Minimum Viable Product · Product Development

How to Validate your Business Model before You Start?

Richard Pridham Investor, President & CEO at Retina Labs

January 28th, 2015

I'm looking for feedback on ways to validate your business model and market need prior to MVP build. I have a concept that I believe is valid and for which there is an important need but I want to be sure before I invest in funding the start-up. 

The product platform being considered will be marketed to enterprise clients in the consumer products manufacturing sector. It also involves a consumer app for the whole thing to work. Adoption and usage of the app is the key to the whole thing. 

I am validating on 2 levels:

1) I am seeking direct feedback from companies in the target market to gauge their receptiveness to the idea and need for such a product. So far, the feedback is very positive. Most have expressed interest to be part of a beta program. This feedback will be very valuable in terms of informing product direction, feature set, market penetration strategy and value proposition development. My goal is to talk to about 15-20 companies in a few key sectors.

2) I also need to validate the consumer side of the model. I can talk to friends and people in my network but it's highly anecdotal. I need more data. I was thinking of having a research firm conduct a gen pop panel study (n=1000) to assess consumer proclivity to use the app and maybe get some suggestions. Is this a good idea? Some say it's dangerous as the study may indicate high interest but users don't adopt. We see this a lot in research: what people say they will do and what they actually do are two very different things. Is it worth investing (approx $6K) in this and taking the results with a grain of salt in the hope that there is some valuable insight to be gained. Are there other ways to validate consumer needs?

Thanks!



JC Duarte Co-founder & COO @ Distribu.td

January 28th, 2015

Apologies in advance if this is too basic, but have you run your business model through the Business Model Canvas

Also, although your targeting Enterprise, have you considered this advice? HBR's Start-ups Should Sell to Small Businesses, Not Big Enterprises

Too often I've seen Entrepreneurs get ahead of themselves, that's why I'm checking the basics have been thought through.

Jeremy Grodberg Web CTO & Software Architect - Available

January 28th, 2015

Before I get to #2, let me make a few comments.

1) Your post title is misleading. I know you know it, but for anyone else reading, you have already started, and you're starting with validating your business model, which is a good place to start. You're not doing this "before you start".

2) You should read (or at least be familiar with) Running Lean  by Ash Maurya and  Business Model Generation by Alexander Osterwalder & Yves Pigneur. I can recommend a few other books if you want. These have a lot of wisdom and research results that will help answer your question. (By the way, I recommend the Lean Canvas over the Business Model Canvas. See Why Lean Canvas vs Business Model Canvas?)

Now, as for #2, you should continue to do 1-on-1 interviews for insights, but you are absolutely right, there is a huge difference between what people say they will do and what they actually do, and getting more research on what people say is not generally worthwhile. I say no, at this point, having a research firm conduct a gen pop panel study is not a good idea unless you are trying to understand their existing behavior rather than trying to predict responses to a hypothetical new product. (Also, if you're just trying to understand existing behavior, there probably is a cheaper source of data than commissioning your own study.)

The best way to gauge consumer interest is to get people to actually take action and commit to a purchase. If it is a product you know you can build profitably for a relatively small amount of money, use Kickstarter. This doesn't seem to be the case for you, so I recommend building a web page that explains the product and offers people a chance to buy. You can roll your own or use a service like LaunchRockor Unbounce. Then fine tune your sales pitch both with A/B testing of the landing page and with Google AdWords testing. See what it costs to acquire a customer, see what features drive the highest conversion rates, and see what pricing works best. (In case it is not obvious, when a customer clicks a "sign up" or "buy" button or link, then and only then do you tell them that the product is currently in development and offer them a chance to leave their email address to receive an invitation to the free private beta when it is ready.)

You can do all of the above for much less than it costs to do some focus groups and the information you get will be much more reliable. After the real-world testing generates a pile of data, analyze it and use it to generate the next round of questions to ask your friends. Maybe then do a small focus group or 1-on-1 interviews, drawing at least some of the people from your new list of prospects. Repeat until satisfied.

Let me know if you have more questions or want my help with this. This is one of the areas in which I offer consulting services.

=Jeremy=

Valentin Radu CEO Marketizator - The 3 in 1 conversion suite

January 29th, 2015

If I were you, I would use for this
- Google Surveys (from $0,1 / response)
- a Landing page & an Adwords budget to test the UVP and the most important barriers through on-exit surveys
- an excel sheet to get from that campaign the KPI's I need to forecast the business growth rate based on PPC:
- CTR, CPC, Conversion rate, adoption rate, NPS

Cheers,

Adrian Andrade Creative Director at emPower

January 28th, 2015

Richard, We are dealing the same exact issues you've outlined. B2B reception is strong and we're in the process of laying the groundwork of iterating through consumer feedback. Interviews with your potential consumers are invaluable. Not only because they may reaffirm your vision, but more importantly because they may cause you to question your hypotheses and can potentially make you see something you hadn't thought of. The key question to ask yourself going into consumer research is "what do these users need?, rather "what do these users want?". Take a qualitative approach and strive for more direct research with fewer testers over a quantitative approach which surveys 1000s without direct interaction. Since you don't have an MVP or prototype to obtain direct feedback, you may consider using the competitive landscape approach instead to determine what users love/hate about current market offerings. 

