Category Archives: Product

Which Comes First: The Product or Target Market?

Chicken
Egg
Determining which comes first, the product or the market is challenging even for companies with an established brand and existing products consistently generating revenue.  It’s exponentially more difficult for startups to separate the two which is why it may be a relief to hear that the two are actually inseparable.

Startups are born in a variety of ways but two of the most common are these.

  1. When a recurring or consistent need is identified. The founders decide to build a solution and sell it to people with that need. The emphasis is more on the needs of the market but is still ultimately inseparable from the product.
  2. When founders develop something “really cool.” It is often for their own specific use, and realize somewhere along the way that if they can identify a group of people with the same need, they could sell it. Sometimes that requires some adaptations to make it more appealing. In this case, the process starts with the product and evolves to identifying a target market, again making them inseparable.

In the case of the chicken and the egg, both need each other. The same is true of the product and target market. One can’t thrive without the other – at least not as successfully.

If startups don’t know who their customers (i.e., their market) are, how can they determine their needs? And if they don’t know their needs, how can they determine what products to sell them? Alternatively, if they don’t know what products to sell, how can they determine who might want to buy them?

Investing the time to identify and understand their target market drives financial success for startups.

How to Define Your Target Market?

Here are some ideas on how startups can define their markets:

  • By consumer type. Startups that are planning to sell to consumers and businesses might find it helpful to distinguish their markets as B2C and B2B. Businesses can be further defined by size – small, medium, enterprise, global, etc.
  • By geography. Startups that are planning to sell only in one or more geographic regions (they could be cities, states or countries), and then later expand to other regions, might find it helpful to define their markets as names of those regions.
  • By distribution or sales channel. Startups that are planning to sell some products using in-house sales, and some products using a reseller or distributor or wholesaler, might find it helpful to define markets as names of those channels.
  • By marketing technique. Startups that are planning to make customers aware of products using a variety of techniques such as website, direct mail, telesales, pay-per-click web advertising, and so on, might find it helpful to define markets by the names of those techniques.
  • By demographic. Startups might find it helpful to define markets as children, double income no kids (aka DINKs), single income no kids (SINKs), zero income no kids (OINKs), retired, and so on.
  • By size of purchase. Startups may find it helpful to define markets as small purchasers, medium purchasers, and large purchasers.
  • By category of user. In some businesses, a product may produce multiple income streams from multiple classes of users. For example, a company with a product that helps high school athletes find the perfect college to attend might find it useful to define its markets as students, parents, coaches, and college recruiters.

There is no limit to how many ways markets can be defined. As a guideline for the sake of planning and to avoid unnecessary complexity, startups are best served by defining something as a unique market only if

(a) Pricing will be different than for other markets,

(b) Different products will be sold to this market than to other markets,

(c) A different commission structure will be used for this market than for other markets,

(d) Entry into this market will be in a different timeframe than other markets, or

(e) It makes sense to track the financial performance of this market independently from other markets.

The bottom line is there is nothing magical about defining a market. Startups can define it any way that makes good business sense. .

Is it better to define a market broadly or targeted?

To answer this question, let’s look at an example. Let’s say a startup has an innovative, but exclusive, approach to wedding photography.

  1. It could define its market to be the number of marriages in the United States every year, which is 2,000,000+. As a starting point, that might be okay, but where a lot of startups tend to come unstuck is in assuming that “we only need to capture 1% of that business and we’ll achieve our financial goals!”One percent of anything sounds so easily achievable but depending on the product, price, competition, and many other factors, it may be totally unreasonable. Broad market identification tends to lead to a false sense of security.
  2. Another possibility is to define its market as the number of actual wedding ceremonies in the United States that spend over $50,000 for the event. Now the target market is smaller but with a much higher likelihood of being the audience that will purchase from the startup.Although market penetration numbers are going to be higher, the resulting financial projections will be far more believable.
  3. Yet another possibility is for the startup to plan to grow its business regionally. Let’s say it is physically located in Denver. It can define its first market to be the number of actual wedding ceremonies in the greater Denver metropolitan area that spend over $50,000.Now penetration numbers could be even higher as the result of a more targeted marketing effort. Then it defines its second market to be Colorado, and then the third to be the Rocky Mountain region, always targeting the high-end only.

