In my previous post, I mentioned to identify why there is a need for creating the product. I wrote that by pointing out to a VC why there is a need for your product, you also point out the profitability and public acceptance of your product.
That was your first step into market validation.
Simply put, market validation is finding out if there are people out there willing to pay for your product.
But wait; didn’t you just pitch your startup to a VC by addressing a problem to which your product is a solution? Wouldn’t that mean that there are people out there who will buy your product based on that alone?
Well, yes and no. Yes, your product addresses a need for it. But no, it doesn’t ensure that people would want to purchase it. David Skok, an entrepreneur turned VC, wrote in his article Why Startups Fail?,:
“There is not a compelling enough value proposition, or compelling event, to cause the buyer to actually commit to purchasing. Good sales reps will tell you that to get an order in today’s tough conditions, you have to find buyers that have their “hair on fire”, or are “in extreme pain”. You also hear people talking about whether a product is a Vitamin (nice to have), or an Aspirin (must have)…”
There are well organized, well funded, and well run startups that just don’t get off the ground because of mediocre acceptance of the product. Conversely, there are startups that are short staffed and underfunded that suddenly prove successful.
Why? Because of what they call the Product/Market fit.
It’s having a customer base that’s willing to pay for your product. The base should be large enough to create a viable business. Just because you and your investors are excited about the product doesn’t mean that everyone else would feel the same.
Last year, Google launched “Google Wave” with lots of fanfare. They were really excited about it. The product had enough features and benefits that it surely will catch on. The product had the best team backing it up, not to mention one of the richest companies in the world funding it.
Early this year, they pulled the plug on Google Wave. No one was really using it. The Market just didn’t feel as excited as Google. It didn’t have the right Product/Market fit.
Do not fall into the trap and fall in love with your product. Mark Suster mentions on his blog, Sorry Guys – It’s the Size of the Wave, Not the Motion of the Ocean,:
“My own hypothesis on why more market sizing doesn’t happen is that many entrepreneurs are in love with product features rather than thinking through how much they could charge for their product, how many people would actually buy it, how many competitors they will have and therefore how big the market might be…”
Cost to Acquire Customers
Of course, you can argue that the Market just doesn’t know how badly they need your product. And once you introduce it to them, they will be clawing tooth and nail to procure it. Going that route comes at a cost.
You are paying people to use your product with the hopes that they will, in the long run, be paying you to use it.
- In the movie and stage play, Glengarry, Glenross, the company was buying leads (or potential customers, so to speak) to whom they could pitch their product.
- Most software companies offer a free use of their product for a limited time. Microsoft and other big software giants, up to now use this route.
- Some companies offer a full refund if the customer is not satisfied with the product, no questions asked.
- TV Infomercials
CAC is not a guarantee to propel your product into profit heaven. It is a nice option to have. But don’t overdo it. You might end up paying someone 100 dollars to use a 10 dollar product. And he won’t even pitch it to ten of his friends to use. David Skok in his article Startup Killer: the Cost of Customer Acquisition writes,:
“Far more common is a need to acquire customers through a series of steps like SEO, SEM, PR, Social Marketing, direct sales, channel sales, etc. that will cost the company significant amounts of money. What shocks and surprises many first time entrepreneurs is just how high the numbers are for CAC using these kinds of techniques.“
This sounds basic but make sure that the money you shell out to acquire a customer is significantly less than the money you get from him when he uses your product.
So now, you have an inkling of market validation. What measures can you take to cover this aspect to your startup?
- Ask around. Find at least 10 people who will be willing to purchase your product. Jason Cohen writes in his blog Why Getting 10 Customers Is All That Matters, “Businesses don’t start with millions of customers, they start with one, then ten, then a hundred, and then a thousand. But most don’t get past ten. If you haven’t gotten ten to at least say they’ll buy, where do you get your hubris to proclaim that thousands actually will buy?”
- Identify your market base. How big is that market? How much is it’s value?
- Study your competitors. Look at their product compared to yours. If you have a one-of-a-kind product, look at the closest one there is. See how they are doing.
- Know who to approach when selling your product. Study their organization. You might be stepping on people’s heads if you go straight to the top. Those heads you just callously stepped on may be the decision makers in the end.
- Control your CAC. You want paying customers. You don’t want to pay customers.
- Study the Market Validation Plans of other startups. They might have something you yourself could use.