A timeless question:
What makes a GREAT, 8 figure business idea?
This is a question I’ve been asking myself for over a decade now.
I asked it to myself when I was in college taking classes and dreaming about what life would be like after school.
I knew that I wanted to start a business, but what makes a GREAT business idea?, I thought.
I asked it to myself as my business partner, Nathan Hirsch, and I were contemplating starting a new business to tackle the problems we were seeing in the rapidly growing freelance industry.
We knew that we had a problem we wanted to address for a specific niche market, but was it a GREAT business idea?
I asked it to myself in 2020 after we exited our company, FreeUp, and we were trying to figure out how to spend our time.
It was the start of the pandemic and we had ample time to work on something new.
And we kept coming back to the question…”What makes a business idea truly GREAT?”
For 10 years, I’ve been toiling with this question.
Reading articles, listening to podcasts, and speaking with entrepreneurs to better understand what are the criteria that make up a GREAT business idea.
If you’re an entrepreneur, I’m sure that it’s something you’ve thought about as well.
As entrepreneurs, we aim to start companies that address real problems and have ample opportunity for growth, profits, and impact.
When you’re on Day 1, how do you know if it’s all it’s stacked up to be?
I can’t say that I have a definitive answer by any means, but I have learned a tremendous amount over the past 10+ years experimenting with my own companies and watching others do the same.
In this article, I want to outline the key characteristics that I’ve found to define a GREAT business idea and WHY.
If you read this article, you should walk away with a new framework of how to evaluate business ideas, how to pick the winners from the losers, and how to understand which business ideas will be the best for your personal and professional goals.
Here’s what we’ll cover:
1. MRR, YRR, and LTV
3. Turnover Rate
4. Market Size
5. Niche Opportunity
6. Service + Tech Marriage
7. Proven Competition
8. Institutional Investment
All of these characteristics factor into how you can determine if a business idea is GREAT.
How Do I Define GREAT?
Before we dive into these 9 characteristics that make a great business, I want to define the word “GREAT” when it comes to describing a business.
So, what does a GREAT business entail?
1. The opportunity to grow to 7, 8 and 9 figures…quickly
2. Low cost to operate
3. Strong profit margins at scale
4. Solves a real problem
5. Offers a unique solution
6. Caters to a massive market
7. Is enjoyable to run
8. Has network effects
Disclaimer: This is my definition of a GREAT business idea. Yours may be slightly different and that is 100% okay. Every entrepreneur has slightly different definitions of what makes a business great for THEM.
For me, a great business idea is one that meets these 8 bullet points because it best fits my lifestyle and how I enjoy growing companies.
For you, it may be slightly different. I encourage you to think through what makes a great business idea for YOU. What does your perfect business look like? Add to my list and remove pieces that don’t apply to you until you have your own definition of GREAT.
From there, you can apply the following 9 characteristics to assess if your business idea is one of merit or if there are missing pieces to making it a 7, 8, and 9 figure business potential idea.
9 Characteristics That Make a GREAT Business Idea
1. MRR, YRR, and LTV
MRR is monthly recurring revenue that you receive from customers for your business services or products.
YRR is similar. It’s your yearly recurring revenue that you receive on average from each customer.
LTV is lifetime value of a customer. This is the average amount of revenue that you make per customer for the length of time that they stay as a customer.
MRR Example: You own a bookkeeping business that offers monthly services to your clients. You charge them $500 to $1,000 per month for your services. If you have 10 clients at an average of $750 per month, your MRR is $7,500 per month. If you increase to 100 clients, your MRR becomes $75,000 per month. As your clients and average cost per month goes up, your MRR goes up.
YRR Example: You own a coaching business that offers entrepreneurs consulting services. You charge your customers with a yearly subscription to stay in the community and keep working with you. Similar to the MRR example above, if you have 50 customers that pay you a yearly subscription of $5,000, your YRR is $250,000. As long as you don’t have any customer turnover, you can expect to make $250,000 per year with your 50 customers.
LTV Example: You’ve been running your software company for 3 years now and you’ve found that customers stay for an average of 10 months. In those 10 months, they pay an average of $100 per month for your software. Multiplying 10 months by $100 per month, you get a LTV of $1,000 per customer over a 10 month lifespan with your business.
