The Business Model Test

A simple way to think about the viability of a new business idea is to use the logic test and the economic test:

  1. The Logic Test: does the business make sense?  Is it easy to explain the value it will provide and how it will make money?  You can't understand its viability if you can't understand these things.
  2. The Economic Test: once you've established that the business idea makes sense, now consider whether it can work profitably.  Space travel is a good example of a business that passes the Logic Test but not the Economic Test.  Certainly there would be a lot of people that would like to travel to space for the weekend, but with the current technology it simply can't be done profitably. -- the famous dot-com bust -- that promised free, one-hour delivery of things like CDs, DVDs, candy and magazines is another example.  It's just not possible to deliver a pack of gum to someone within an hour at a profit.

Once these two tests have been passed, there are of course dozens of other factors to consider.  But I've found this framework to be helpful in discussing a new idea's viability.