There are three types of risk you should think about when evaluating a business idea. The first type of risk is obvious. It is simply financial risk that you are willing to take on. The other two types of risk have more to do with actually building and growing the business. They are the product risk and the market risk. Let’s take a closer look at all three.
Every business has some degree of financial risk. But that risk varies. A web business can have financial risk as low as a few hundred dollars if you can build the website on your own. And a restaurant can have financial risk of up to hundreds of thousands of dollars.
It is up to you to determine how much financial risk you are willing to take on, and what your limit is. And when you evaluate business ideas, try to determine whether they fit into the financial risk that you have determined that is acceptable for you.
Market risk is the risk that the market will not accept your product or service after you launch it. Every business has some degree of market risk.
Parts of the risk are that you may not be able to out-market your competition in the current market, or that the customers you are going after may not really like or buy the product or service that you will be selling for whatever reason. This is a very real risk because there are so many products and services that consumers are able to choose from that they tend to have a strong indifference towards new products. So your product must really delight them in one way or another because if you can’t get market adoption and generate sales, that will be a serious problem for the survivability of the business.
Product risk is the risk that you may not actually be able to deliver the product to market within the resources (time, money) that you have available to you. And if you do deliver the product, the risk is also in that the product may not work exactly as well as hoped or promised or envisioned. Every business has a degree of product risk, but just like financial risk, product risk can be mitigated and kept low.
For example, if you are building a very basic website like a blog, the product risk is very low. You can launch this product within a day. But if you are building a complex website that would take months of engineering time to complete, then the product risk is quite high because there are many things that can happen before the product can be launched. You may run out of money, the engineers might quit, some technical challenges may be greater than initially assumed, etc. And all that adds to the risk that the product may never be launched, or that it isn’t up to par even if it does get launched.
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I also wrote a book about starting a business that takes you from business ideas and covers the steps needed to start that actual business. Here is that book on Amazon. I have also created a number of business courses like this course on starting a business or writing a business plan or raising money.
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