In this step we look at Demand and the MVP (Minimum viable Product)
Do enough potential customers love the product?
- Will they pay enough for it?
- What specifically do they value?
- Can you create a ‘Mock-up’ product to test the demand
- Can you structure the business to delivery the product/service profitably at that sale price?
From the research you have done – talking to people and feedback from industry sources – Can you tell if there is plenty of demand for the product /service?
Sometimes you will be in an industry sector where there is lots of demand and lots of competitors. Others will be in smaller markets with fewer customers and competitors.
In both cases it is much easier to be in growth industries, where new potential customers are coming into the market rather than having to attract customers off competitors. Whilst existing customers not may be completely happy with the incumbent provider, there is an inertia about change. If you offer a frequent purchase item or service, changing providers may affect your customer’s routine, if it is a larger purchase it may involve work for the customer and/or risk to change. There is also a chance the existing provider will ‘pick up their game’ when they see a new competitor enter. Attracting customers off competitors is harder than you might think. Entering a mature or declining industry is difficult and generally not for inexperienced owners.
The two key questions assumptions that are inherent in this stage are:
- Do customers want/value my Product or Service?
- Do enough of them want it?
Finding one or two customers who like your idea is one thing, getting customers to buy in enough volume to meet your sales goals is what you need to test or prove as early in the process as possible.
What the current theory from Lean Start-ups for new product development shows is that you need to be flexible about your initial ideas. No matter how clever you think you are in identifying an opportunity, the specific details of what customers’ want and will respond to the most, needs fine-tuning by trial and error. This could be the difference between a small lifestyle business and a large international success – or the difference between a business or no business at all.
The theory around creating a minimum viable product (MVP) means that you create a test or trial version of your product or service and try it on customers is as real life a situation as you can, at as low cost as you can. Even if you have to manually manage the “back end” to deliver and the trial version is not profitable, you are testing and validating an important assumption – before you have built a whole business around that product or service.
In the MVP stage you are looking to ascertain which aspects (features or benefits) of your product or service are important to your customers, and which are not, and if there are any missing factors that you need to include. What is the MOST valuable to them? Do some customers value your product/service and features higher than others? Should you just focus on that type of customer? Do not add any factors that are not valued, or only appeal to a very small subset of customers. You will also see how much they will pay for the product or service. You should be testing pricing in this stage to ascertain how much you can charge before you see demand drop, and remember that the more the features/benefits are valued, the more the customer will pay.
To validate the second big assumption of demand, you need to test the level of engagement: how often they interact with your service, how often would they buy it, would they recommend it to others? Really what you are finding out here is: do they really want it or are they just being polite and trying it and giving you feedback as requested. This is the same issue as focus group testing has: the test customers are in a theoretical situation, not a real life situation. Until you ask people to buy and use the product or service, you (and they) cannot tell how much they like and value it.
Once you have found a product or services that customers are responding well to, and ascertained how much they will pay, you can back-engineer the business model to deliver the product for that price. If it is a low price/low margin product, you will need high volume sales and automated processes to deliver it economically, if it is a high cost high margin product, you may be better with customised and personal service. The questions will then be:
- how much does the product cost?
- how much overhead can you afford per unit?
- what volume of sales do you need to break even and to make a profit?
- who is taking the risk if it takes longer or costs more to deliver?
- Should you out-source or provide the key inputs in-house?
- Do you use off-the-shelf software or develop your own?
The benefit with leaving the design of the business model until you know how much you can afford is that you can make it fit. You know how much profit you are looking for, how much overhead per unit (billable hour or product or service package) and how much raw cost you can therefore afford. You can also assess what is the biggest driver of profitability for the business. Ie if distribution costs are large, then managing them and finding a supplier/partner who can provide them at an economical rate is the key determiner of your business profitability. Focus on that and see if you can negotiate a rate that works. When you know the amount you can afford and are confident that you can generate sales at that volume then you can partner with your supplier and find one who is prepared to drop their normal price in return for a relationship and ongoing volume work. You can also look for other benefits for them to make the deal more attractive. For example: you may be able to provide access to new markets, or customers and an opportunity extend their services outside of your contract.
At the end of this 4 step process you should have an idea about how you should establish your business and how to test your assumptions. This is a lot lower risk than developing projects that you think that they customer wants and finding out that you cannot attract them in sufficient numbers to run your business profitably. A small change in the offer, could produce a high change in financial performance.
When you get it exactly right, customers will be queuing round the block!