Single necessary condition for a business: a paying customer.
It's essential to create a new market instead of being a "me-too company".
Primary (end user) and secondary (economic buyer). Sometimes they overlap. Sometimes business model calls for both.
Multi-sided market case - when the business model needs target customers to be viable (e.g. in airbnb hosts and travellers).
Wide array of market opportunities even such that sound crazy. Talking to potential customers is good even at this early stage.
Do a tree to segment the market opportunities. Even seemingly narrow markets can be segmented to narrower ones. Potential industries -> Who will benefit from the idea/technology in this industry (focus on end users)? -> Make a narrow segmentation of the users
- Is the target customer well funded?
- Is the target customer readily accessible to your sales force?
- Does the target customer have a compelling reason to buy?
- Can you today, with the help of partners, deliver a whole product?
- Is there entrenched competition that could block you?
- If you win this segment, can you leverage it to enter additional segments?
- Is the market consistent with the values, passions, and goals of the founding team?
Choose 6-12 markets based on the questions above.
Talk to potential customers in the markets that have been chosen in the previous step. If there is already a research on the market out in the internet, probably you are late.
- You do not have “the answer” for your potential customers and their needs.
- Your potential customers do not have “the answer” for you.
- Talk with potential customers in “inquiry” mode, not “advocacy/sales” mode. Listen to what they have to say, and don’t try to get them to buy anything.
Organize research:
- End User: Who specifically would be using your product?
- Application: What would the end user be using your product for? What is the task that would dramatically improved?
- Benefits: What is the actual value that the end user would gain?
- Lead Customers: Who are the most influential customers that others look to for thought and adoption of new technology?
- Market Characteristics: What about this market would help or hinder the adoption of new technology?
- Partners/Players: Which companies will you need to work with to provide a solution that integrates into the customer’s workflow?
- Size of the Market: Roughly, how many potential customers exist if you achieve 100 percent market penetration?
- Competition: Who is making similar products — real or perceived? (from the customer’s perspective)
- Complementary Assets Required: What else does your customer need in order to get the “full solution,” that is, to get full functionality from your product? You will likely need to bundle your product with products from other manufacturers so that customers can easily buy your product and have full functionality.
Based on the 7 questions from step 1, choose just one market. This market might still need further segmentation.
Being focused is extremely important. You should continue segmenting until your market matches the:
- The customers within the market all buy similar products.
- The customers within the market have a similar sales cycle and expect products to provide value in similar ways. Your salespeople can shift from selling to one customer to selling to a different customer and still be very effective with little or no loss of productivity.
- There is “word of mouth” between customers in the market, meaning they can serve as compelling and high-value references for each other in making purchases. For example, they may belong to the same professional organizations or operate in the same region. If you find a potential market opportunity where the customers do not talk to each other, you will find it difficult for your startup to gain traction.
You must build your business based on the customer you are serving, rather than pushing onto the market the product or service you want to sell.
- End User: The individual who will use your product. The end user is usually a member of the household or organization that purchases your product
- Decision-Making Unit: The individual(s) who decide whether the customer will buy your product, consisting of:
- Champion: The person who wants the customer to purchase the product; often the end user.
- Primary Economic Buyer: The person with the authority to spend money to purchase the product. Sometimes this is the end user.
- Influencers, Veto Power, Purchasing Department, and so on: People who have sway or direct control over the decisions of the Primary Economic Buyer.
In this step it's important to build a profile of the end user that is specific enough for calculating the Total Addressable Market size of the beachhead market.
Even in the narrowest beachhead market there will be much variety among the end users. Market strategies won't work well for different groups of people.
- What is their gender?
- What is their age range?
- What is their income range?
- What is their geographic location?
- What motivates them?
- What do they fear most?
- Who is their hero?
- Where do they go for vacation? For dinner? Before work?
- What newspapers do they read? Websites? What TV shows do they watch?
- What is the general reason they are buying this product? Savings? Image? Peer pressure?
- What makes them special and identifiable?
- What is their story?
