The only way to know how customers see your business is to look at it through their eyes.
—Daniel R. Scroggin1
Solid third-party evidence of an attractive market of customers who will buy a product is one of the most valuable things a start-up can have in hand. The process of gathering this evidence is called market validation.
Knowledge really is power when it comes to market validation. The more information you have, the stronger your story is and the more value you offer potential investors and customers. It seems at times that everything in a start-up is essential—even potentially fatal if ignored—but few things are as critical as validating your market, proving to yourself that the dogs really will eat the dog food. Confirming your customer base early and often saves time and money and protects the whole enterprise from costly restarts and failure. If customers don’t want to buy your product, don’t you want to know that before you sink money and effort into building a company and making a product? It seems self-evident, but you’d be surprised how often companies do little market validation or neglect it altogether.
If you’re going to fail for lack of a market, you want to fail fast. You shouldn’t want to invest any more time and effort than necessary to discover any fatal flaws in the market’s appetite for your idea.2 It’s actually simple: Think about questions likely to reveal potential market problems and ask them. In market validation you obtain solid third-party data to answer the ultimate question: Will customers really buy my product in sufficient numbers for a price high enough that I can cover all my costs and make a good profit? Start the moment you first have your idea or, better yet, when you first sense a customer need and have ideas about solutions. Gather as much data and information as possible to build a good evidence-based understanding of your idea’s potential value and your customers’ demographics: where to find them, how to talk to them, and how many will buy your product. A caveat: Unfortunately, nothing guarantees that your research will hold up when you go to market. There are lots of examples of solid research that later bombed. Nevertheless, thorough market validation, early and often, immeasurably improves your odds of success. At the least, a “no” answer from a market validation study is pretty reliable. It’s the “yes” answers that can’t always be counted on. Besides, you never know: Your customers might give you a better idea for how you can fill their needs and collect their money.
In addition to learning whether customers will embrace your idea, when you validate the market, you need to understand how you can differentiate your idea from the competition. Failing to differentiate a product leaves you in commodity hell, “the place where executives find themselves when they cannot convince customers that their widgets or services are better than those of their ever-burgeoning competitors.”3 The best way to avoid commodity hell is to differentiate between value and simple utility. Utility is a product’s usefulness; value is what customers think the product is worth to them. Wheat flour has utility; it’s a commodity. When someone turns it into organic whole-grain bread, it has added value for a health-conscious customer who will pay a premium for that value. Utility has become differentiated value. When a company markets specialty and “premium” flours to serious home bakers, it has turned a commodity into a value-added, differentiated product. It’s important to understand what motivates and interests your customers and then work to apply that knowledge to product creation, promotion, and pricing.
Associated with differentiation is the idea of barriers to entry, both the ones you face and those you want to create to keep your competition out. In market validation research you want to understand both kinds of barriers intimately. We’ll discuss competition and barriers to entry in Chapter 11. This chapter is about establishing an attractive, validated market in a way that can reduce your idea’s inherent risk drastically and make you attractive to investors and others.
Market validation refers to methods and practices that can help you confirm your customers’ interest in and willingness to buy your product. This includes doing basic market and competitor research, identifying promising market segments, understanding customer needs, defining and refining the product, actively engaging target customers for reactions and feedback, and perhaps getting a provisional commitment to buy. In going through this process of validating your market, you eventually will figure out the most effective way to talk about and position your idea. When you encourage your potential customers to think and talk creatively with you, you’ll often find that they come up with ideas fundamentally different from, and maybe better than, what you had in mind.
You can’t start knowing your future customers or getting inside your potential market too early. Inventing or innovating before thinking about a market is like creating a solution and then looking for a problem. Sometimes you can guess a good solution by connecting a need you haven’t researched to a product or service that fills it, but this usually happens when you already have a sound sense of the customer universe. Often when people innovate this way they are their own target customers.
