How To Know If You Have A Million-Dollar Business Idea
Every one-person business idea I have has to have the potential to reach $1 million a year in revenue. If it doesn’t I move on to the next idea.
Why $1 million?
After expenses and taxes, the business has to provide me enough income to justify the effort.
The more I make the higher that number becomes. Since our focus is on one-person businesses, $1M is a good benchmark.
Depending on the business, the margins can range from a few percent to 90%.
As a quick illustration let’s say we have a business idea that can generate $1 million a year with margins of 25%. That leaves $250,000 for you the owner after all expenses.
Of course we still have to pay taxes. Right now that means a tax bracket of 24% or $60,000 to Uncle Sam. Leaving you with $190,000.
Not bad, but that’s also not going to make you wealthy.
Of course, you can buy/start several businesses and hire other people to run them. Hiring an operator will lower your margins. But having several businesses spreads out your risk in the event of a downturn.
3 Steps To Know If Your Business Idea Can Generate $1 Million A Year
Step 1: Is there enough of a market?
First, we need to understand how big our potential market is.
You’ll want to make a copy of the spreadsheet I use to plug the numbers into. It’s a new tab on the spreadsheet I shared from last week. Let’s pick a business from the ideas we organized last week. In this case, I’m interested in selling art projects for adults.
The first place I’ll go is SEMRush.com to perform a keyword search.
I started with “paint by numbers” but SEMRush also gives me related keywords. In this case “paint by numbers for adults” hits closer to the mark and has 60.5k searches per month.
Next, I looked up “coloring books for adults.” There are lots of variations on this one but I’ll keep it broad. That phrase has 90.5k searches per month.
I could keep going but let’s see where that gets us.
Total searches for two products we’re interested in selling are 151k per month.
Next, I want to see what that looks like in Facebook.
For adults 22 – 65, there are 5,000,000 people with an interest in coloring books.
I’m not able to pull numbers for that demographic for “paint by numbers” but since “adult coloring books” is so popular we’ll move forward.
What is the price of your product or service?
Since paint-by-number kits and coloring books for adults are already sold, we can do some research to see what they sell for.
I’m going to go to Amazon and do a search for the product and look at the best sellers.
Across the top 10 best sellers for “paint by numbers” the average price is about $12 so I’ll use that as my baseline.
For “adult coloring books” the average is about $8.
I still need to know the cost. I’m not making coloring books myself (though if you’re an artist there is an opportunity here).
A search on Alibaba shows that I can buy adult coloring books for $.20 – $2.00 each depending on how many I order.
To keep our start-up expenses down assume we’re placing a smallest unit order at $2.00 each. That still gives us a good margin to work with.
Searching Alibaba again for “adult paint by numbers” shows prices from $1.50 to about $10.00. In this case, I don’t want the most expensive ones because they don’t work with the sales numbers I’m seeing.
The paint by numbers that look most like the popular sellers on Amazon are about $3.50/ea for the smallest quantity. So that is the number I’ll go with.
How much of the market will buy from you?
This is a big guess and there are a lot of variables. I tend to make conservative assumptions and rarely put more than 1% down.
For clarity, this is the percent of the market we expect to sell to in any given month.
Depending on your market, product, and general marketing capabilities that number can go higher. In some cases, I’ll go lower.
Since I’m looking at selling 2 products I’m going to assume I can sell to 1% for the paint by numbers product, and .25% for the adult coloring books.
Keep in mind, .25% of the 5,000,000 market size (based on FB interest) is still 12,500 sales per month and might be aggressive.
Now I plug the following into the spreadsheet:
- Market size
- Addressable market (% of the market I can sell to)
- Average sale amount
- Cost of goods (cost of each unit).
The spreadsheet will do the rest of the work for you (yellow cells).
Based on the numbers above what I see is that selling only paint by numbers doesn’t get me to $1M a year. Selling adult coloring books does. Selling both seems like a good idea.
In fact, I not only have a possible $1M revenue business, I have a possible $1M PROFIT business.
To be fair, this is a very quick estimate. There are expenses not included that you will need to account for (advertising, web hosting, domain name, etc…).
Before I pull the trigger I would also conduct competitive analysis, look at trends, and determine start-up costs.
But the goal of this step is to see if we have an idea that can generate $1 million a year in revenue with enough profit to be worthwhile.
But based on our analysis, this looks like a strong possibility.
Business Examples To Inspire You
Subscription content businesses can be crazy profitable. You have to build an audience and deliver high-quality content on a consistent basis. But if you do, the rewards can be immense.
Ben Thompson started his newsletter Stratechery in 2014 and charges $120/yr to subscribe.
VCs, entrepreneurs, and other business-minded individuals value Ben’s thoughts and pay for them.
I am also a subscriber.
A little detective work shows $3 million+ in revenue for Stratechery in 2020 with margins above 90%.
Dig into the analysis below:
Ben Thompson’s Stratechery should be crossing $3 Million in Profits this Year
Current Experiment
54 – 61 Subscribers
This is falling well short of my goals but I haven’t been as aggressive about promoting it as planned.
So in that vein, if you know of someone with an interest in what we’re doing here, please feel free to forward this to them. I would appreciate it!
If you want to give it a shout out on Twitter, you can find me @vsellis.
On-going:
- Improving SEO of existing content. Traffic is up 12% over the previous purpose. This isn’t huge but it’s not bad. If I keep compounding on that, we’ll make a big dent this year.
- Letting friends and family know about the newsletter. I’m slow rolling this one. My first 4 pieces are cornerstone content then things will ramp up. This is #3 for reference.
- Social promotion. Some parts of the newsletter get repurposed as tweets. These tweets drive a couple of new subscribers per week.
- Building a dedicated landing page for the newsletter. Still a work in progress.
This Week’s Featured Tool
Every post, page, and newsletter I write spends some time in Hemingway. It’s free and does a great job of giving you feedback that will tighten up your writing.
I shoot for a score below 9 to ensure reading my content is easy to digest. I’m usually at a 5 or lower. This newsletter is coming in at a 4.
So how are we doing so far? Have any feedback for me? If so, leave me a comment and I’ll look forward to chatting with you about how we can do better.