MRR: When looking at a new business idea and determining if it’s great or not, I look at the opportunity for the business model to have MRR. Will this business model produce recurring monthly revenue from customers? If the business idea has MRR built in then it’s a great sign for the idea. If the business model is lacking MRR and it’s all dependent upon one time sales or repeat purchases, it gets downgraded in my book.
MRR is valuable because it allows your growth to compound as you scale. With each new customer, you’re growing your revenue base and creating more revenue in the future.
YRR: When looking at YRR, the story is similar to MRR. I personally prefer that a business have MRR over YRR as it creates more frequent payments from the customer in smaller amounts. If you’re running a business like the example above where it’s a yearly subscription fee, it makes it harder for customers to stay on unless the product or service is critical to their business. It’s a lot easier for a business owner to leave a $100 monthly service running over a $1,2000 yearly subscription.
Overall, you want your YRR to continually increase over time as you add more customers. It all depends on how you manage your turnover rate with customers, which we’ll discuss further later in this article.
LTV: LTV is an important figure to understand and analyze when determining if you have a great business idea. This is a figure that most investors look at when determining if they want to purchase a business or not because it gives them an indication of future cash flow for the business. You want your LTV to be as high as possible per customer.
A high LTV shows a number of things. First, it indicates that customers are staying with your business for a good amount of time. Working off of the example above. If your software company were instead to find that the average time a customer spends with your software is only 3 months then your LTV would only be $300. This shows that the customer doesn’t really enjoy the software or find it that critical to their business. And you, as the business, has only made $300. It may have cost you more than that $300 just to acquire them.
On the contrary, if your software company found that the average time a customer spent with the software was 18 months then your LTV would be $1,800. This shows that customers really love the software and stay for almost 2 years using it. It tells you that you can expect customers to stay for that long on average and that you can expect to make $1,800 on average per new customer that you sign up. That offers a lot of budget to acquire new customers and make a profit off of them as well.
Overall: A GREAT business idea is one that has MRR and/or YRR built into the business model with a high LTV. As you’re determining if your new business idea is GREAT, evaluate these three metrics and keep the results in mind as you make your decision of whether to work on the idea or not.
Stickiness is an informal measure of how loyal a customer becomes to your business, its brands, and its products/services. The more stickiness, the more loyal that a customer could become with the potential of turning into a repeat customer or an ongoing, long term customer. The less stickiness, the more likely that the customer will move away quickly and not come back.
Social media (Facebook, Instagram, Twitter, and LinkedIn) are VERY sticky products for their customers. All of these companies keep their customers engaged, keep them coming back for more, and allow them to build relationships through their products.
Other software companies specializing for specific purposes can be very sticky as well. In the eCommerce industry, there are softwares like Helium10, Shopify, and BigCommerce that provide their customers with key functionality to build and sell their products online. Once a customer commits to one of these tools, there’s a strong chance that they’ll stay with them for years to come. Hence, a very sticky product.
A non-sticky product or service is one that where customers don’t feel inclined to come back or to stay with the company. This could be from a bad initial experience or from the product/service being a one-time purchase for the customer.
When thinking about a GREAT business idea, you want to think about how sticky the product/service is that you’ll be building and offering. Make sure that the business model has a history of being sticky with customers and that you can rely on retaining customers for a long period of time. When a business is sticky and you can keep customers around, you experience compounding effects for growth and you can grow faster than if your business is not sticky.
Finally, when you choose a business that is sticky, it also leads to more word of mouth referrals from your customer base. When your customers care about staying with your product/service and they see the true value it in month after month, there’s a much better chance they will leave you a review and refer their friends who could benefit from it as well.
3. Turnover Rate
Turnover rate is the percentage of customers that leave your business or stop using your products/services over a certain period of time. The lower the turnover rate, the better because it means more customers are staying with you for longer. The higher the turnover rate, the more work you have to do as a business to replace them and find more customers.
Let’s use EcomBalance as an example. EcomBalance is one of my companies that offers bookkeeping services to companies online. After 12 months, we calculate our turnover rate and we find that out of 100 companies that signed up to work with us, 10 decided to stop our services. 10/100 = 10% turnover rate for that specific 100 companies over a 12 month time frame.
This means that going forward, we can expect 10% of new customers to drop off within a 12 month time frame. As a business, we want to always be working to lower that turnover rate so that we can keep customers past the 12 month time frame.
Another figure to think about in this situation that we’ve already discussed is the LTV, Lifetime Value. When looking at turnover rate, it’s important to look at your average LTV for that specific grouping of customers over that timeframe.
