Understand why some businesses or investments thrive

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Everyone wants to make a mark on earth. Many people want to excel in whatever they do but the reality is that sometimes our plans do not work the way we want. This is the reason why being an investor or an entrepreneur does not give you a one way ticket to success. You need to understand why some businesses or investments thrive while others fail.

When you are thinking about starting a business, know that there are many factors that can lead to the success or failure of your idea. Sometimes knowing the basics can save you from losing a lot of money.

Whose problem are you solving?

The greatest assets you have as an entrepreneur are the people. Whatever you produce or supply depends on them. Knowing this will make it easier to understand why other businesses or investments thrive while others struggle.

Therefore, if you build your business by starting to answer the “what to produce” question, the chances of success are minimal. It is like finding a cure for the disease that do not exit – who is going to buy your medicine?

People really do not care about how sophisticated your product is – they only care about what problem it is going to solve in their lives. Understand that people (myself included) are mostly selfish and they can not waste their resources and time if they are not getting value from what you are offering.

Moreover, people do not follow you or support your product if others are not doing it. Understand that people tend to follow the voice of those who are successful because of the number of followers they have. Whatever they endorse, people will buy.

The key to make your product more appreciated in the market is to target people with many followers. If you win their hearts then you are also cashing on the demand of their followers.

What product are you offering?

After you understand about the people you are dealing with, you need to know what they want or what they may want. Many great inventions were wasted because people did not find any value in them. Understanding what to produce will become easier if you master the psychology of the people you are targeting. This is another crucial step to understand why other businesses or investments thrive while many fail.

You can consider the following as guidelines to what you need to produce:

1. demand and supply.
2. competition and uniqueness of your product.
3. availability of substitutes and complimentary goods.

1) Demand and Supply

Take note of the following proven facts:

• the higher the demand, the higher the price.
• the lower the demand, the lower the price.
• the higher the supply (the number of people offering the same product), the lower the price.
• the lower the supply, the higher the price.

This is very crucial to note before you launch a new product. Your profit will depend on this. That is, even though your costs of production may be high, if demand is high enough, you can charge a price high enough to make a profit.

Likewise, if many people are willing to supply an identical product, your profits are reduced because the price may not be enough to cover the costs of production.

Demand and supply is also very important in the world of investing. See our post on investing in property.

2) Competition and uniqueness of your product

Competition increases the supply of the product and this reduces your share of profits. If suppliers compete to sell an identical product, the supplier with the least costs of production will dictate the terms.

This justifies why the chances of failure are high when you start a small business that delivers the same service as a big business. It is not about being an entrepreneur, it is about finding a way to do better than your competitors.

Make your product unique by offering something that can differentiate your product from the rest. Have you ever asked yourself why Cocacola company existed for so long? Their products are unique to other beverages.

Furthermore, uniqueness of your product should be determined by the number of years it takes for another supplier to replicate your product. The longer it takes, the more profitable your company becomes. This gives you the power to control supply.

Likewise, if you follow other investors, you will not make meaningful returns. An investor who opposes what other investors are doing has a higher chance of making more money.

Suppose a company is having some challenges, many investors will panic and sell their shares thereby forcing the share price to fall. An investor who opposes others will buy those cheaper shares.

As the company starts to do well, more investors will buy the shares making them more expensive. An investor who opposes other investors will sell when others are buying. In the process, he/she will gain more.

3) The availability of substitutes and complimentary products

Substitutes are those that can replace your product. These products may not be identical to your products but they have the same purpose in the eyes of the consumer. For example Vaseline lotion is a substitute of Nivea lotion.

If your product is highly demanded by people but has no close substitutes, then it will be highly profitable. Substitutes reduces the profit because if you increase the price of your product slightly, consumers will buy the substitute making your product less attractive.

However, complimentary goods are those products that work hand in hand with your product. For example, petrol and cars. How can you capitalize on this?

Before I became aware of complimentary pricing, I often wondered how companies make money after discounting the price of some of their products.

A company selling tea and tea creamer can put tea creamer on promotion to attract buyers. As consumers buy more tea creamer, the demand for tea increases hence more profit from the tea sale. Even though they may be losing on tea creamer, the profits from tea will be good enough to compensate for the loss.

What is next?

After you master the most important questions of who needs your product and what you need to produce, you still need to sell your product. This is one of the most challenging part. You have to let people know that what you are offering is the best. People will never guess this and you have to make them aware through advertising.

As already outlined, this is the stage you will need to convince people with a bigger following to believe in your product. People can easily believe the testimony of the person they trust than your own words. This explains why some businesses or investments thrive while others fail.