Bottom Line Advice

The narrower and more targeted the market is, the more focused the marketing message can be, resulting in a greater quantity of qualified leads and a higher conversion rate. This also allows startups to have a lower customer acquisition cost. All of that means a higher probability of being financially successful.

About the Author

Alan DavisDr. Al Davis has published 100+ articles in journals, conferences and trade press. He is the author of 6 books, including the latest, Will Your New Start Up Make Money? He was a founding member of the board of directors of Requisite, Inc., acquired by Rational Software Corporation in 1997, and subsequently acquired by IBM in 2003; co-founder, chairman and CEO of Omni-Vista, Inc.; and vice president at BTG, Inc., a Virginia-based company that went public in 1995, acquired by Titan in 2001, and subsequently acquired by L-3 Communications in 2003. He is co-founder and CEO of Offtoa, Inc., an internet company that assists entrepreneurs in crafting and optimizing their business strategies. Click on the following to see a short video on Offtoa:

Photo credits:

4 Things You Must Do When Starting a Company

BXP135658The lean startup movement (of which I am a big proponent) has thankfully eliminated the “build it and they will come” attitude among aspiring entrepreneurs.

In its place, most new entrepreneurs build minimally viable products (MVP), test them with real customers, receive feedback, adapt and refine, and continually repeat until they find a product that customers like (at a minimum) or ideally, crave.

This new process reduces risk, minimizes cash burn, allows companies to fail early, and allows investors to put their larger investments into only those companies that look like potentially big winners.

However, it also puts a very heavy emphasis on the product – an emphasis that can result in distracting startups away from other essential activities that when initiated at the start of a business can help to identify and reduce other risks just as enormous.

The Biggest Risks

Those risks will vary from company to company and industry to industry, but some risks are common to all startups:

  1. Will customers crave your product?
  2. What will customers pay for your product?
  3. Are their sufficient numbers of customers?
  4. How will you make customers aware of your product?
  5. What will it cost to produce your product?
  6. What will it cost to run your company?
  7. How much cash do you need?

So how does a startup manage these risks from their inception and consistently?

Reducing Those Risks

The popular iterative process described in the second paragraph of this article addresses risk #1 very well. If pricing experiments are included, it can also address risk #2.

Addressing risk #3 requires some level of market and industry research. I’m not suggesting a major effort here, but I am suggesting that you spend at least some time understanding market segmentation, the competition and which segments each competitor aims for. Make sure you include substitute (indirect) competitors.

Failure to address risk #4 early is perhaps the most common mistake of newbie tech entrepreneurs. Often, they’ll think “once we figure out what the product is, then we’ll figure out how to sell it.” This is just a few steps away from “make it and they will come.”

Another common attitude among newbie tech entrepreneurs is “oh, the internet will take care of sales.” The fact is making sales takes work for 99% of companies. Internet sales are not easy! And margins when selling through Amazon are close to nil.

Iterate on your sales model just like you iterate on product features. Start with an initial proposal (based on serious thought!). Then iterate as you learn more. Some of your basic options include inside sales force, outside direct sales force, sales channels/distributors (e.g., Amazon), and internet sales from your own website along with a major SEO effort. Each choice has major impact on your costs and thus your viability as a company.

The easiest way to address risks #5-#7 is to create a quick financial model.

  1. First, make a list of all your business assumptions; this is a good idea to keep you organized in your experiments anyway; after all, it is these very assumptions that serve as the hypotheses that you are testing in your lean startup experiments.
  2. Use a tool to automatically transform the assumptions into pro forma financial statements. These financial statements will then tell you (a) when you will be profitable, (b) when you will break even, (c) how much cash you will need, and (d) what your company’s valuation will be based on industry averages, and (e) what kind of return your investors are likely to receive.

The actual process of entering data for business assumptions should take you no more than 30 minutes. But the real value of using a tool that requires you to write down your business assumptions is the thinking that it inspires you to do. For example, for manufactured products, it asks you questions about what you assume the cost of raw materials will be; for software products, it asks you questions about how many customer support people you plan to hire, and so on.