Some of these may not be applicable, others may be added.
TAM = the amount of annual revenue your business would earn if you achieved 100 percent market share in that market.
Counting noses: how many customers (trade associations, customer lists, etc.) and how many end users each customer has.
Very useful here is to have exact amount of end users at some companies and latter estimate number of end users per 1000 people or per million dollars revenue.
This analysis is complementary to the bottom-up analysis.
Using secondary market research estimate how many end users meet different characteristics. Expressed by a inverted pyramid, the bottom-most level are those that match the End User Profile.
This will need some assumptions. Try to calculate how much the user is spending to do the task that your product will do instead of him. As much as possible, base the number on the budgets of the potential customers you have identified. How much have they paid in the past for other new products? How much value does your product create for them?
Generally a TAM between $20 and $100 million per year is a good target. It is possible though that an initial TAM of $5 million per year could be a successful business, if you can capture the market quickly and convincingly, especially if the gross margins on your product would be very high (e.g., 90 percent as it would be for software, mobile apps, information-based business models) and you do not need a lot of employees to do it.
As these steps are meant to be part of iterative approach, latter revisit of the TAM will lead to a more credible estimation.
The End User Profile is a composite of a person that represents the primary customer for the beachhead market. The Persona is a concrete person who best represents the primary customer (however he won't ideally match the end user profile). Making this way the end user tangible helps the founding team to focus on making target customer happy. He can resolve all arguments definitively instead of making guesses.
This is not just an exercise but the Persona should be the first thing to think when taking decisions about going forward. What features should you prioritize or drop? How should you allocate resouces? Who should you hire to sell the product?
Multiple personas? Only if you have multi-sided market (e.g. ebay with buyer and seller).
- The process should include all key members of the team.
- Pick one user from a successful customer that you already sold to or from a really interested customer from the primary market research.
- Don't worry too much, make your best guess
- Prepare a fact sheet about the Persona (both personal and professional information); it must be very specific
- List the Persona's purchaising criteria in prioritized order
- Interview the end user who is your Persona and ill the gaps
- Summarize and post it on a big sheet of paper on the wall
Important to be (as everything else) through the eyes of the customer.
Essential factors part of the FLCUC:
- How end users will determine they have a need and/or opportunity to do something different; why existing producst don't meet their needs and how you meet these needs
- How they will find out about your product.
- How they will analyze your product.
- How they will acquire your product.
- How they will install your product. Customers who are generally satisfied with their workflow will rarely want to radically overhaul their process even if your product provides benefits over their current system.
- How they will use your product (in detail).
- How they will determine the value gained from your product.
- How they will pay for your product.
- How they will receive support for your product.
- How they will buy more product and/or spread awareness (hopefully positive) about your product.
The Full Life Cycle Use Case should be visual, using diagrams, flowcharts, or other methods that show sequence.
Start by mapping out the process from beginning to end for your Persona and then check to see if it is consistent with other potential customers as well.
A High-Level Product Specification is, at its core, a drawing. It is something you draw without understanding all the underlying details, but which gains consensus within your team on where you are going. If the product is software or a website, storyboards should be made showing the user’s logical flow from one screen to another. If it is hardware, then diagrams are useful. The key here is that you have something concrete and specific enough that your team understands thoroughly.
This simple visual representation of your product can now also be shared with potential customers, immediately generating an unambiguous understanding of your product. You are not selling the product, but are merely iterating with customers so that you more thoroughly understand the strengths and weaknesses of your product spec.
The process of identifying and outlining your High-Level Product Specification is further strengthened by describing the various features of your product, explaining how these features translate into function, and most importantly, describing the benefits your customer gains from each. Be specific about what you are offering, and how each component of the offering benefits the customer.
Quantified Value Proposition = the benefits the Persona will get from the product turned into a tangible metric that aligns with the Persona's top priority(ies). In a simple view of the world, benefits fall into three categories: better, faster and cheaper.