Carefully studying a market or problem also can stir up ideas that define a solution that the market is already signaling it is interested in buying. In contrast, inventing something cool and then looking for an interested market is seldom successful. But however you arrive at an idea, you should always study the market and the customer before seriously investing in product development or, worse, launch. It seems self-evident that making something without knowing people will buy it is not a good idea, but you would be surprised how often it happens. The earlier you start, the better. You can even start looking at the market before you develop the idea; just never stop.
Market validation amounts to little more than shooting in the dark unless you carefully define your target market. You should understand the size of the market, be able to describe it simply, and be able to tell people how big it is in dollars. You should know its demographics and who may be serving it (potential competitors). You should understand growth and other trends. Even if you think you know your market, carefully review primary sources, many of which you can access in any good library. Be familiar with business press coverage. A number of industry reports are publicly available in libraries or online, and university libraries sometimes can give you access to proprietary analyst and industry survey reports such as IDC and Gartner and Forrester. If you know people at a business school, ask them for help. They often have access to a treasure trove of expensive and difficult-to-find licensed reports and studies.
Studying competitors is essential. Although competitors may be a threat, they are also a source of information about the market. Studying your competitors in detail gets you started on differentiation and barriers to entry. For the purposes of preparing your market validation research, knowing the competition gives you a wealth of information about your customers’ purchase habits and what they want. When you interview potential customers, have a thorough knowledge of the competing products—both what’s out there now and what’s coming in the future—because more than likely your customers will. They will expect you to explain why your product is better. When you are entering a market to go against competitors, remember that your proposition to customers can’t just be good; it has to be better.
Beyond primary research and getting to know the competition, different circumstances call for different approaches. Think about your circumstances before you start your research, because they will affect both how you frame your questions and who you want to answer them. For example, consider the difference between entering an existing market with a new product and entering a new market with an existing product. In an existing market you have to differentiate your product to capture demand that is being served by others, whereas entering a new market means you have to create new demand for a product they can see in another market. Or are you taking a new product to a new market? In these circumstances, you may have to educate your potential customers not only about your product but about their need for any product like it—a doubly risky challenge.
In his book Crossing the Chasm, Geoffrey Moore lays out a useful framework for thinking about market validation, product launch, and growing a customer base. Moore thought about a framework of innovation diffusion developed by sociologist Everett Rogers, in which Rogers observed that new innovation is adopted in a market along a predictable progression of different segments, beginning with innovators and early adopters—those most inclined to try new and different things—going through what he calls early and late majorities, and finally including the laggards.4 In this framework, the groups have different adoption patterns and choose to purchase a product for different reasons. The innovators and early adopters are few in number and love innovation for its own sake. They are generally comfortable with technology, enjoy learning new things, and for the most part are tolerant of the higher costs that come with newly introduced innovations. In contrast, those in the early majority, particularly business buyers, look for products that improve their return on investment; they are looking for innovations that will help them save or make money. This early majority is influenced by the early adopters, but its needs and decision processes are different. Few innovations can prosper only in a market of innovators and early adopters. The big numbers are all in the early and late majorities. To penetrate those segments you have to make the leap from one set of buyer needs to another. What worked on one side of the chasm probably won’t work on the other; in fact, it may be counterproductive. This is Moore’s chasm, and crossing it is the big hurdle on the way to sustainability and profit. The ultimate market validation question you are seeking to answer is: How will you cross the chasm (see Figure 4-1)?5,6
Figure 4-1 Moore’s market chasm.
Source: Geoffrey Moore, Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers (New York: HarperCollins, 1991; revised 1999 and 2002): 17.
You may not start at the beginning of this curve with the innovators and early adopters. For instance, if you are introducing a new variation of an existing product, obviously you should start your validation in the large majority markets that will count when you launch. Of course, carving market share out of an established market with entrenched competitors brings its own set of challenges, and in this case your validation will focus there.