Remember, these are just assumptions, so you can launch your company with your eyes wide open. You don’t want to start a company that you know will be unprofitable from the start.

I am not advocating for a full business plan. On the other hand, I do not believe that just having the right product is a sufficient first step. Instead you need (from the start!) to be engaged in at least four simultaneous risk-reduction activities:

  1. Building an MVP and then iterating it until customers crave it
  2. Studying the market, segmentation, and competition
  3. Assuming a sales model and iterating as more is learned
  4. Building a financial model based on assumptions and iterating as more is learned

Here are some examples of why just getting the right product is not good enough:

Why the “Right Product” is Not Sufficient: Example 1

Let’s start with a hypothetical case. You have created a product that provides a special nutritional source for pregnant women in Niger, to help reduce the country’s 14% rate of maternal death during childbirth.

You can run a series of experiments to determine if the product is palatable and refine it if necessary. You can also run a series of experiments to determine its efficacy on reducing deaths.

However, the biggest hurdles are not the product’s features. The biggest hurdles are logistics, costs, prices, and everything else that makes up the business.

Why the “Right Product” is Not Sufficient: Example 2

Turning to a simpler example, suppose you are building an app. You can tweak it based on myriad experiments until you have the product that customers love. But if customers expect to download the app for free, you have no business.

 

Why the “Right Product” is Not Sufficient: Example 3

Let’s look at another example, this time from a real company: This company planned to manufacture industrial lubricants with very unique properties and capture a large percentage of the market by (a) marketing unique differentiators that were the result of unique raw materials that were “green,” and (b) price the products well below competition.

That sounded like a great value proposition for all stakeholders. However, a careful early financial analysis revealed that the green raw materials drove the cost of goods sold up to around 85% of the planned price. This left just a 15% gross margin, far too low to support infrastructure costs. A financial analysis at the beginning revealed that this company was a non-starter.

Why the “Right Product” is Not Sufficient: Example 4

Let’s look at one final example, another real company: Adapta Medical. Founded by Dr. Glen House, and based on his numerous patents, Adapta iterated on and perfected an intermittent urinary catheter that an individual with limited dexterity (e.g., a C6-C7 quadriplegic) could use to self-catheterize.

From the beginning, Dr. House experimented with product designs, customer satisfaction experiments, multiple manufacturing sources, and financial models, simultaneously. The tasks that took the longest time and consumed the most energy were working out the manufacturing and cost models. Fortunately for him, he started on these from the beginning, so after about a year product iteration (to arrive at the first commercially viable product), he only had another two or so years to work out the manufacturing and cost model glitches.

Now that he is in production, he continues to perfect the product, iterate on the financials, hone the costs, and adapt the manufacturing processes. Learn more about Adapta at www.adaptamedical.com.

Summary

These days, everybody thinks they can launch a new company. The popular process of “iterate the product until customers like it” provides necessary but not sufficient assistance to the naïve first-time entrepreneur. At a minimum, an entrepreneur must start with these four activities to mitigate the risks of starting a business:

  1. Building an MVP and then iterating it until customers crave it
  2. Studying the market, segmentation, and competition
  3. Assuming a sales model and iterating as more is learned
  4. Building a financial model based on assumptions and iterating as more is learned

Start doing all of them at the beginning; don’t do them sequentially.

About the Author

Alan DavisDr. Al Davis has published 100+ articles in journals, conferences and trade press, and lectured 2,000+ times in 28 countries. He is the author of 6 books. He is co-founder and CEO of Offtoa, Inc., an internet company that assists entrepreneurs in crafting their business strategies to optimize financial return for themselves and their investors. Formerly, he was founding member of the board of directors of Requisite, Inc., acquired by Rational Software Corporation in 1997, and subsequently acquired by IBM in 2003; co-founder, chairman and CEO of Omni-Vista, Inc.; and vice president at BTG, Inc., a Virginia-based company that went public in 1995, acquired by Titan in 2001, and subsequently acquired by L-3 Communications in 2003.