If their top priority is time to market for producing goods, and your product’s value is that it will lower the cost of production, your value proposition will not persuade your target customer to buy your product. And if your product also lowers the time to market, you should focus your Quantified Value Proposition on that.
You need a simple comparison that is as quantifiable as possible.
One potential danger of focusing solely on your Persona is that you could build your business to be too specific, focused only on the Persona without the ability to sell to other customers. If the Persona is done correctly, this will not happen. The TAM calculation was the first checkpoint to guard against hyper-focus; this step is another one. Also, the output of this step, a list of 10 potential customers beyond your Persona, will be highly beneficial to you as you proceed.
Some negative feedback is expected. If the only feedback you get is “everything is okay,” then it is likely that the customer doesn’t care much about your product and its value to them.
- List more than 10 potential customers and include any information about them from the existing research. Each of them should be similar to each other and to the Persona.
- Contact each potential customer on the list and present the Full Life Cycle Use Case, the High-Level Product Specification and the Quantified Value Proposition. Determine whether the customer’s needs and ideas are in line with what you’ve established thus far. Especially validate the hypothesis regarding the Persona’s top purchasing priorities.
- If a customer validates your hypothereses, ask if they would consider providing a letter of intent to buy your solution. If they are extremely enthusiastic, you can even ask them to prepay for the product.
- If the feedback is not aligned exactly with your assumptions, take good notes and think how this affects your analysis.
- Possibly having new data, go back and revisit some of your earlier assumptions. Determine whether to contact additional customers (the target is 10 customers who are truely intereseted in the product and are aligned with the Persona).
- If you cannot create a list of 10 such customers, you may need to reconsider the beachhead market.
- Do not share the list of customers or gathered info with others outside the company.
If the Persona is a statistical outlier relative to the target customer group, it will not only be a poor source of information, but it will lead you to develop a product your target customer might not want. While validating the Persona, you may also uncover other interesting traits that customers share with the Persona, which will allow you to revise the description of the Persona to make it stronger.
It is something that you do that will make you better (more effective) than anyone else at producing a solution for your customers. That single thing that will make it very difficult for the next company that tries to do what you do. It could be a very small part of the overall solution, but without it, you don’t have nearly as valuable a solution.
- Network Effect: You become the standard by achieving so much critical mass in the marketplace that it does not make sense for potential customers to use another product (eBay, LinkedIn, Facebook, Google).
- Customer Service: By establishing processes and culture that focus on excelling at customer service, this potential core allows you to retain customers at a very high rate as compared to competitors. It will also allow you to attract and obtain customers in a much more efficient way, as your customers become salespeople for you.
- Lowest Cost: Often it is not a Core, but rather an entry strategy for companies who then choose to compete on something else.
- User Experience: The strategy here would be to become the best at developing and continually improving the UX through the company’s emphasis on it (Apple).
Defining the Core is more inward-looking and less research-based than the other steps so far. You will rely on this internal introspection, combined with external data gathering and analysis.
It should integrate many different considerations: what the customer wants, what assets you have, what you really like to do, what others outside your company can do, and what the personal and financial goals of the owners are. When you arrive at an answer you should be highly confident it is accurate. You cannot be changing your Core like other elements in this process. (That being said, it does happen that Cores change as you learn more about your market.)
- Intellectual Property: It is possible to be the Core but is depends heavily on the industry. In the medical industry, especially the biotech industry, patents are incredibly important but in others, they are not sufficient. For instance, teams with high levels of capability in an area will continually produce innovative goods, over time overwhelming a company that is built around one or a small number of patents.
- Company Culture: It can be an advantage to build the company culture and processes that innovates incredibly fast. However, this strategy is difficult to sustain as a unique Core as your organization scales, because as smaller companies enter the market, they will have advantages that allow them to be nimble as well. Do not rely solely on speed of innovation as Core, but rather use it as a motivator.
- Competitive Position: The customers very likely will not see your Core as the reason they buy from you. They will instead look at your Competitive Position (Step 11). Your Core will drive your ability to deliver certain benefits to the customer, which has to translate into value for the customer (based on the customer’s top priorities), which then leads to a better Competitive Position.