Paul Bostwick

January 28th, 2015

Hey Richard; I cannot tell if replying works anymore on FD discussion boards as they are so keen on folding into LinkedIn that being said: The consumer side is both the weak side and, advantageously, the high visibility side for you. Plus they do not take a long time to decide (at least at the individual level.) If they embrace you and your offer and then you hold the value they hand over, then the business side will be easier to test/approach as youll be able to show them the process underway. At that point it will not be an "IF we get this flow offer but a, "Now that it has started, we can aim it your way offer so clearer and easier to embrace. You might have $6k to spend but you could learn tons from the smoke test and keep that $6k in your pocket for when you have some more viability feedback to go on and maybe a couple of rethinks all on the cheap. anyhow: google up Smoke test and landing page. if you can get consumers to act on the offer (if and only if) then spend a bit to quantify it. But a marginal case will look marginal and you can tweak it and/or move on. A strong gimmie! signal from both sides might justify a study to dress it up and make it more credible to others you desire to bring on board. But a study will not generate heat that you did not discover in the first place. Not a $6K study done by somebody else, anyhow. OH also. Just because it is a need does not mean it is important enough to change behavior. The status-quo is a real heavyweight so you need more than reason on your side: looking for and serving pain-points for your customers should be more important than helping them do better: they think they are doing fine. Change is a hassle and not a rational act but an emotional one: for example You should quit smoking to save yourself and money Quit! vs Howd you like to meet your grandkids? - Quit! -Paul

Michael ★ Vice President, User Experience at RingCentral

January 30th, 2015

Hi Richard -

There is a very simple test we've used successfully for this kind of validation. Distill it down to a demo you can give in under 5 minutes. It has to be that short, or you're still exploring your value proposition. Then, show it to people, but don't ask if they like it. Ask "Would you recommend this [service/product] to a friend." 9 or 10, you've got a good idea (message me and I'll invest). 7 or 8, you probably need to continue exploring the business model and value proposition (look at Strategyzer.com for some great tools here). 6 or below, they are probably leaving the interview actually laughing at your idea. Doesn't have to be a lot of people. Some argue that by the time you get 6-10 comments, you've got 99% of the information you need.

Don't give yourself any slack. You really do need to be getting 9s and 10s before betting your farm on the venture.

peachey

Julien Fruchier Founder at Republic of Change

January 30th, 2015

Hi Richard,

I'm going to preempt this with the obvious: Generally speaking, you will need a number of on-the-field failures/trial-and-errors in order to understand what customers want, how to communicate your product and how to properly validate it. Talking with potential customers, whether corporate or consumer, won't get you too far (or accurate info) in my experience and observation.

On #1
Enterprise customers are notorious for being agreeable - until they have to pay. They will be polite and encouraging all the way through your engagement but at the end of the day, you're dealing with an organization (and employee) that likely values risk mitigation over innovation. Even if your contact loves your product, he/she will likely make a recommendation that reflects well on him/her among his/her peers/boss, not necessarily what is best for the company. I can't think of a single example where a large company took a chance on a startup/unproven product. I urge you to consider targeting SME's instead (emphasis on "small"), work to communicate directly with the founder/president/ceo from the get-go and build user case scenarios that you can then take to larger potential customers.

On #2
Marketing Research is pure BS. Sorry. The best way to do this in my experience, is to get out there and start building/engaging your community. Here's how to do it:

1) As suggested by Jeremy, build a landing page/sales page where you can direct potential members and have them buy/download or at least sign-up. If you're not getting at least 15-20% of visitors signing up, you're not doing a good job at engaging or communicating your value proposition well enough to your target group.

2) You need traffic. DON'T buy it. It won't be reliable at this stage. We've gotten a few thousand people the hard way, by creating social accounts, attracting people to our feeds and then directing them to visit the landing/sales page. Your investment is the cost of having someone being active on social media and the ingenuity to engage your target audience. Forget FB - organic traffic is dead there. Focus on Twitter and Instagram or whatever platform your target customers use.