In a sense, crossing the chasm focuses on time; you think about what happens when. But you can look at validation another way: How is the market segmented? Which segments might be most promising for you? There’s always a trade-off between reaching for a broad market and entering a narrower, more defined market segment. In broad markets the main draw is market size: the sheer number of potential customers. In a segmentation-focused strategy, the coherence of the segment allows you to hone your appeal and competitive advantage more tightly, but you need a much larger market share.
You should consider carefully how to segment your market, how you might best position yourself for entry, and how you would defend a profitable market share. The more defined the customer base and the better you know your segment, the more likely your product or service will get traction. In 1990 Hewlett-Packard management charged a division manager, Michael Clarkin, with introducing the light-emitting diode (LED) into new markets. The LED market promised to be big but diverse. Different markets were likely to find different value propositions and approaches appealing. Clarkin’s group broke the lighting market into segments, looking carefully at the value chain to define the parts that would be most likely to adopt this revolutionary product.
Michael Clarkin, SYKES
Michael Clarkin leads the marketing activities of SYKES, a global leader in outsourced customer contact management solutions. In addition, Michael is the founder and president of Trilogy Consulting, which develops customer-driven strategies for companies in information technology (IT) system integration, enterprise software and medical devices, semiconductors, network security, and wireless and optical communications. Over 10 years at Hewlett-Packard, Michael held marketing and business management leadership positions in California, Germany, Hong Kong, and Malaysia. We asked him to recall a market validation project at Hewlett-Packard he often uses in our Tuck classes and to share the lessons learned.
In 1990, Hewlett-Packard charged me and a team of marketing managers with introducing the LED into new markets. After years of simple uses such as digital clocks and colored lights behind keypad buttons, LEDs had made a breakthrough in brightness and were suddenly as bright as the common incandescent bulb. So we set out to identify the best markets where we could go head to head with a technology people had found satisfactory for over a hundred years. The automotive market was an early choice because of the LED’s advantages in reliability, faster turn-on time, and design flexibility.
Incandescent bulbs in cars were highly unreliable and burned out often. Warranty costs on defective taillight bulbs could be 10 to 20 times the cost of the bulb. The appeal of an indestructible LED seemed obvious.
Our LED lightbulbs got bright more quickly than incandescents. The advantage was only a fraction of a second, but that extra fraction of a second could make a big difference to safety. In a driving simulator at the Detroit Auto Show we proved that a fraction of a second might give a following driver an extra 10 to 15 feet of braking distance.
And by chance we learned that some vehicle designers saw in our little round dots of light an awesome design tool to create new shapes and styles: “art lighting on a car.” We were still skeptical; as a group they had no buying power or budget of their own, and they were often deeply buried and highly protected in the car companies.
Fast forward 20 years and you know how this all played out. After much time and fruitless effort, we learned dealers make money on warranty repairs, so they found no appeal in cutting warranty claims for burned out lights, and manufacturers are sensitive to what their dealers want. There are still no regulations requiring these safer lights on cars. But nearly every cool, sleek, or elegant car taillight today is made of those LED dots—the lighting paintbrush of the car industry.
We learned some lessons the hard way with this exercise:
As engineers, we focused on applications that made sense to us. Only when we talked to customers (dealers) did we learn how different their priorities were from ours. Don’t assume customers think like you do.
Our ambition to get our lights into every last new car through government regulation blinded us. We spent months trying to influence lawmakers and consumer advocate groups to support our safety proposition. If we had done our research, we’d have found that it took over 15 years for armies of dedicated advocates to get seat belts required in every car. Car companies resist new safety devices as long as they can.
We learned to do our homework earlier on how decisions are made inside corporate customers. Although designers didn’t have any budget, it turned out they had immense influence in car companies. When they found a way to make their designs more unique and cool, the industry had to change fast to remain competitive.
New and improved doesn’t automatically mean enthusiastic adoption. Substituting for a satisfactory and entrenched hundred-year-old technology can be really hard. It takes a strong reason for a buyer to throw away ingrained habits.
