Last Updated Jul 27, 2010 1:32 PM EDT
By Sean Harper, TransFS, Chicago
I've started two successful businesses. In both cases, I was inspired by a problem that didn't have an existing solution. That situation alone doesn't guarantee a successful business, but it's a great way to come up with a potentially viable business idea.
The first company I started-TSS-Radio.com-sold satellite-radio gear on the Internet. A friend and I were early adopters of satellite radio, thanks to Howard Stern: We were big fans, and when he moved to Sirius in 2004, we signed up for subscriptions. When my partner's antenna broke, we had a tough time finding parts to replace it through traditional retailers. So we decided to go into business providing a wider range of parts to people like ourselves.
We started the company when satellite radio was still pretty young. Now, TSS-Radio.com is 94th on the Inc. 500 list of top American startups, with revenues of $4.5 million in 2008-I'm now more of a silent partner.
I started a second business, TransFs, last year with a different partner. We were both fed up with shopping for a credit-card processor-the company responsible for capturing credit-card data at the point of sale and transmitting it to the major card companies-for our respective businesses. So we decided to solve the problem ourselves by creating a comparison shopping website for credit card processing services. We've grown steadily and have six employees, including ourselves.
Identifying the problem
It's not like we found a problem and then launched a company that could solve it the next day. We took some important steps. First among them was clearly identifying the problem and seeing if it was one that other businesses shared. If you are the only one that has a problem, then making money from the solution isn't likely.
Step two is identifying why the problem exists. It could be because the solution is really hard, so it represents a challenge from a business point of view. But in most cases you'll see that there's a fairly simple solution available, and that's a good opportunity for a business.
In the case of credit-card processing, our problem was we kept getting ripped off. I have a degree in economics, but I still had a hard time figuring out how to compare the different processing offers.
Credit card processing has one of the highest rates of price dispersion of any financial service. That means one business owner could be paying a 2% fee while his neighbor is paying 5% for the exact same service. The only reason is that one found a better deal than the other.
It turns out we weren't the only ones with this problem-and a solution already existed in other industries. So we essentially started a Lending Tree-style website for credit card processing. Business owners fill out a form that asks questions about their business and their transactions, and then they receive several competitive bids from pre-screened credit card processors. The reverse auction approach helps business owners get much better offers than they would if they just picked up the phone and contacted processors directly.
Confirming the hunch
Once we knew how to solve the problem, we still had to make sure it was a good business idea. We first approached potential customers we already knew. If you know them, they're not going to flat-out tell you it's a stupid idea-unless it really is. But eventually you have to work up to asking strangers for their opinions.
We went online and pitched the idea on various chat groups for small businesses and tech-savvy entrepreneurs, because that's where our potential customers congregate. Non-internet businesses could do the same thing in a local chamber of commerce or other business networking organization. We pitched the idea as something we'd heard about, rather than our own business. That way we got much more honest answers.
We also put up a beta site and got a lot of great feedback from potential customers. Instead of the 'Get Started' button that now starts the auction process, we had something that read 'Come Join Our Beta Trial.' It was a great way to test the marketing materials. And if you run a test like that and get no feedback at all, then you know you have a problem.
We also commissioned some market research surveys. There are plenty of companies like Zoomerang and QuestionPro that let you ask a lot of potential customers 15 to 20 questions. In our case, we asked a 500-person panel made up of small business owners 15 questions. The most important questions were "Have you experienced this problem?" and "Would you use this service?" Almost 70% of the panel said yes to both. That really cemented our belief that we'd not only found the right problem to build a business around, but the right solution as well.
-As told to Peter McDougall
Sean Harper, CEO and co-founder of TransFS, says his company helps small business owners save as much as 40% on credit-card processing fees.