Many times we are bubbling with business ideas, but we are not sure which one to prioritise. If we end up prioritising the wrong idea then we end up giving that baby our 5/10 years of our lives. They say 99% of small businesses fail. But some might never fail and just keep you poor for the rest of your life. Yes, I am talking out of the experience.
Disclaimer - This Blog is inspired by Elon Musk's concept of Utility Delta (watch video). I am probably going to paraphrase it so that my readers can relate to it.
One thing to take into account is the market size. Now if you are home business making butter chicken and selling than your market size is limited. As for freshness is a prerequisite. In case you are developing an app than your market size could be the entire world.
So once you get an idea of your market size, the next thing you need to figure out is how much difference your product/service is going to make to your prospective customer than currently existing businesses in the same category. This is also called as Utility Delta.
An image representation of Ulility Delta
The formula for Utility Delta
The total improved usefulness of something (utility delta) is equal to the usefulness to the average person, minus the next best similar item, multiplied by the number of people who would find it useful.
Or in math terms:
X = (Utility Delta) (Difference in Usefulness)
U = Usefulness to one person
C = Comparable item in usefulness & cost
P = Number of people this item would be used by/affect
X = (U - C) * P
Area Under the Curve
In the words on Elon Musk transcribed from the video
Well, I think you make some estimates of, whatever this thing is that you’re trying to create, what would be the utility delta compared to the current state of the art times how many people it would affect. So that’s why I think having something that makes a big difference but affects sort of small to a moderate number of people is great, as is something that makes even a small difference but affects a large number of people. Like, the area under the curve…
Excuse my bad drawing - This is the area under the curve!
Next thing you need is Leverage
In case you are going to make a small difference than your competition then you need an ability to reach a larger market via leverage.
What is Leverage?
Capital, Labour, code, content are leverage. Naval Ravikant says Capital and Labour need permission, In the sense, it is not easily available. But code and content are permissionless leverages. For deeper insights - Read Naval twitter threads on How to get rich or if you want to dig deeper watch this entire video podcast here.
Summing it Up
Figure out the 3 parameters
- Market Size
- Utility Delta
I entered an extremely niche business and lacked any kind of leverage. I have been stuck with the business for the last 12 years. So the concept of Utility Delta was such an eye-opener. I am trying to experiment with other business idea's taking into consideration the above 3 parameters.
I hope this helps someone avoid the same mistakes I did.