You can think and analyze things to your heart’s content, but there is no substitute for talking to customers.
Inexperienced market validators often make a fundamental error in selecting interviewees. When your idea targets consumers—as contrasted with industry buyers whose job it is to purchase for their companies and who know their market intimately—it is easy to interview people whose responses are irrelevant or downright misleading. Be sure the consumers you interview are really potential buyers. Most people are willing to answer a market validation question, but if they are not the people who will buy the product, their opinions are not worth much. In our class, we often ask who would like to own a Mercedes-Benz SL65 AMG Roadster, 604 horsepower (Figure 4-2), that goes from zero to 60 miles per hour in 4.2 seconds. Of course most hands go up. Then we ask how many of them are in the market to buy any car in the next year or two. Only a few hands go up. Finally, we ask how many will have $198,750 to spend on a car in the next year or two. Seldom does a hand go up, and usually it belongs to a smart aleck. This is the difference between feedback and validation. To get validation, you need to be talking to people who are qualified buyers for your product.
Figure 4-2 Validation or feedback?
© Courtesy of Daimier AG
This also applies if you plan to sell a product or service to a business customer rather than an individual consumer. You need to interview qualified potential buyers, but with an added complication. Here you usually have to contend with corporate decision-making processes, not just an individual. To interpret properly what you hear, you will need to know how the company makes buying decisions. Often decisions go through a chain of several people, many of whom have the power to veto but not the power to approve. For example, a company may have a gatekeeper who screens out salespeople. There will be people who influence the decision—an employee who uses the product, an IT manager who focuses on technical factors, an economic benefits watchdog—and perhaps other managers who advise but can’t approve. Then there will be the actual decision maker. Often the influencers provide the most creative ideas for enhancing a product and can give you important validation. But be careful: It may not be obvious to you at the time, but influencers cannot confirm whether their organization actually will buy. Although often you won’t be able to access a decision maker directly, try every way possible to get a sense of how the entire decision-making chain will react to your product. Access to interviewees often is simply the art of the possible and you will take what you can get, but it always pays to know how the real purchasing decision will be made.
Once you have identified your targets, you should think carefully about what you really want to know. Probably this is not just a start-to-finish exercise but an iterative process of trial and error. In determining your questions, you should also take into account the likelihood that your targets can give you meaningful answers. Building prototypes to show to customers can be good, but be careful about how much you invest before you validate. In validation, especially if you have a sample product in hand, the temptation to cross the line from asking to selling is almost irresistible. At this point, you shouldn’t be selling. You are looking for honest answers that predict future behavior and for criticisms and input to develop the product further. Mostly, you want to provide your potential customers with every chance to think creatively about features and improvements. You’d be surprised how often they’ll think of something you didn’t.
A product is not a unity. You should think of it as a collection of different features and elements, any combination of which can make for a compelling and competitive offering. All kinds of things make up the appeal and value of a product or service, and any one or combination can be a compelling advantage (Table 4-1).
Beyond the product itself, your business model can create value. Think about Amazon or Dell. You too may end up delivering a known product in a new way. Sometimes explaining a business model to a potential customer is tougher than introducing a new product because a new model is often more difficult to visualize. In such an instance, validating the idea is doubly important.
Table 4-1 Elements of a Value Proposition
With your test bed and your product’s most important and salable elements defined, you are ready to draft some questions to try out in your interviews. Remember, these interviews are not about facts; they’re about reactions. You are as interested in the emotion behind a statement as in the statement itself. Don’t ask only yes or no questions. Ask open-ended questions and follow-up questions. Try to get inside the customers’ thinking and tease out their emotional reactions. Remember, an important goal is to learn about the customers’ needs and problems, not just their reactions to your product. You hope for an outright declaration of their intent to buy, which you may or may not get, but you should always be able to draw out new and creative ideas to improve your product. Thus, there is a balance of directed questions and open-ended conversation.
