14.
  7. This concept requires behavior change in customers, which is the most difficult thing to achieve. One brand tries to train the customer with messages like " We are not a luxury, we are a necessity". That does not ring true with customers.
  8. Their fixed costs are high and takes about $25000-$30000 sales per month to break even. When supplies costs go up, as they do now, they further eat into the margins.
  9. The customers are very fickle and had no switching costs. While those inspired by Food Network might try these for experience, they will not generate repeat revenue.
  10. There are many substitutions, pre-cooked and pre-prepared meals are now available in stores like Whole Foods and other grocery chains. People can order groceries and some pre-prepared meals online for home delivery.
This idea sounds neat but does not have merit. The same can be said about many high tech ideas that sound extremely cool. Instead of creating value, the ventures based just on the idea end up destroying value for the founders, the investors and the employees.

Love your idea but do some analysis before betting on it.

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