This is from a LinkedIn group I answered from Gaurev Malhotra in Chicago:
Question: I wanted to know how does one know if his/her idea will work? I know as an entrepreneur you take risks but there has to be another way.
Also, are there any steps that you followed to start your own business and it worked out so well that you would like to share?
Answer: Gaurev, that's a great question. I get asked that question often, and have helped entrepreneurs do this for years. I have done this for my company. There's never any guarantee that a new business will work, but you can figure things out enough to make an educated decision whether to move forward with it.
One way to know is to go through a facilitated strategic planning process, which includes some pieces of strategic marketing planning. This reduces risk by increasing the knowledge about the idea, the competition, who you are and what you bring to the table, your unique selling propositions, etc. You can do this yourself, but then you don't get the education/perspective from people who have started businesses and already know the rocks that lie ahead in the curves down the road.
More comprehensive strategic marketing planning includes primary and/or secondary market research, and focus groups on an idea that has not been sussed out in the market place. Its better to do this right, rather than have blind faith that people are going to buy your products.
Financial planning is a big part of it to ensure the business model works and makes money over a time period. Not just top down (like x% market share of some multi-billion dollar industry), but bottoms-up planning to detail out the sales model, profits, expenses, etc. for a five year planning horizon. Then you get to play with the model to dial in what works financially.
Planning reduces uncertainty. Planning reduces risk. Planning increases chances for success.
When I take entrepreneurs through the strategic planning process, it helps to look at things through the eyes of an investor, and ask the tough questions before the investors do, so you're prepared. Even if the investor is yourself.
I hope this helps!