What are your titles/positions/responsibilities in the company?
What do you most worry about? What keeps you awake at night?
Can you describe the microenvironment you think my product might address?
Can you describe the factors in your environment that might affect your adoption and purchasing decisions?
Can you tell me about the economic and budget issues that affect purchasing and pricing? (Does the potential customer or company have the money?)
Can you tell me about the purchase decision processes? (Who else should I talk to?)
Do I correctly understand your need? Do you see this need persisting into the future? Do you feel my product will meet the need?
What alternatives do you see to my product?
What benefits do you see in the product? What features or capabilities are appealing? Not appealing? What’s missing?
How can I best reach others like you? Where do you go for information on products and solutions? Press? Trade journals? Media? Trade shows and conventions? Direct sales?
What do you think about the price? (How does the customer react?) Is this product a nice-to-have or a must-have? Do you want it? Why and how badly?
(Note: The price you want is the price the customer is willing to pay. Pricing is not cost-plus! Customers may be willing to pay a lot more than simple cost plus some average profit.)
What trade-offs do you see? (Do you sense a willingness to use? To buy?) Are particular purchase terms or structures appealing or potentially determinative?
Do you detect any opportunities to get advantage from unique capabilities or assets that you have? Do you see any competitive differentiators? What kind of support might you need? Would it make a difference in the purchase decision?
Do you see opportunities for expansion of the product or other up-selling?
Pay special attention to preferences that might work against you, objections, or criticisms.
Here are several ways to get the information you need:
1. Surveys, although the least definitive gathering method, often provide your first glimpse of the market. Sometimes you can engage specialized consultants to help you maximize the yield of useful information with the most efficient survey sample set. Otherwise, you can use one or more of the many basic survey resources available: SurveyMonkey, eSurveysPro, and Zoomerang, for example. Surveys are especially useful in the early stages to help you define your target market and your questions. Just don’t view your online survey results as definitive validation. These results are notoriously misleading, usually in the direction of overoptimism. Telephone surveys are better but still provide only superficial information.
2. Focus groups can yield a lot of rich information, especially if you need creative insights into product improvement. Although this information-gathering tool is powerful, you have to watch out for groupthink and participants who aren’t qualified buyers.
3. Demos and product tours can get you into your customers’ homes or places of business. They are best used early in the process for validating basic concepts or late in the process when you are using validation interviews as an opening to try to make a sale.
4. Interviews are the richest source of validation. Ideally, you’ll conduct the interview in the customers’ place of business so that you can absorb all sorts of environmental cues and insights in addition to what they actually tell you. The more time you can get, the better, but of course longer interviews will be more difficult to obtain. Use your network for access and favors. You can also cold-call, advertise, and use e-mail lists to find potential interviewees. Naturally, your acceptance rate will be lower, but these impersonal contact methods can help you get a broader sense of the market.
It’s wise to start your interviewing with a few less important targets so that you can refine your approach and questions. You’ll get better at validation as you go. Think carefully about your interview method and style. Always remember that you have one mouth and two ears. Use them in that ratio. You want to know what they have to say; be careful not to fall into the trap of push polling people for their opinions. Market validation is interviewing, not selling. Further, it’s not just about what your interviewees tell you, it’s also about what you see. Look everywhere the customer will let you: into processes, problems, and people. Also, let them ask you some questions. It’s a really good sign if they want to know the price, so don’t jump to that so quickly that you don’t give them a chance to ask on their own. The goal is always to get an indication that they are interested in buying. Go into every interview hoping you come home with a purchase order, a conditional purchase letter, or a letter of interest from the decision maker. You won’t get all that many, but these types of written indications of intent to buy are major assets in raising money.
You also want to take with you to the interview as many team members as you can. Taking an engineer or scientist involved in product design and development is always advantageous. Not only will your scientists or engineers help establish rapport with the customer’s technical people, having your technicians in the room to hear validation and criticism firsthand helps with buy-in to your findings later. If your technical people are not there, you will often find when you get back to the office that they will resist the customers’ criticism and pepper you with lots of defensive questions: “Didn’t you ask them … ?”
