When thinking about business development or how to value a companies potential I often use the AIDA model with my A level business students. It is a simple and quick method of evaluating the key points of what makes a business succeed.
As you can see in the graphic below you can pick any business and just fill in the blanks with your assessment of it's current potential. i.e. How much awareness is there of the company? How much interest is there in the company, service or product? etc.
Maybe not a very promising business based on the above assessment?
In the current economic climate after a year of the pandemic it's useful to look at historical data.
Many students/investors/speculators tend to either overcomplicate things or under estimate the importance of simple truths.
In the world of blockchain and crypto currency we can further refine this model to specifics. Who is on the team, use case of tokens, adoption etc. In the case of Bitcoin for example. It's primary value is derived from it's apparent scarcity!
Using this simple method you can assess just about any organisation in a couple of minutes with remarkable clarity without the emotional baggage and wooly thinking that often gets in the way of rational thought.
Remember this axiom:- K.I.S.S. it stands for Keep It Simple Stupid.
People in general are often irrational, and will still push ahead and open their dream restaurant or whatever dumb business idea because they 'think' they will succeed against all the odds.
Statistics prove otherwise. Interestingly the Office for National Statistics doesn't use the term business failure?
Wishing to cast a favourable more positive light on the £ billions lost by new startups and long established firms they prefer to refer to the data as Business survivals!
Business Survivals
The UK five-year survival rate for businesses born in 2011 and still active in 2016 was 44.1%
By region, the highest five-year survival rate was in the South West, at 47.0%, while the lowest was in London, at 41.7%.
By broad industry, some notably high five-year survival rates include health, with a survival rate of 54.1% and property, with a survival rate of 51.1%. Accommodation and food services were the lowest, with only 34.6% of businesses surviving for five years.
For those of you who are visual learners. This graphic below shows the above data in simplified form.
Source ONS
As we can see above. London had the highest rate of business failures at almost 60% in 5 years and the sectors where most failures took place was in accommodation and food services, with only a 34.6% survival rate.
If your investment was in the health sector your business survival rate was 54% and in the property market 51% of businesses survived for 5 years.
In (2018 Q4) we had seen a succession on 'chain' restaurants or franchises go into administration (Bankrupt). 2018 has also seen some long established businesses going bankrupt.
Next time you are tempted to invest in a business. Run this simple AIDA test and see how it stacks up before spending penny one.
Do you have a great idea for a business? Does it pass the AIDA test?
Let us know in the comments below.