If you’d like to learn if your great business idea will make money, take a look at Will Your New Start Up Make Money? If you’d like a tool that transforms business assumptions directly into pro forma financial statements, check out www.offtoa.com.

 

 

Starting Line Photo Credit: “Female Track Athletes at Starting Line” by Tableatny (Creative Commons)

Risk Photo Credit: “Los Angeles Graffiti Art” by A Syn (Creative Commons)

Niger Flag Photo Credit: “Niger Flag” by Philippe Verdy (Wikimedia Commons)

Not for Sale Photo Credit: “Onis Not for Sale Sign” by Noblestrawberry (Creative Commons)

Start-ups: How to Release New Products

Like all lean startups that also practice agile development, our company makes small releases of the product and website roughly twice a month. With each release, we gather valuable information, reach tentative conclusions, and incorporate what we learn into subsequent releases.

However, every once in a while, the time comes to launch an entirely new version of the product. This blog is about the mechanics and psychology of a major launch.

FearFirst, let me digress for a moment about the role of fear. Early in my life, I thought that the fears I felt (e.g., fear of embarrassment, fear of failure) were character weaknesses. Now I see them as strengths. These fears drive me toward careful planning and fastidious preparation for major events so that neither embarrassment nor failure becomes likely.  With this planning and preparation comes a desire for perfection.

As an entrepreneur, I cannot explicitly look for colleagues who possess a similar “gift of fear,” but the team members that succeed with me do share my attraction to planning, preparation, and perfectionism, regardless of their motivation.

So, how does this all apply to launching a major release of a product? Product releases have dozens of interrelated moving parts. The proper functioning of each part relies on the unique talents of your team. Seamless interconnections between the parts rely on communication between the individuals on your team. And all of the parts and their interrelationships are highly visible. If anything fails, the opportunities for embarrassment and failure are huge. Now you see where planning and preparation, and thus fear, play roles.

Let’s talk about some of the parts, how they interrelate, and how to avoid failure to launch well.

Product

  • Add enough new features so you can seriously claim (from a press release perspective) that this is indeed really a new version of the product
  • Select features based on plenty of customer feedback. To do this, read my article on the art of triage.
  • Make sure you update all your help screens to match your new features
  • Buggy software is a great way to lose all your customers. Thorough testing is a necessity. At Offtoa, we spend 2-3 months doing system testing on a new major release of a product after development has finished with it and before we release it to the general public. Is this overkill? Perhaps. But like I said above, we don’t like to be embarrassed!
  • Use your loyal customers to help with testing. We bring on board such beta customers toward the end of our own system testing. We don’t expect them to find anything wrong, but if they do, any damage is well-contained.

Website

  • Usually, a major new release of the product coincides with refined messaging and new differentiators. So, a newly designed website is almost always in order. Certainly content will need to change.
  • A major new release of the product is also a great time to freshen up the website with a similar look and feel.

Marketing

  • Since a new product release always implies new differentiators (or else why are you building a new release?), you should be spending considerable effort on a new marketing campaign.
  • As a guideline for software companies, I spend equal resources on marketing and development in preparation for each major new release.
  • Target 1-2 specific vertical markets.
  • Make sure you fully understand the pains of your targeted vertical markets and the messaging that drives home how your product relieves that pain. This is essential to conversion rates and low customer acquisition costs.
  • If you are using Google AdWords (or equivalent) to drive traffic to your website, you’ll need to use all you have learned from earlier campaigns about which search words attract the most qualified leads from of your targeted vertical markets.
  • Make sure you have built customized landing pages for each AdWords campaign to help convert leads into customers. Once again, earlier campaigns should have helped you hone the messaging.
  • Construct and disseminate press releases to appropriate media outlets to help drive both customer traffic and analyst interest.
  • Instrument (e.g., with Google Analytics or equivalent) your website so you understand how leads become customers.

Customer Support

  • Contact your current customers in advance about the new release so they have plenty of warning.
  • Create a transition plan to seamlessly transition your current customers to the new product without any pain felt by them. You need to convert all customer data.

