Feasibility studies are critical for predicting business success
For every great business idea, there are many that won’t be profitable. Large corporations may have millions of dollars in their budgets to study the feasibility of new products, services or locations. Small business owners and prospective entrepreneurs don’t have that luxury. They need to do the work themselves.
Getting started
Don’t overlook the obvious. Simple homework can help save time and money. Ask friends, associates and other business owners what they think about a new idea. Ask potential customers how much they would pay for a new product or service. Document information about demand and price to help estimate potential income.
If initial feedback is positive, a feasibility study is the next step. There are two approaches – the business owner can independently conduct informal research or hire a professional who can offer an unbiased conclusion.
When a sophisticated report is needed, it’s wise to consider hiring a professional. For example, if a business owner is seeking financing, bankers and investors expect to see a professional report. Furthermore, the larger the dollars required, the more sophisticated report necessary. Many consulting companies are available to help with feasibility studies.
What is a feasibility study?
A feasibility study addresses a particular industry – as a whole and at a local level. It describes the products and services offered, attempts to gauge market demand, and identifies pricing considerations, competitive factors and other issues that could affect the success or failure of a new product, service or business concept.
A feasibility study is usually prepared before a business plan. A feasibility study helps determine the likelihood a product or service will succeed. A business plan is created only if the feasibility study finds that a product or service is likely to succeed.
Feasibility studies can be relatively general when covering an industry. Business plans should always be very specific to the proposed operation
What to include
A feasibility study should include general information about an industry and the immediate marketplace – from trends to pricing. For example, if a business owner wants to buy a building and develop it into a bed and breakfast (B&B) inn, the feasibility study should outline:
Importance of demographics
Demographics help describe a "typical" customer – age, median income, education, average use of product or service, etc. When planning a new business – from a convenience store to a day-care center – it’s important to identify who is most likely to buy the product or service being sold.
Area demographics should be matched to customer demographics. Traffic patterns or attributes of surrounding communities may also help determine the best location. Even if a business is not sensitive to location, a feasibility study can help identify where to target marketing efforts.
Demographic information is also important for companies which sell to other businesses. Rather than including personal information about customers, the study may identify specific existing businesses that would be potential customers for a product or service.
Information sources
Information for feasibility studies can be collected from: trade groups or publications, government bodies (such as the U.S. Census Bureau or the Department of Transportation), university studies, local business groups (such as chambers of commerce), etc. Telephone and mail surveys may also be useful.
Covering the cost
A feasibility study should provide enough information to determine whether or not to move forward with a project. A quality study can cost from $3,000 to more than $25,000, depending on the level of detail required. The Wisconsin Department of Commerce offers Early Planning Grants to help businesses cover feasibility study costs. Call 414-220-5363 or visit www.commerce.state.wi.us for more information.
Jesse Hagen is with WBD Finance Corp., the statewide Certified Development Company for U.S. Small Business Administration 504 loan packaging. The organization provides other packaging and planning assistance for other government-guaranteed loan programs. Additional information can be obtained at www.wbd.org or at 262-970-8533 or 800-536-6799.