Another problem to which you should always be sensitive is what we call the Aaron Kaplan problem. Dr. Aaron Kaplan is a friend of ours, a successful interventional cardiologist and medical device entrepreneur who talks about this challenge in market validation when he speaks to our class. Aaron says, “When I show people a picture of my daughters, they usually say something like, ‘Aaron, those are the two most beautiful girls in the world!”’ Aaron says he loves his daughters more than anything in the world and thinks they really are the most beautiful girls in the world. But he’s their father, and he knows deep down that it doesn’t matter what his daughters look like. They could look like frogs and people would still tell him his daughters are the most beautiful girls in the world. People won’t tell you your kid—or your latest idea—is ugly. This is the challenge of getting people to tell you honestly what they think about your idea, especially people who know you well. The most valuable feedback in the world is honest feedback even if it tells you that your idea or product is ugly. Unfortunately, this is often the hardest kind of feedback to get. You have to work at making people comfortable enough to tell you the truth.
Although gathering the information is important, it’s only the first step in market validation. The next step involves what you do with the information. As soon as you can after an interview, discuss the outcomes as a team. Reduce your findings to actions that help you adjust your approach for future interviews and integrate key findings into your product and story. Keep track of solid validation data. It’s worth a lot when it comes time to raise money.
Probably you have little or no money when you are first vetting your idea and considering whether to pursue it. Validation has to be done, but unless you’re willing to spend your own money or your precious seed dollars, you’ll be doing it yourself. Fortunately, you can learn market validation passably well by doing it. Practice makes perfect. If you have the money and the inclination, market research consulting firms can help you. Consultants generally charge $100 to $300 an hour. Some will help prepare you to do the bulk of the work yourself if you ask. You’ll get the highest yield per dollar if they work with you to form the questions, train you to do the interviewing yourself, and then help you interpret the results. There are agencies that can do larger projects, but the cost can run into the tens of thousands of dollars or more. Whether on your own or with an army of professionals, market validation done well can make all the difference. Many consumers are familiar with the Jetboil, a creation of Dwight Aspinwall and Perry Dowst. Their careful market validation was literally the foundation on which they launched a successful company.
When you have done your market validation homework, you’re ready to define what it takes to turn your idea into value and, if it’s a for-profit, dollars. It may be that you like your idea, you want to execute it yourself, and grow a successful enterprise. Or it may be that you aren’t sure you’re the right person to take it forward, especially if it’s an invention that would be more valuable in the hands of an existing company. In this case, you may want to consider marketing your idea as a license. The nature of the idea or the product sometimes makes this decision obvious. Other times the pros and cons will be more balanced. In Chapter 5 we’ll examine the two alternatives, what each involves, and the advantages and disadvantages of each.
Can write a paragraph or two listing all the important things you know about your customer?
Who might give you a prospective purchase order or nonbinding letter of interest to buy before you build the product?
How will you know when you have enough information to proceed with confidence?
1. Daniel R. Scroggin, president and CEO of TGI Friday’s, Inc., quoted in LeBoeuf, Michael, How to Win Customers and Keep Them for Life (New York: Berkley Books, 1988): 65.
2. Hall, Doug, “Fail Fast, Fail Cheap,” Bloomberg Businessweek, June–July 2007.
3. Buchholz, Todd G., “Drowning in Red Ink,” Wall Street Journal, May 30, 2007: D8.
4. Moore, Geoffrey, Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers (New York: HarperCollins, 2002): 9–25.
5. Rogers, Everett M. “Categorizing the Practices of Agricultural Innovations and Other Adopter Categories,” Rural Sociology 23:4 (1958).
6. Rogers, Everett M., Diffusion of Innovations (New York: The Free Press, 1962): 148–191.