Twenty years ago, software development companies released all new functionality in huge new releases. Today we have learned the value of both minimally viable products (MVP) as well as small incremental releases. However, even with this new knowledge, major new product releases are still necessary on occasion. And these are fraught with risk. Avoid failure to launch well, which hurts the credibility of your company and your product, and consider these tips when you are about to embark on your major release.

ABOUT THE AUTHOR:

Alan DavisDr. Al Davis has published 100+ articles in journals, conferences and trade press, and lectured 2,000+ times in 28 countries. He is the author of 6 books, including the latest, Will Your New Start Up Make Money? He is co-founder and CEO of Offtoa, Inc., an internet company that assists entrepreneurs in crafting their business strategies to optimize financial return for themselves and their investors. Formerly, he was founding member of the board of directors of Requisite, Inc., acquired by Rational Software Corporation in 1997, and subsequently acquired by IBM in 2003; co-founder, chairman and CEO of Omni-Vista, Inc.; and vice president at BTG, Inc., a Virginia-based company that went public in 1995, acquired by Titan in 2001, and subsequently acquired by L-3 Communications in 2003.

If you’d like to learn if your great business idea will make money, take a look at Will Your New Start Up Make Money?

Photograph of Cover

Fear photo is a screen capture from the public domain film ”Carnival of Souls.”

“A-Team & B-Product” Trumps “B-Team & A-Product”

Many aspiring entrepreneurs are in love with their business ideas and expect investors to fall in love with their ideas as well. When they receive a “no” from potential investors, they think the investors “just don’t get it.”

What don’t they get? The entrepreneurs think the investors don’t get how great the business idea is.

Unfortunately, most investors will pass on the opportunity to invest in what appears on the surface to be a terrific business idea led by a less-than-stellar team. On the other hand, seasoned investors will often invest in a “fairly good” idea led by a fantastic team.

Why should this be? The reason is that most startup businesses fail regardless of how terrific they seem at first glance. That is where a great team is essential.

A-Team Will Prosper

MrTThe A-Team will prosper for two reasons.  The first reason is that they’ll see the signs of failure much earlier than the inexperienced team. The second reason is that they’ll pivot the company (perhaps even repositioning it with entirely different products or aiming it for entirely different markets) quickly toward new fertile ground.

B-Team Will Stagnate

Meanwhile, a B-Team is more likely to stay with the original business idea even when all signs indicate that it won’t work.

Is This Fair?

Is it fair to inexperienced teams that investors reject them? Well, it all depends on your perspective. From the perspective of an inexperienced team, it may seem unfair. From the perspective of the investor, it makes sense.

Does this mean you have to succeed before you can succeed? If investors prefer to invest in experienced teams, what do you do if you are either (a) a solo entrepreneur, or (b) a member of a totally inexperienced team?

If you lack experience:

  • Team with others who have “been there before.” Perhaps the most difficult thing for a newbie to understand is that you are much better off with 10% of a $100M company than 100% of a $100K company. Just do the math!
  • Compete for a spot in an accelerator like TechStars. Competition for entry is fierce, but you will learn a lot and some investors will consider your experience to be as good as having “been there.”
  • Bootstrap. Plan to grow slowly with little or no investment money. Learn the tricks of The Lean Startup by Eric Ries, especially the creation of a series of minimally viable products.
  • Put your idea on hold and join an experienced team pursuing their dream.

Although I talk about how I am in my fifth startup, “my” first startup wasn’t in any way “mine.” I joined a very experienced entrepreneur, in his venture. I gained relevant experience via association with him and his company.

And, in fact, “my” second startup wasn’t “mine” either. I joined other more experienced serial entrepreneurs as an investor and founding member of the board of directors.

From these two experiences, I gained the stripes (and scars and street cred and . . .) to then start leading teams in new ventures.

Don’t expect investors to write checks for you because you have a great business idea and no experience to demonstrate that you have the ability to make it succeed.  There are many ways for you to gain the experience you need to become investor-worthy.

Al Davis is a serial entrepreneur currently in his fifth startup. He is also an angel investor and the author of six books.

Mr. T photo courtesy of Paul Townsend (Creative Commons).