Why this is worthwhile: Nobody likes to give up their email address. If/when they do, you know they see value in your product. From experience, we've had to tweak our landing page several times to arrive at a message that truly captivated people. We get up to 35% signup rate currently. This will also help you validate the consumer side of your business to your SME side of the business with something substantial, transparent and live - an actual community instead of surveys or studies.

I hope I can save you a lot of aggravation and lost time. Please consider focusing on small businesses instead and build user cases that you can then use to attract the customers you want at a later date. Start building your community right away and don't spend your money on surveys or traffic. Most importantly, ask for businesses to pay up and keep tweaking your model/pitch until your target audience is happy and willing to pay, up front for your product. You have nothing until the money is in the bank from willing customers.

Good luck!

Jeremy Grodberg Web CTO & Software Architect - Available

January 29th, 2015


Lots of companies have tried to provide warranty management services but AFAIK no one has achieved significant participation. If you think in terms of "jobs to be done" and work through The Value Proposition Canvas I think you will have a tough time finding enough pain points to figure out a way to make your product a compelling alternative to the status quo for consumers. Remember, it's not enough to be slightly better, you have to provide exceptional advantage in order to change consumer behavior.

A fundamentally important gut-check question for a technology product is "why now"? What has changed that makes this product viable now when it wasn't viable last year (or what is going to make it viable next year when it is not viable now)? If you can't answer "why now"? then odds are great that several other people have tried and failed to execute a very similar idea and unless you are beyond genius with a new take on it you are probably also going to be doomed.

Unfortunately, Richard, as Rob points out, this was easily doable a few years ago when smart phone penetration reached critical mass and I don't see anything that suggest now is better than last year for this idea.

Richard Pridham Investor, President & CEO at Retina Labs

January 29th, 2015

Lot's of great advice here. Thanks for everyone's input!

If you are a paying member on FD, you can see a synopsis of my project on my profile. Here's the gist of it:

The problem I'm trying to solve is connecting consumer product manufacturers to their end customers. Since products are purchase through retail, dealer and e-comm channels, manufacturers do not have direct line of sight to who their customers are.  The solution will enable consumers to register ownership of a product they purchased and activate their warranty through a free app. The app would also store the consumer's products in the cloud and will enable them to socialize their product experience. Manufacturers would have access to all this info and many more consumer engagement features through an enterprise dashboard.

Manufacturer's are clamouring for consumer insight and love the concept. However, the entire solution is predicated on user adoption of the app. Obviously, the challenge is to create awareness of the app (this can be done by the manufacturer) and useful enough so consumers use it. This is the harder part to validate. Would consumers actually use this type of app and what feature set would make it compelling? Without user adoption, the entire business model is dead.

Insofar as getting a beta client to fund the development in exchange for some degree of limited time exclusivity, I'm working on that. This would likely take a company that is large enough to pay for the development an done that obviously buys into the vision.

Chris Carruth VP/Director. Strategy | Business Development | Operations | Product | Solutions

January 28th, 2015

Ah, my favorite topic..so full of landmines LOL. Chuck's comment is spot on IF you can get a manufacturer to "bite". If the app provides sufficient value (data) they can't currently get at a similar price and similar quality, they might. I would pursue that approach for the mfgring side of the tabled.

Re consumer side, I would add that the results of any testing approach  will be heavily impacted by the question(s) you want answered. And quite frankly conducting focus groups is qualitative and directional in nature and you should really not depend on that feedback for making business decisions for this reason: even if  the participants are screened correctly, and the moderator delivers (which is not always a given), having 3 or 4 groups of people talking about the product is not the same as demand for the product - which is really at the heart of what everyone wants to know. 

Demand is influenced by many, many things, and a $6k test will not tell you what demand is. For example, in my previous role we ran several different types of tests aimed at specific topics - ease of navigation, UI look and feel, consumer profile most likely to buy or try (as the case may be), branding framework, messaging components, and playability. The consumer profile measure was 2,000+ screened participants and contained various measures of purchase intent to see if we could get consistent demand sizing. To top it off, even with that, it was not designed to measure breadth and depth of purchase, which is critical in creating a sustainable business model from the revenue side.

Try Chuck's approach - it can work. If not put some real thought and focus into who should be included in the smaller $6k study, and find a research firm that clearly understands your question and is honest in what can be done for the $6k and what cannot. If iterations can be done in the real world cost effectively, and mgmt understands the product is not prime time but in development, then nothing beats that feedback. 

Some will disagree with me on this but at some point though, before too much money is burnt through, I would suggest some quality insights into demand be done. All too often "new and cool" doesn't last and what looked promising at the beginning turns out to have no real legs to last. Now, of course, if over time, you have sky high conversion rates, your churn rates remain low, and your LTV consistently exceeds acquisition cost, then you are on your way!