For example. Let’s say that in that 12 month time frame for those 100 customers, on average, each customer stayed for 8 months. This provides us with even more information to be able to understand how our customers are acting and turning over. On average, 10% of customers turn over after 12 months and they stay with us for an average of 8 months. With those numbers, we can figure out how much we’re making from each customer in that 12 month time frame and make sure that it is profitable to the business.
When you’re analyzing a business idea and its business model, look at other companies in the space and understand the average turnover rate. Ideally, the turnover rate is low (under 10%) which tells you that you can expect to keep on a large percentage of customers that you sign up. If you’re evaluating a business idea and you see a high turnover rate (for example: 50%) then you should dig deeper and really understand how that could impact your business if you were to go with the idea. A GREAT business idea is one with a low turnover rate where you can keep customers happy and paying for 12+ months.
4. Market Size
Market Size is the total addressable market that your business idea directly applies to. This is the total number of potential customers that are in the market for the product and/or service that your new business idea is offering.
Let’s look at two examples. First, let’s look at a business idea with a very small market. You live in a rural area somewhere in the United States and your business idea is to start a dog walking company. Neighbors live miles away from each other and there are only 10,000 people in your entire town. The number of dogs owned by the population is relatively high, but but we’re still only talking a few thousand dogs. This is a very small market for this business idea. Does that mean that this business idea is automatically a bad one? Not necessarily, but it’s probably not a great idea for a rural area as we’re describing. Now if you were to take that same business idea and put it in the middle of a booming city where people love their dogs and treat them as their children, well then you’re onto something with much more potential. Your total addressable market increases dramatically and your ability to scale into a profitable, valuable business increases as well.
For a second example, let’s use one of my companies again, EcomBalance. EcomBalance provides monthly bookkeeping and accounting services to the eCommerce industry. The market size? Well, bookkeeping and accounting applies to the majority of businesses whether they are in eCommerce or not. As a company, we aim to work with customers who are doing between $500,000 in sales per year to $20 million in sales per year. This limits our market size to a certain extent, but there are probably still 100,000 businesses, just in eCommerce, that fit that description and are looking for bookkeeping and accounting services. If we were able to capture even just 1% of that market, we’d have 1,000 customers and a wildly profitable company.
Do you see the difference between the market sizes in these examples?
No matter what your business idea is, it’s important to look at market size and understand how it will impact your ability to grow as a business. In our example of the dog walking business out in the country, the market size drastically limits that business owners ability to grow and consistently find new customers.
Before you dive into a new business idea, understand your growth goals and where you want to take it over the next 2-3 years. Once you have a general mindset around that, look at the market size and see if it aligns with where you want to take the business idea. If its too small, expand your target market so that the addressable potential market is larger and will align with your goals. Similarly, if your market size it TOO big (meaning that you’re trying to cater to everyone), niche down and find a niche that is still large enough, but where you can also specialize.
5. Niche Opportunity
A niche opportunity relates to market size. It is a subset of the overall target market that you can speak directly to and specialize for and that is also still large enough that it has massive potential for fast growth.
EcomBalance and FreeUp are perfect examples. EcomBalance’s overall market is any online business that needs bookkeeping and accounting services. That is a massive market made up of millions of businesses. But within that overall market, there are also hundreds of niches. For example, eCommerce, agencies, software companies, lawyers, healthcare, online education, etc. EcomBalance focuses on the eCommerce niche. While it’s only a subset of the overall potential market for bookkeeping services, it’s still massive and offers ample opportunity to scale at speed.
FreeUp is another similar example. FreeUp is within the overall freelance hiring market. Again, any business in the world could be in the market for hiring a freelancer to help them with different parts of their business. When we started FreeUp, we focused on the eCommerce niche and we stuck to that for the first 2-3 years before rebranding and expanding to cater to other online businesses as well.
A great business idea is one that starts focused on a niche opportunity. As you analyze your business idea, think about how you’ll achieve that niche focus as you get the business off the ground. Building a business that caters to everyone is a lot harder than building a business that caters to a specific group of people. Especially at the start, it’s advantageous to cater to a niche because your brand can gain reputation within that niche and you’ll be able to grow faster. When the time comes that you’re ready to add another niche to your focus, you can do that and expand to offer your services to a new group of people. Great business ideas don’t cater to everyone.