How Reducing Costs Can Impact Pricing

Reducing Costs Provides Opportunities

Let us assume that your start-up has figured out some way of reducing its costs below the competition. It might have done so through finding cheaper sources of raw materials (thus lowering costs of goods sold), or reducing process steps, or using proprietary technology, or using cheaper labor, or whatever. Once accomplished, you now have two sub-strategies to consider:

Lower Costs Can Mean Lower Prices

  • Sub-Strategy 1: Passing Reduced Costs on to Customers: You leverage your unique capability and turn it into lower prices for customers, thus achieving higher market penetration. This is a particularly good sub-strategy to utilize when cost savings does not also result in a better pro­duct in the eyes of customers. Now, when customers compare your product and a competitor’s product side-by-side, they will see two products that provide relatively equivalent performance but your product will be less pricey, and thus will provide more value.

Lower Costs Can Mean Higher Margins

  • Sub-Strategy 2: Converting Reduced Costs into Higher Margins: You main­tain prices comparable to competition, but because your costs are lower, you achieve higher profit than competition. With higher profits, your company will command higher valuation, and you can retain those profits, reinvest them in R&D, further enhance your processes, and thus drive down your costs even further.

The above is extracted from my latest book, Will Your New Start Up Make Money? Buy your copy in Kindle at http://www.amazon.com/Will-Your-Start-Make-Money-ebook/dp/B00JOOZQNE or paperback format http://www.amazon.com/Will-Your-Start-Make-Money/dp/0996028307 

How Differentiation Can Impact Pricing Strategy

Let’s talk about how the choices you have made for business strategy (for my previous few blogs) will affect your pricing strategy. Let us assume that your start-up has figured out some way of being different and better in the eyes of customers. Either your product itself is better (i.e., product strategy), or it has better features (i.e., feature strategy), or is somehow delivered to the customer in a better way, (i.e., delivery strategy) or the company delivers better customer service (i.e., service strategy), or something else. Once accomplished, you now have two choices for a pricing strategy to consider:

  • Sub-Strategy 1: Premium Pricing: You price your product higher than the competition. You argue that customers will see more value in your product and thus will be willing to pay more for it.
  • Sub-Strategy 2: Comparable Pricing: You price your product in line with the competition’s products. When customers compare your product and the competitor’s side-by-side, they see two pro­ducts at the same price, but your product will stand out as clearly superior, and thus will provide more value. As a result, you will achieve more volume and thus higher market share.

The above extracted from my latest book, Will Your New Start Up Make Money? Buy your copy at http://www.amazon.com/Will-Your-Start-Make-Money-ebook/dp/B00JOOZQNE.

Feature-Rich or Feature-Poor: Entrepreneur Strategies

Once entrepreneurs figure out what products they are going to sell, they still need to select approaches on how they will deliver its features to customers. These are called feature selection strategies.

  • Feature-rich. Start-ups that engineer products have an option to introduce to the market products that are feature-rich. The advantage of this strategy is that customers who are comparing your product against entrenched pro­ducts on a feature-by-feature basis are more likely to select your product. If you are targeting a fairly general market and/or products are in a fairly mature stage of their life cycles [MOO95], you may have no choice. In such cases, order qualifiers (order qualifiers are those features, which if absent, will mean customers are unlikely to purchase) include a long list of features.
  • Feature-poor and build capability slowly. For products early in their product life cycles [MOO95], or when you are targeting a newly recognized segment of a broader market, building a feature-rich product could be dangerous (you may build the wrong product) and expensive. Instead, a better strategy could be to build a smaller, simpler, feature-poor product, sometimes called a minimally viable product (MVP). Then you carefully select representatives from your target market to serve as beta customers who can experiment with the product, provide feedback, and you slowly migrate the product toward a richer and richer set of features based on customer feedback and customer demand. In The Lean Startup, Ries recommends offering the MVP to an even broader market to fully validate not only your features but also your assum­ptions concerning market penetration, price tolerance, sales model, etc.

The above extracted from my latest book, Will Your New Start Up Make Money? Buy your copy at http://www.amazon.com/Will-Your-Start-Make-Money-ebook/dp/B00JOOZQNE.