You don’t want to invest time and money on a business idea unless you’re sure that it’ll get traction.
You’d be able to throw everything into it if you knew that it’d be successful when you launched, but it's very hard to feel committed while you’ve still got nagging doubts that it might not work.
In his book the 4-Hour Workweek, Tim Ferriss shows how to test a business idea using Google AdWords .
You build a website that talks about your idea as if it already existed. The website provides a way for people to buy the product or service you’re evaluating. It's got headlines, text, pictures etc.
Then you use Google AdWords to send potential customers to the website.
When they hit the buy now button you don’t actually charge their card. Instead you show them a page that says you’re not able to complete their transaction and reassure them that you’ve not charged their card.
It’s more or less the same if they’re signing up for an account or filling in an enquiry form.
You track how many test purchases, signups or enquiries you get and use that to decide if it’s worth going ahead.
I recently did this for a client of mine.
He’s been an immigration adviser for decades. He’d come up with a brand new approach to pricing and delivering his services. He had to know it was a safe bet before changing everything.
I built a website with an enquiry form and an AdWords campaign. The campaign sent people who Googled for things about immigrating to New Zealand to the site.
78 people filled in the enquiry form during the test. He did something a little different. Instead of showing the enquirer a "sorry can’t help" message he called them. He talked about what they wanted and how the service would work.
The number of enquiries and the conversations he’d had made him comfortable that the idea had legs.
I paused his Adwords campaign for the moment. We’ll reactivate it when he’s ready to launch and he’ll have an almost instant supply of clients for the new business.
A false positive will trick you into wasting time and money on something that’s never going to get traction. A false negative will kill what could have been a fantastic business.
Poor execution is the main cause of false negatives. Think "The way we did the AdWords test didn’t work." Rather than “The business idea won’t work."
It is true that many people build their own AdWords campaigns, but this isn’t the moment to starting learning. Evaluating the idea you might spend the next few years on is too important to risk by messing about with your first DIY AdWords efforts.
There is a reason good AdWords practitioners can command hefty rates. This is the time to ask for help.
Stopping the test too soon can give false negative or false positive answers.
You need to send enough people through the website and conversion process to get a solid answer.
If 10 people visited the site and 2 signed up you’d have a 20% conversion rate. 10 people is too small a sample to make this a reliable test.
If 10 000 people visited the site and 2 000 signed up you’d have the same 20% conversion rate. The test is much more reliable because the sample size (10 000) is bigger.
Extrapolating across traffic sources can lead to false positives.
Assume you test by advertising on Google search like my client did. We showed his ads when people searched for “new zealand immigration advisor”, “new zealand immigration requirements” etc.
The searcher starts the process. The words they use suggest they might be considering immigration.
His future plan might be to advertise on the Google display network, Facebook or Instagram. Those ads are passive. You’re doing something else and there are ads interrupting you. You might click if you’re curious.
Curious visitors behave differently to active visitors. My experience has been that the conversion rate (number of sales/signups/enquiries) from curious visitors is much lower.
There is no way you can safely say - I’m getting 5% signups from Google search so I’ll get the same from all traffic to my site.
This is not a problem if there are enough people using Google to look for what you sell, but if you need more than what’s available there you should consider a second test to look at the conversion rates from other advertising.