I remember when I started my second company many years ago. It was a dog food manufacturing business. I developed a recipe after my dog became very ill and no veterinarian could figure out what was wrong. My last option was exploratory surgery. I took a gamble and developed a food after researching what an optimal diet should look like for dogs with similar symptoms. I watched anxiously to see how my dog reacted. When my dog not only started eating again, but her energy increased and her coat looked fabulous, I figured it was time to go into business.
Running With My Assumptions
I’m going to rush to the heart of the matter, but I will tell you, I did my dog food homework and researched heavily what was important for a dog’s health. I learned all about the dog food regulations. I had the licenses. I had the equipment I needed. I even had some money to get going. Yet, just like many other companies I work with, I did not go and talk to the people who might buy my product. I didn’t find out if they really wanted another food or even if they liked to change their dog’s food. I assumed that my product was great based on comments from my friends and family and my dog’s experience and I thought it would be flying off of the shelves and that the favorable comments would spread like a haboob. So, again, like many entrepreneurs, I jumped in with both feet and a heap of my own money.
It wasn’t a flop. I was able to sell the food. I made a profit, but the entry into the market required a lot of consumer education which slowed sales. I had to pivot twice on how to distribute. Had I talked to people in the beginning, it would have saved me a year's worth of money.
I learned the hard way, through trial and error, instead of discovering more about how it might work prior to production. I was also fully attached to my product. My blood, sweat, tears, and my dog’s life were invested in this creation which obstructed my view and prevented me from being objective and clearly identifying obstacles. I should have asked myself earlier on if this product was more valuable than what existed at the time. I should have found out by asking potential customers. This would have helped me identify who REALLY would buy my product, where they would go to buy it, and what would make them purchase this new food.
This type of conversation isn't about SELLING, but learning everything about how and why someone buys food for his or her dog(s). This would have been brilliant data to help me identify my customer persona and how they like to buy. Instead, it took much longer to find a way to sell the food which chewed up more money while figuring it out.
There Must Be A Better Way – Validation
Why am I telling you this story? Because there is a better way to start a business and identify the real risks and obstacles you'll run into BEFORE you pour your money and your time into it. Finding out about your customers, how they buy, where they buy, how the distribution could work, and doing some short immersion into the work of your business industry gives you a tremendous insight to what to expect during growth. If you feel the risk is too high after this information discovery, then find a better business to start. We entrepreneurs usually have another great invention coming soon.
The idea of validating an idea is sometimes off-putting to startups and to businesses. To some, it is like insulting their idea and product. Imagine though, if Coca Cola had asked people if they wanted a new Coke recipe and letting them know they were thinking about phasing out the original recipe. They could have saved themselves a lot of money. From this example, you can see that validation isn’t a one-time thing.
Right now, customers are reporting and guiding purchases through reviews and feedback. This means that if you are going to add a product to your line, a feature to your software or change your recipe, ask your customers, “Is this what you want? Does it add more value to you? Does it make you want to purchase it more? If not, what would?” And, why not start with the customer? Why not find out how you make your product so valuable that it has a competing chance? Only the customer can tell you what that looks like. Coca Cola would have discovered that their customers wanted the original Coke and only the original. This goes for all other parts of your business model as well. Save time and money by understanding how your industry gets sales. If you have a new idea for getting it into the hands of the customer, you can find out about that too…from whom? The customer, of course.
Getting Out of the Building
Steve Blanc refers frequently to “getting out of the building.” The most successful people and businesses I have seen are those who are constantly talking to customers and potential customers. They have also validated each portion of their business model. Things that need to be validated are best represented in Alex Osterwalder’s Business Canvas. It is a great place to start:
- Value Propositions – how your product or service solves the customer’s problem, what are the unique differentiators and the quantified value (e.g., price, usability, ease)
- Customer Relationships – essential type of interaction with customers and how this customer persona wants the relationship built (community, self-service, personal assistance, etc.)
- Channels – method of distribution to customers (e.g., retail, wholesale, distributors, agents)
- Key Partners – buy/sell relationships, including strategic relationships, joint ventures
- Key Activities – high priority actions to implement the value proposition (e.g., developing robotic production to reduce costs)
- Key Resources – what is needed to develop value for customers (e.g., human, intellectual, financial, facilities)
- Cost Structure – important monetary considerations (e.g., cost-driven, economies of scale, fixed and variable costs)
- Revenue Streams – how to generate income from customer segments; selling goods, subscriptions, advertising fees, and licenses. Is there a way to have more than one revenue stream? Validate that idea second stream idea too.
The accuracy of the first two elements, Customer Segments and Value Propositions are so critical that if you get them wrong, the rest of your model may be powder. And it is the relationship between Customer Segments and Value Propositions that can be the difference between a stunning success and a deadly disaster. Specifically, these two business model components must answer the question, “Who will buy what you have to sell?” and “Are they more likely to buy it over what exists today?”
If you feel validating a product idea is a waste of time, consider how much you can save in time and money by either stopping the development of an invalid business/product or by discovering how to strengthen a good idea to move from a possible bomb to a real success.
Strategizer Business Model Canvas
Why Startups Fail (Reason #2, Business Model Failure) http://www.forentrepreneurs.com/why-startups-fail/
Join us for a working presentation on validating your business, January 12, 9am -10:30am, presented by Steve Wood.
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