AP® Business with Personal Finance review sheet from Aim for Five (aimforfive.com/business-finance/units/1/1-4)
Unit 1 · Topic 1.4
1.4 How Do Business Ideas Originate?
Business ideas come from paying close attention to customers and to gaps in a market. Bringing a new product to market is risky, so entrepreneurs use a design-thinking process to check that the problem is real and that people want their solution before spending a lot.
Key terms
- entrepreneur
- risk
- design thinking
- validation
- prototype
- minimum viable product (MVP)
Entrepreneurs and where ideas come from
An entrepreneur is a person who starts a new business and takes on its risks in exchange for its possible rewards. Existing businesses also launch new products, and they use many of the same methods.
New product ideas usually come from three places:
- Watching, interviewing and surveying potential customers to find needs they have.
- Paying for market research and technical research to find gaps no one is filling.
- Experimenting to build new abilities, like a lab that develops a new material and then finds a use for it.
Why launching a product is risky
Every new product takes resources that cost money: financial resources (cash), physical resources (equipment, materials, space) and human resources (people's time and skills). Nothing guarantees the product will bring in enough revenue to cover those costs, let alone a profit.
So why do it? People take the risk for the chance of future profit, for the satisfaction of solving a problem they care about, or to turn a passion into work. Owning a business is also one way to earn an income instead of working for someone else.
The design-thinking process
Design thinking is a way to cut that risk by testing cheaply before investing heavily. It runs in steps:
- Find and validate the problem. Observe, interview or survey potential customers. Validation here means collecting evidence that the problem really exists, that you can describe it clearly, and that many potential customers have it, not just you and your friend.
- Develop a possible solution. Brainstorm, sketch and build rough prototypes (early test versions).
- Validate the solution with an MVP. A minimum viable product is the simplest version of the idea, with only its core features. It can be a sketch, a written description or a simple model. You show it to potential customers and collect their reactions.
- Use what you learn. If the feedback is weak, change the idea and test again. Each test is built around a business hypothesis, a statement you can check, like most students we interview will say they'd pay $5 a month for this.
What validation looks like
Imagine you think high school athletes struggle to keep track of practice schedules across several teams. You interview 25 athletes and 18 describe missing practices because of mixed-up schedules. That's evidence the problem is real and shared. Next, you sketch a simple shared-calendar app and show the sketch to 20 athletes. If most say they'd use it and suggest changes, you've validated the solution enough to keep going, without writing a single line of code.
Worked examples
Try each one yourself first, then open the solution.
- Example 1
Naming the design-thinking stage
A startup wants to sell meal kits for college students. For each step, name the design-thinking stage: (a) It shows students a one-page description of a $9 kit with three recipes and asks if they'd buy it. (b) It interviews 30 students about how they handle dinner. (c) It sketches four kit ideas on a whiteboard.
Show the solutionHide the solution
- Step 1: Interviewing to learn about a possible problem is the first stage: identifying and validating the problem. That's (b).
- Step 2: Sketching and brainstorming possible products is developing a solution. That's (c).
- Step 3: Showing a simple description and asking for reactions is testing an MVP. The trap is thinking an MVP has to be a working product; a written description counts. That's (a).
Answer: (b) validating the problem, then (c) developing a solution, then (a) testing an MVP.
Common mistakes
- Jumping straight to building the product. Design thinking starts with evidence that the problem exists and affects many people.
- Thinking an MVP must be a finished, working product. It's the simplest version with only core features, and it can be a sketch or description.
- Treating your own opinion as validation. Validation needs evidence from multiple potential customers.
On the exam
- Questions often describe what an entrepreneur did and ask which step of the process it was, or what they should do next.
- On Question 1 you may need to explain how you tested a business hypothesis. Name the hypothesis, the test, the result and the decision you made from it.
Connected topics
Videos
Check yourself: 1.4 How Do Business Ideas Originate?
3 questions on 1.4 How Do Business Ideas Originate?. Pick an answer to see if you got it, and why.
Which of the following best explains why bringing a new product to market is risky?
Dana Ruiz, a parent of two, kept hearing other parents at her children's school complain that packing healthy lunches every morning took too long and that their children threw away food they didn't like.
Dana interviewed 30 parents at school pickup. Twenty-four said they spent at least 20 minutes each morning packing lunches, and 19 said their children regularly came home with uneaten food.
Dana then sketched an idea for LunchLoop, a weekly delivery of ready-to-pack lunch items that children choose from a picture menu. Before buying any kitchen equipment, she wrote a one-page description with sample menus, showed it to 15 of the parents and asked whether they would order it at $35 a week.
Dana estimates that each week of LunchLoop will cost her $26 to prepare and deliver.
Hypothetical business scenario
Dana's interviews with 30 parents served mainly to
The one-page description Dana showed parents is best described as
0 of 3 answered