I am currently writing a business plan for an entrepreneurship competition. After Googling around for a while for data that does not exist, I reverted to an idea that I first heard about two years ago. This idea, designing low-cost business experiments to test critical assumptions, gives an alternative route when passable data does not exist for a certain metric and you need to make an assumption in your business plan. These business experiments are actual experiments — run with controls, randomization, statistical analysis, and so on — which can be used to guide future business decisions.
In my case, there are no comparable tools for which I can use to guess advertisement click-through rate, or the number of clicks per number of times the ad is seen. How can I get a reasonable estimate for my revenue if I cannot get a reasonable estimate for my click-through rate? I do not believe that I can. Nonetheless, I need a decent estimate in order to justify investment.
So, how do I move forward? I assume that my click-through rate is equal to that of Google Adwords (~2-3%), and I design an experiment which I can use to test this assumption. If I find that my rate is likely to be significantly lower than expected, I can abort the business after just a few months and only a small amount of investment capital.
I’ll call such an approach scientific entrepreneurship. To get useful results, the experiments must be carefully designed and statistically analyzed. Here is an interesting HBR article discussing some of the essentials.