- First-mover Advantage: The term refers to a company being successful solely by being the first in the market. However, most companies that are first to market end up losing the market to a later entrant who outperforms the first company. It is advantage but cannot be your Core.
- Locking up Suppliers: One way to gain a competitive advantage is to anticipate the key elements of your solution and lock in vendors on an exclusive or a functionally exclusive arrangement. It is a good strategy to slow down your competitors but it is not your ultimate Core.
The chart shows the position of your competitors and you aligned with the customers top two priorities. It also marks the current status quo of the customer – which is the toughest competitor of all.
Create a simple matrix/graph as follows:
- Divide both the x-axis and y-axis into two halves.
- On the x-axis, write the number-one priority of your Persona.
- On the half of the x-axis closer to the origin, write the “bad state” of this priority (e.g., if the priority is “reliability” then write “low” here).
- On the other half of the x-axis, write the “good” state of this priority (e.g., “high” for “reliability”).
- On the y-axis, place the number-two priority of your Persona. Write the “bad state” on the half of the y-axis closer to the origin, and the “good state” on the other half of the y-axis.
- Plot your business on the graph, along with those of your competitors (current and future). Also include the customer’s “do nothing” or “status quo” option.
- Champion: The champion is the person who wants the customer to purchase the product, typically but not necessarily your end user.
- End User: This is the person who will actually use the product to create the value that is described in Step 8. Plays a significant role in the purchase of a product.
- Primary Economic Buyer: This is the primary decision maker, as everyone else looks to this person to sign off on spending money to purchase your product.
- Primary and Secondary Influencers: These individuals often have a depth of experience in the subject matter, and can influence the rest of the DMU. They can also be not individuals within the company but web sites, blogs, public figures, etc.
- Person with Veto Power: These individuals have the ability to reject a purchase for any reason. Often, in a B2B environment, this individual outranks the advocate or end user in a corporate hierarchy.
- Purchasing Department: This department handles the logistics of the purchase. They can be another obstacle, as this department often looks to drive prices down, even after the decision to purchase has been made.
Operating in "inquiry" mode talk with the customer to gather information about the DMU. This is an excellent time to ask the customer:
- Assuming we could produce the product we have described, what would need to be done to bring a product in to test out?
- Who besides you (make sure you make them feel good!) would be involved in the decision to bring our product in? Who will have the most influence? Who could stop this from happening?
- Assuming the product does what we believe it will do, whose budget will the money come from to pay for it? Does this person need anyone else to sign off on this budget?
- Who will feel threatened by this and how will they react?
If the Advocate or Primary Economic Buyer are not your Persona, you will want to build a fact sheet similar to your Persona fact sheet for the individual in each role.
Using the information from the Full Life Cycle Use Case and the DMU you should break the process to acquire a paying customer in steps and estimate how much time each step takes. This steps will usually include: lead generation, access to influencers, pre-purchase planning, purchasing, and installation. These elements will also have subelements.
For each step in the process include:
- Who are the key players from the DMU that will be involved?
- What is their influence on the process? This is information you have already obtained in Step 12 but now we are putting it in temporal order.
- What is their budget authority (amount and type)?
- How long will it take to complete each component you identify? List them in temporal sequence noting any that can run in parallel. (Be diligent.)
- What are the inputs and outputs of this step?
Key factor is the budgeting/purchasing authority of each individual included in the process. For instance, if an individual can purcahse items up to $5000 without approval from a more senior person, you can shorten the sales cycle by reducing the price based on these limits.
Another key factor is whether payment will be made from operating or lenger-term capital budget. In some companies, it may be much easier and faster to get approval to include an expense in the operating budget than in the capital budget; but with other industries and companies it may be exactly the opposite.
Two types of follow-on markets:
- selling the same customer additional products or applications (upselling). One benefit is that you can use existing sales and distribution channels to sell the new products. However, making additional products will likely stretch your business beyond your Core, which may hurt your Competitive Position in those markets, unless your Core is something related to customer relationships.
