Many home-based business owners spend a lot of money on supplies, thinking they will recoup it in early sales. They later find that even though they bought supplies, sales haven’t materialized, and they may have spent money that could have gone to household expenses while unused supplies sit on a shelf gathering dust.
The financial risks associated with starting a small business can be daunting. Conducting an experiment to test your idea before spending too much money to find customers can provide valuable insight into issues such as whether people will actually buy from you, whether the prices you set will cover your costs, and whether you can really run a business from home while other family members rely on you for childcare and other household responsibilities.
A well-planned experiment will give you the information you need to make good decisions about your home business without eroding your household funds.
Protect Your Household Budget Before Spending Anything
Before you consider spending any of your household savings, take time to review your current household budget and regular expenses, such as rent, child care, and school. Also, take into account items that are part of your regular household spending and for which you currently have no reserve and for which you have no budget.
To assess how much you can spend on an experiment, review your household income and regular expenses. Create a simple budget to track the money you have for experimenting with a business idea and to distinguish between money you can afford to lose and money you need to reserve for household expenses and emergencies.
For example, if you’re considering making personalized party favors, you might set a $150 budget for your experiment and split it among materials, packaging, and unexpected expenses.
Setting a spending limit helps protect family savings, but you also need to know whether your business idea can generate enough revenue to cover its costs. This is where the importance of a business plan becomes clear. Identifying potential customers, estimating expenses, and setting realistic sales targets can help you decide whether further investment makes financial sense.
Track everything in a simple Google Sheets document to estimate the initial cost of your business idea and to log the money you spend. Once you have spent the agreed amount, don’t increase it even if you experience huge early success!
You also need to consider how much time you have to devote to each order. If preparing each order takes two hours, make sure you have that time available, in addition to your job, childcare, and other family members’ needs.
Find Out Whether Customers Will Actually Pay
People can be generous with your time and money to test ideas you think they will like. But once you have shared your handiwork with them, they can become penny-pinching and unwilling to pay for it.
Research early on to gauge whether people beyond family and friends want to buy your product. Research competing products and consumers, and create a realistic offer that can be put to the test.
Look for Demand Beyond Friends and Family
You can look at how other people are marketing similar products on online marketplaces. For example, if you wanted to start a party favor business selling personalized products, you could look at how other sellers price and market their wares on Etsy.
These can often highlight recurring consumer complaints about similar products and unmet customer needs. For example, even if you create very attractive designs, customers might complain about long, confusing personalization options.
Still, competition doesn’t guarantee demand for another seller.
You can also use Google Forms to gather feedback from people who might buy from you. This differs from asking whether people like what you are making. The questions should focus on the purchasing habits of the people you think your customers will be. This can include questions about their previous purchases, typical spending on something like what you are making, and the features that they want to see.
Surveys will provide direction, but potential customers’ actual purchasing behavior will provide the best evidence of future sales.
Test a Small Offer Instead of Launching Everything
Once you have a good idea of what your customers want, you can test the full version of your product or business idea with a small offer.
For a party favor business, this could mean creating three different designs and taking orders for only five items to start. You can order the minimum materials needed to create the items, then start producing them once customers have paid and confirmed their orders.
An Etsy listing would work too, and help you confirm that your products are suitable for an online store, should you decide to set one up. Approaching local potential customers via relevant channels would also work.
This means you need customers to commit to purchasing from you, not just compliment your upcoming business.
Be honest about your costs. Large launch discounts could attract customers but obscure the reality of your future sales. Will you make enough to keep running the business?
Before you start accepting orders for your product, make sure you have checked if any registration is required, if your products are safe for children, etc. Just because you ran a small experiment doesn’t mean all legal requirements disappear.
Decide What Success Looks Like Before Testing
Getting several orders is encouraging, but until you know how many orders you actually got compared to your expectations, sales figures don’t help much.
In your example of selling personalized party favors, you could aim to sell five $28 party favors within a month.
For example, consider the amount of time each order will require and set a target for your earnings from each order.
If you get the sales you were looking for but it takes twice as long to complete each order as you thought, you have discovered an operational issue. Perhaps you should run another experiment, this time to see if you can produce simpler items in order to attract more customers.
You need to define what success means for your experiment before you can even evaluate the results of your test.
Measure What Your Experiment Really Costs
It matters not just that you generate revenue, but that the earnings are worth it. That includes the cost of materials and packaging, as well as shipping. And the charges of marketplaces must also be included (e.g., here: Etsy’s seller fee).
For instance, five orders at $28 each total $140 in revenue. However, after subtracting direct expenses of $110, only $30 remains, plus the initial setup costs, labor, and taxes you must pay as the seller.
Customers may be interested in paying for your products, but that doesn’t necessarily mean they will generate worthwhile earnings for you.
A simple spreadsheet can help track four important measurements:
- Revenue: Total amount customers actually paid.
- Direct expenses: Materials, packaging, delivery, and selling fees.
- Time: The time you spend making the product, communicating with the buyer, and delivering the goods.
- Remaining earnings: Including the value of your time and other unpaid work and the money you need to repay any startup loans and investment.
Charges by the various marketplaces need to be considered too. Fees for listing and transactions on Etsy, as well as payment processing charges, vary by location and are detailed in the seller fee guidance on the Etsy site.
After reviewing your results, you have three options:
- Run another small test to gather more information.
- Adjust your offer by changing the product, service, or price.
- Stop the experiment if the results don’t justify further investment.
If you get some sales but not enough earnings, you can try to increase your return by offering your wares at higher prices or in a simpler form. The worst news is that suitable buyers may show little interest in your items.
No action is required to develop into a full business in either situation.
Make Your Next Investment Based on Evidence
Just because an experiment worked well doesn’t mean you have to buy lots of equipment, stockpile materials, or start selling many different products right away. Direct more spending toward what your potential buyers’ behavior supports.
However, buying more materials for similar products would be sensible if several customers bought similar products in the experiment. Producing more of the same item between orders would also be sensible, as it would mean holding less stock and reducing the chance of wasting products.
Remember that business activities often affect family members’ routines, and the extra hours they need to work will often outweigh any benefits of consistent demand.
If you develop a home business, test it with several experiments rather than launching it all at once. The best experiments are those that answer one question, cost only as much as is necessary, and give you some leads for later.
Protecting your family’s savings is not the same as killing your business ideas. Be enthusiastic, but don’t commit your family’s savings to a business until you have confirmed customers will pay
more for your work at prices that cover your costs after you have taken out your labor and all other required payments.
Discovering needed changes before risking more money than you make on first sales is often more valuable than making those first sales at a low margin.