6. Service + Tech Marriage
A business idea with a service and tech marriage is a business that offers a service as its main product and also has proprietary software that powers the experience behind the scenes.
Let’s say that there is a SEO Agency that offers SEO services to its customers. Their main product is helping their customers get ranked on the first page of Google for specific search terms that apply to their customer’s business. Now, there are lots of agencies out there like this (probably thousands). But in order for the SEO Agency to have the service and tech marriage that we’re talking about, it needs that backend proprietary software that truly powers the experience for the customer and the service that they offer. So, think of it like this. This SEO Agency’s core service is what I mentioned above and they achieve it with their own proprietary software that they’ve developed from their 10+ years of SEO experience. The software is a part of the customer’s experience and it’s what makes the SEO agency unique to the thousand of other SEO agencies out there. This SEO Agency is unique and has a value proposition in the market because of their service and tech marriage.
This characteristic is a bit unique to my personal preference, but I believe that it makes a major difference in how good a business idea can be. Choosing a service for your business and performing it at as high a level as possible with a focus on the customer experience is a good business idea. However, I argue that it’s not a GREAT business idea. Again, thousands of others are already doing it. How do you make it unique? You marry it with software and technology that enhances the customer’s experience and the overall service. Over time, you build not only a top notch service in your specific industry, but you also develop a proprietary piece of software that powers the entire experience. That makes your business idea more unique and more valuable.
7. Proven Competition
Proven competition is the already-existing presence of large, 8 and 9 figure companies within the market. These companies were first-to-market, have proven the market, and continue to grow.
When Nathan Hirsch and I first set out to build FreeUp, we knew that there was already proven competition in the likes of Upwork, Fiverr, TopTal, and others. We knew about them intimately because we had used them to hire talent when we were running our first eCommerce business. We knew them in and out and we saw holes in their customer experience that we wanted to improve upon with FreeUp. I can’t imagine what it would have been like trying to create FreeUp if we didn’t have that proven competition to look at and figure out how we could do it better.
Similarly, when Nathan and I were deciding to build EcomBalance, one of the things we looked at was the current competition and where the market stood. We quickly found Bench, Pilot, Xendoo, and a number of other large companies in the online bookkeeping space. We researched how many customers they had, what software they had built, and how long it took them to go from start to where they were. It offered us confidence that the market was massive and if the three of them could be growing rapidly within it, why couldn’t we as well?
Why would you want there to be leaders already in the market that you’re entering? Doesn’t that make it harder to get customers and gain market share? Having proven competition already in the market shows that there is real opportunity for you to build a similarly sized business catering to a similar or slightly different customer base while providing a uniquely different product or service. In essence, proven competition assures you that the market is there…you just have to find out how to carve out your piece of it. Proven competition also gives you companies to look to when you’re building…what did they do wrong? how could you improve on their offers? what web design is standard in the industry? etc. etc.
If you’re analyzing a business idea and there is no one else offering the same product or service in the market, you’re essentially setting out to create a new market. Yes, this has to be done by companies as new markets are created, but it’s a lot harder than entering a market where the business model and concept has already been proven and is making millions in profits for other companies already.
I’m not saying that there isn’t opportunity in creating your own market, but it’s going to require more funding, more patience, and more resilience as you push through hard times and educate the customer market on this new product/service that you’re offering. There is a much larger chance of failure when there isn’t already proven competition in the market. It’s hard to gauge just how large the market is for your new idea which requires you to take on educating the market in addition to everything else that comes with growing the business.
8. Institutional Investment
Institutional investment is money flowing into a given market from venture capitalists, angel investors, private equity firms, and other private investors.
When Nate and I were researching the online bookkeeping market, we looked at the proven competition to see how they had gotten their starts. Bench, Pilot, and Xendoo had all raised large rounds of funding from venture capitalist, private equity, and high net worth individuals. There was over $150 million invested into just these three companies in the past 5-10 years and investments were continuing to pour in as other competitors joined the mix. Talk about an institutional investment party! It was clear to us that top echelon investors and entrepreneurs were betting big on the online bookkeeping market further indicating that we had found ourselves a GREAT business idea.
