Market and Feasibility Study

1Why this matters

Every town has a graveyard of businesses that “felt” like sure things — the fourth phone shop on a street that could support three, the restaurant opened where no one walks in the evening. The owners were not lazy or unlucky. They skipped the one cheap step that would have warned them.

A feasibility study is testing an idea on paper, before you commit real money, to answer a single question: will this work? Testing on paper costs a notebook and a few days. Testing with your savings costs your savings. This lesson shows you the four parts of a feasibility study and then does the arithmetic that decides most of them — the break-even calculation — in full.

2The four questions a feasibility study answers

A complete study checks four kinds of feasibility. An idea must pass all four — being strong on one cannot rescue a fatal weakness in another.

1. Market feasibility — is there a customer? Who exactly are they, how many are there, how often will they buy, and who else is already serving them?
2. Technical / operational feasibility — can you actually make and deliver it? Do you have the skills, the equipment, a reliable supply of inputs, and a workable location?
3. Financial feasibility — do the numbers work? What does it cost to start, what is the break-even point, and is the likely profit worth the risk?
4. Legal feasibility — are you allowed to do it? In Rwanda that can mean registering the business with the Rwanda Development Board (RDB), meeting hygiene standards for food, registering employees with the RSSB for social security, and paying tax to the RRA.

We will follow one idea — Umutoni wants to make and sell 500 ml bottles of drinking yoghurt near two schools — through market feasibility and then, in detail, financial feasibility.

3Market feasibility: who, how many, and against whom

Identify the target customer. Umutoni is not selling “to everyone” — that is the beginner’s answer. Her target market is students and staff at two nearby schools, plus people passing a small health centre. Dividing a broad market into groups with shared needs like this is called market segmentation, and it matters because you cannot design a product or a price for “everyone.”

Estimate the market size. Guessing is not allowed; you build the number up from evidence.

• The two schools have 800 and 400 students, so 1,200 students.
• She surveys 60 of them. 15 say they would buy a 500 Frw yoghurt about twice a week. That is 15 ÷ 60 = 25%.
• Applied to 1,200 students: 0.25 × 1,200 = 300 regular buyers, each buying twice a week → 300 × 2 = 600 bottles a week from students.
• Staff, the health centre and passing trade add a conservative 75 bottles a week.
• Total ≈ 675 bottles a week × 4 weeks ≈ 2,700 bottles a month.

Notice she used a real survey and then stayed conservative. An honest study rounds down, because the cost of over-estimating demand is a fridge full of spoiling yoghurt.

Study the competitors. One kiosk already sells imported yoghurt at 600 Frw. Umutoni’s advantage — her unique selling point (USP), the reason a customer picks her over the alternative — is that hers is fresh, local, and 100 Frw cheaper. A study with no competitor section is incomplete: if you cannot say why customers will leave what they currently buy, you do not yet have a business.

4Financial feasibility: the break-even calculation

This is the part that decides most ideas, so we derive it rather than just quote it. First, two cost types.

• A fixed cost does not change with how much you sell: the monthly rent of the room, the electricity for the fridge, the cooperative licence, a part-time helper’s wage. Umutoni’s fixed costs are 400,000 Frw a month — she pays them even if she sells nothing.
• A variable cost is incurred per unit: the milk, sugar, culture, the bottle and the label for each bottle. Hers come to 300 Frw per bottle.

Her selling price is 500 Frw per bottle. The key quantity is the contribution per bottle — what each sale contributes towards covering the fixed costs once its own variable cost is paid:

Contribution per unit = selling price − variable cost per unit = 500 − 300 = 200 Frw.

Now find the break-even point: the number of bottles at which total revenue exactly equals total cost, so profit is zero. Let Q be the number of bottles a month. Set revenue equal to cost:

Total revenue = 500Q
Total cost = fixed + variable = 400,000 + 300Q

At break-even they are equal:
500Q = 400,000 + 300Q
500Q − 300Q = 400,000
200Q = 400,000
Q = 400,000 ÷ 200 = 2,000 bottles a month.

Check the units, because A-Level marks reward it: Frw ÷ (Frw per bottle) = bottles. The answer is a number of bottles, exactly as it should be. Over a 25-day selling month, 2,000 bottles is 80 a day.

Now bring the two halves together. The market study said she can realistically sell about 2,700 bottles a month; break-even is 2,000. She is above break-even, so the idea is financially feasible. Her monthly profit at that level:

Profit = (contribution × bottles sold) − fixed costs = (200 × 2,700) − 400,000 = 540,000 − 400,000 = 140,000 Frw a month.

How much safety does she have? The margin of safety is how far sales can fall before she starts losing money:

Margin of safety = (expected sales − break-even) ÷ expected sales = (2,700 − 2,000) ÷ 2,700 = 700 ÷ 2,700 ≈ 26%.

Sales can drop about a quarter before she hits a loss — feasible, but not comfortable, so she should not add fixed costs carelessly.

See why the study mattered. Suppose the survey had instead pointed to only 1,500 bottles a month — below the 2,000 break-even. Her result would have been (200 × 1,500) − 400,000 = 300,000 − 400,000 = a loss of 100,000 Frw every month. The feasibility study turns that disaster into one line of arithmetic done before the fridge is bought, not after.

Practice

Do the arithmetic before reading each solution.

Answer. Contribution = 4,000 − 2,500 = 1,500 Frw. Break-even = fixed costs ÷ contribution = 150,000 ÷ 1,500 = 100 shirts a month. Below 100 he loses money; above 100 he profits.

Answer. 160 is above the break-even of 100, so yes, it is feasible. Profit = (contribution × sold) − fixed costs = (1,500 × 160) − 150,000 = 240,000 − 150,000 = 90,000 Frw a month.

Answer. Margin of safety = (160 − 100) ÷ 160 = 60 ÷ 160 = 37.5%. It means his sales could fall by more than a third before he stopped making a profit — a comfortable cushion.

Answer. Legal feasibility (and, through the location, operational feasibility). Strong demand is irrelevant if she is not permitted to trade: she cannot legally sell a single bottle until she meets the requirement. An idea must pass all four feasibility tests — a fatal weakness in one is not offset by strength in another.

Answer. Buying rate = 20 ÷ 80 = 25%. Applied to 2,000 passers: 0.25 × 2,000 = 500 juices a day. The true figure is likely lower because people over-state in surveys what they will actually pay for — and not everyone who would buy passes on every day — so an honest study rounds this estimate down before committing money to it.