- selling the same basic product to markets similar to your beachhead.
Identify some follow-on markets and determine the Total Addressable Market (TAM) for those markets. Use all techniques from step 4. You need not and should not spend much time at all on this step right now. It's just to keep you (and investors in your company) cognizant of the long-term potential of your business.
The business model is hard to change on a latter stage so it's worth to spent time on figuring it out. The track record shows that companies that spend time and effort on innovative business models can see enormous payback.
A business model is not pricing. It is a framework by which you extract from your customers some portion of the value your product creates for them.
"Fremium" is not a business model, it can be a means to a certain end.
- Customer: Understand what the customer will be willing to do.
- Value Creation and Capture: Assess how much value your product provides to your customer and when.
- Competition: Identify what your competition is doing.
- Distribution: Make sure your distribution channel has the right incentives to sell your product.
- One-time Up-Front Charge plus Maintenance
- Cost Plus: The customer pays a set percentage above the cost of producing the product. This model might be attractive when your product is immature and later migrate to a different model. It can also create incentives that reward activity rather than progress.
- Hourly Rates: Also tends to reward activity as opposed to progress.
- Subscription or Leasing Model: can be annual, multi-year, month-to-month, etc.
- Licensing: licensing intellectual property and selling it to customers.
- Consumables: low up-front cost and high-margin ongoing costs based on usage.
- Upsell with High-Margin Products: similar to consumables model - low-margin base product sold with high-margin add-ons.
- Advertising
- Reselling the Data Collected
- Transaction Fee: comission on generated sale.
- Usage-Based: pay for what you use.
- "Cell Phone" Plan: pay for basic package and pay more than that if you overuse it.
- Penalty Charges
- Microtransactions: small transactions for digital goods (e.g. in facebook games).
- Shared Savings: fixed percent from the profit made for the customer; usually hard to implement because it's hard meter the exact profit that the product makes.
- Franchise
- Operating and Maintenance
Whereas your Business Model is much less likely to change, price points are often subject to change based on market conditions. Your goal for the moment is to create a first-pass strategy that will allow you to calculate the Lifetime Value of an Acquired Customer, which along with the Cost of Customer Acquisition is an important variable that indicates the profitability of your business.
- Costs Shouldn’t Be a Factor in Deciding Price. Price should be based on the value the customer gets from the product, rather than on the costs. The exact fraction of this value depends on the competition and the industry, but 20 percent tends to be a reasonable starting point. a. The percentage of customer value that you can capture depends on your business model and how much risk you are pushing onto your customer. b. If costs come up in conversations about your product, make it clear that your price is not based on cost. c. Don’t give out your cost numbers to anyone who does not have a real need to know. Definitely do not tell your sales group because any good salesperson will use any and all of their resources to make a sale.
- Use the DMU and the Process to Acquire a Paying Customer to Identify Key Price Points. Knowing an individual's purchasing authority limits can help reduce friction in the sales process.
- Understand the Prices of the Customer’s Alternatives. From the customer’s perspective, what are the alternative products available, and how much the customer would pay for each, including the status quo?
- Different Types of Customers Will Pay Different Prices. Geoffrey Moore breaks customers down into five waves: a. Technological enthusiasts will only buy one but they want to have it right away hence willing to pay more. b. Early adopters are also price-inelastic but are very interested in feeling like they got a special deal and will require lots of attention and extra service. c. The early majority (pragmatists) is where you will make yourself a great and truly scalable company. That is the price point that most of us think about when we are talking about and planning for a pricing strategy. d. The late majority (conservatives) e. Laggards/skeptics
- Be Flexible with Pricing for Early Testers and "Lighthouse Customers". The first will collaborate with you to improve the product and the latter will influence purchasing decisions of other in the industry. Be flexible with pricing on these groups but do not give your product away to these customers, and do not discount any ongoing revenue streams. Have them sign an agreement where their pricing terms be kept confidential.
- It Is Always Easier to Drop the Price Than to Raise the Price.