When analyzing a business idea, look for large amounts of institutional investment into the market over the past 5-10 years. This indicates that the market and business model is trending within investment communities and there is a lot of hope for the industry to grow and prosper. When you see institutional investment, dig deeper and see which investors are getting into the space. Are they well known with a strong track record of funding successful companies? If so, this is a good sign for your business idea. Venture capitalists and private investors don’t throw money into a market unless they’ve done significant research into the opportunity and believe in where it’s headed in the next 5-10 years. If top investors around the world are investing into the space, it’s a good hunch that it will be growing in some form or fashion over that time period.
If you analyze a new business idea and you find that there is ZERO institutional investment flowing into the market, take caution. It doesn’t mean that the idea is doomed for failure, but it could mean that it is a newer market or that there isn’t much confidence from investors that it will be a large enough market to capitalize on.
Proven competition and institutional investment should be looked at in unison. They tend to move together. So if there is proven competition, there’s a good chance that there is institutional investment as well. Likewise, if there is not any proven competition, then institutional investment tends to be lower.
Trends in business are movements in a general direction that are creating change and development. Trends impact how business is performed, how customers receive goods and services, and can last for both short and long periods of time.
One of the biggest trends in the past 20 years since the Internet came into existence is the movement of traditionally physical, in-person services to online services and experiences.
Think of eCommerce. Before the Internet, we all went into physical stores to buy products. The Internet arrived, shipping logistics became more sophisticated, and BOOM, we now expect products to arrive at our doorstep within 48 hours of clicking the “Purchase” button online. Ecommerce has been trending up and to the right for the past 20 years since it first started. Covid-19 made that trend even more intense as people were forced to use eCommerce instead of going into physical stores to get what they needed.
Think of bookkeeping, accounting, hiring, lawyers, and other traditional businesses. Before the Internet, all of these companies were brick and mortar locations where you’d go to meet with the business owner to get the service you needed. Today, it’s all moved online. You want an accountant that specializes within your business niche, no problem…go find them online and work with them remotely. The same goes for all of the other business types that I mentioned. This trend of moving online continues to happen for almost every industry we could imagine.
Look for trends when you’re analyzing your business idea. Is your business idea aligning with where the market is headed? Or are you trying to start a business that is in the “old rule” of the market? In order for your business idea to be GREAT, you want it to be hitting on a trend that is happening fervently within the market. This will not only help you to grow fast from the get go as you ride the wave of the trend, but it will also set you up for success in the long run. As you ride the current trend, other trends will arise and you can hop on those as well staying at the forefront of the industry.
One of the first steps of building a new business is research.
As I was writing this article, I reached out to some entrepreneur friends asking them what makes a GREAT business for them. I heard back from Chad Rubin, the Co-founder of Seller Labs and the Prosper Show (both acquired), and now the Founder of Profasee. Here’s what he had to say:
“Self Awareness of yourself and of the business market. What are you good at? What are you not good at? Where are your weaknesses, and how can they be addressed? It’s easy to get caught up in the day-to-day grind of running a business, but if you don’t know what sets your company apart from others or what sets you apart from other founders in the same space, then there won’t be any focus or direction.
Being able to take an honest look at yourself and the competitive landscape and make adjustments based on that is vital for success. You need to know problem you are solving for, better than anyone else. What feature set will make you, your stakeholder, customers and employees rich.”
It took me years to understand the strategy that I’ve outlined in this article and I was lucky to have gotten into a number of GREAT business ideas just through being in the right place at the right time and having a good intuition for what was needed in the market.
EcomBalance and online bookkeeping was the first business where I was actually able to put this methodology to work. It proved critical in diving into the current state of the market and truly understanding if this idea was just good or if it was truly GREAT.
As I’m writing this article, we’re about 6 months into building EcomBalance and I can confidently say that I see a bright future for the company and for the future of the industry.
There is MRR and YRR with potential for high LTV. There is true stickiness within the business model and relationship with clients. We have experienced low turnover thus far with our initial 50 clients. There is a massive market. We have created a niche opportunity in focusing on the eCommerce industry. We are building our own proprietary software to marry software with experience. There is proven competition and $100M+ in institutional investments. And millions of businesses continue to move online each year that need bookkeeping and accounting services.
It’s hard to predict if a business idea is truly GREAT unless you take the time to look deeper into these 9 characteristics.
I know that this is just the start to my methodology and I plan to continue updating it as I learn more about entrepreneurship and building 7, 8, and 9 figure companies.
If you think that I’ve missed any factors to consider when determining a GREAT business idea, please comment and share.
Cheers to you all!