Any entrepreneur worth his or her salt has a half dozen new ideas every week. Great entrepreneurs are constantly thinking of new products, marketing tactics, and business expansion ideas. Some of the ideas are great, and some are horrible. The problem is figuring out which is which. In the 5 years that I’ve been self-employed, I’ve had plenty of ideas that I thought were fantastic and turned out to be complete duds. Fortunately, there have been some ideas that resulted in phenomenal success. So, how do you figure out which ideas are the good ones? More importantly, how do you figure out which ideas your should dedicate serious time and money to?

At my company, JCD Repair, we have an eight-step process for figuring it out:

  1. Talk to people
  2. Start small
  3. Make sure it’s easy to unwind
  4. Make it measurable
  5. Scrap quickly what isn’t working
  6. Make a slightly larger investment in what is working
  7. Keep measuring
  8. Aggressively pursue the ideas that keep working

The business I own currently has 13 employees in three locations, helps well over a 1,000 customers a month, and will do $1+ million in sales this year – double our 2011 sales. I don’t say this to brag, but to let you know that the eight steps above did not come from reading a book, sitting in a classroom, or spending an afternoon in contemplation over a bottle of wine. This process comes from hard, real world experience that has been filled with some successes and many mistakes.

Case Study in Total Failure: Our First Retail Location

I’d like to illustrate the importance of this process by telling you about one of our most massive failures as a business. The example here cost us tens of thousands of dollars and almost put us out of business. This is an example of how NOT to do things.

In early 2010, we were doing about $20K/month in sales, and my business partner and I were doing everything (no other employees). I was working out of a shared office space in Chicago for $300 a month and my partner was working from home in Seattle (the business paid $700 a month for his rent). We were a lean, mean machine and splitting up about $10K/month for our efforts. While we weren’t exactly rich, things were heading in the right direction. We decided it was time to hire and expand. We talked it over with a bunch of people, and everyone agreed that this was a good idea. We got step #1 right, but failed miserably at step #2.

We went out and signed a three month contract for $6,000 at an upscale mall in the Chicago area and hired three employees. Yes, that’s right – two guys who had never owned a retail location or had employees thought it would be a good idea to triple our rent expense and go from $0 in payroll to over $10K/month in payroll almost overnight.

For the next three months, my business partner and I worked doubly hard and didn’t take a single paycheck. In the end, we had to let two employees go, drop our lease after three months, move to a much less expensive location, and basically reboot our entire Chicago operation. While this was a great learning experience, it was a complete financial disaster that almost killed our business. If you want to know how we should have done this, just skip ahead to the last example.

Saving Time & Money by Not Even Starting: Radio Advertising

About 18 months ago, we fixed an iPhone for someone that sold advertising for a local radio station. During the repair we talked about his business; and by the end, I was convinced we should do radio advertising. We’d do a trial campaign for three months that would cost us $1500 per month. This was a pretty significant amount of money for us at the time.

I called my business partner to discuss the idea with him. Fortunately, he’s a quick learner, and the debacle of our first retail location was still fresh in his mind. As soon as I was done pitching him my idea, he pointed out that this was not starting small for us (violation of step #2). He also pointed out that we had tried several offline advertising campaigns, and all of them had flopped. However, we were seeing incredible returns on some of our online advertising. So his suggestion was that if we were going to spend $4,500 on advertising, we should invest it in online advertising, which we already knew was working (step #8). The radio advertising idea was scrapped immediately and all it cost us was a 10 minute conversation.

A quick FYI: Some discarded ideas can be revisited because your business conditions change. With our monthly expenses now running around $70,000+, $1,500 per month would no longer violate rule #2. So this is something we may again consider in the future.

The Process at Work: Facebook Ads

In early June of this year, we decided it was time to try some Facebook advertising. Here’s a quick breakdown based on the ideas process:

  1. We discussed the idea with a few employees and friends. Everyone agreed it seemed like an easy, low risk thing to try and it might work.
  2. I spent an hour creating an ad and we set a daily budget of $20. You can’t start much smaller than that.
  3. Unwinding this was basically a click of a button: Stop campaign.
  4. We added a parameter to the link URL so that we could easily track conversions and see if it was working.
  5. After 12 days we had spent $240 and received exactly 1 conversion (valued at about $50). In comparison, Google Adwords, in that same time period, cost us $295 and resulted in 42 conversions.

The entire idea process stopped quickly at step #5 (scrap what isn’t working). What was great is that we learned Facebook ads were not for us, and it only cost us $240 and took 2-3 hours of time.

Learning from our Mistakes: Starting New Retail Locations

Despite the huge disaster of our first retail space, we knew we still wanted to expand our business. But, that first experience made us really think hard about how to expand in a much lower risk way. We’ve come up with an expansion solution that we think fits the bill, and we’re in the process of implementing the first iteration of it.

Before I tell you the process, I want to say one thing: sometimes you don’t have the option of starting super small like we did with Facebook ads. Sometimes “start small” is a relative term. For example, starting a full-fledged retail space costs us about $20,000 for initial inventory, equipment, supplies, and furniture. In addition, it’s a serious effort to find a location, negotiate a contract, setup the store, and hire and train new employees. Lastly, almost all commercial landlords want a commitment of at least 18 months to 2 years. In other words, it’s an expensive and time-consuming process to get a retail space going. So, when I say we have an expansion strategy that lets us “start small,” I mean that relative to starting an actual retail shop coming out of the gate.

Here’s what we’re doing to test the idea of a new store in Madison, WI:

  • Found a shared office space in a good location (near campus, free parking, easily accessible by car).
  • Set up a three month lease at $450/month with an option to stay longer if we want.
  • Hired a single employee to run the “store”.
  • Moved about $5K worth of inventory into the space and bought some used furniture. The entire setup cost us about $2,000 and took about three days of work.
  • Started our basic online advertising campaign that worked in our Seattle and Chicago stores.
  • Watched the location become profitable in its second month.
  • Hired a second person for the store because it had been shown to work so far. This allowed us to be open six days a week and increased our repair capacity.
  • Watched the sales and profits continue to grow with two employees.
  • Made the decision to invest the time and money into a full-scale retail location.

We started with an idea: Open a new store in Madison. We then invested a relatively small amount of time and money to get it started with no long term commitment (easy to unwind). We had measurable profits that encouraged us to increase our investment (hiring the second employee). We continued to watch sales and profits grow. This meant it was time to grow aggressively. And that’s the stage we’re in right now. We’re not positive it’ll work, but we’re extremely confident at this point because the feedback we got from the first seven steps was positive.

The next time lightning strikes and you think you just stumbled upon the greatest idea of all time, slow down. Talk to people, run a small trial, and then see where things go from there. You’ll save yourself time and money – and in the end, you’ll find yourself investing serious resources into only great ideas. And if you do that, your business will be set for big success.