At some point, every aspiring entrepreneur has to ask themselves how they intend on turning their brilliant, back-of-the-napkin idea into an actual business. I'd recommend starting with idea validation (i.e. make sure it’s a good one!).
Idea validation is the process of testing your idea in order to validate if your target audience wants, and is willing to pay for your product or service - before you spend your life savings actually building it! This process will help you better understand the opportunity, identify gaps, and help ensure you build something people want.
While every business is unique, the following ‘8 Steps to Validate Your Business Idea’ provides a framework to help assess whether your idea is worth pursuing.
1. Solve a ‘Real’ Problem
Your idea must solve a 'real' problem that the market (your potential customers) agrees is worth solving. If not, your product or service will be a total bust.
Many first time entrepreneurs focus too heavily on the product first, without thinking about the problem. Out of excitement, they begin listing dozens of features and jump straight into building the ‘next big thing’, convinced that people can’t live without their product.
To avoid building a product that people don’t want, start by validating the problem by talking to potential users about the problem you’re looking to solve. By asking the right questions, you can begin to understand whether your idea solves a real problem for customers, and if they’re willing to pay for it.
2. Understand Your Value Proposition
Your value proposition is the value that your product provides your target audience. It’s important to be crystal clear on the value you’re delivering. Without a clear and compelling value proposition, winning customers will be challenging.
To better understand your value proposition, ask yourself the following questions:
- Why would someone use my product?
- What benefits does my product provide to the customer?
- What value do customers gain through my product or service?
- What makes my product different from others on the market?
Your value proposition might be a single characteristic (ex. we make the best quality watches), or a combination of values (our watches are high quality, affordable, and stylish).
3. Know Your Customer
Understanding who your product is for is critical, and will shape your branding, communication style, marketing efforts, and almost everything your business does.
To identify your target customer, ask yourself:
- Who is my product intended for?
- Who is likely to use my product?
- Who is unlikely to use my product?
- What demographics is my product intended for?
- How can I describe my target customer in the most detail?
To get even deeper into who your target customer is, develop an “ideal target customer profile”. To do this, start by coming up with your customer personas as outlined in this Forbes article.
4. Talk to Potential Customers
This can’t be emphasized enough. Once you have an idea of who your customers are, be sure to talk with them before building your product.
Common excuses I hear for not doing this are “we don’t want anyone to steal our idea”, or that “we are building an MVP (minimum viable product) first, and will talk to customers once it’s ready”. While it is possible that someone may steal your idea, it’s the execution that matters most, and the truth is most people aren't willing to put in the work to execute. Additionally, if customers are the people your product is intended for, why not get their input and learn about their specific needs, before building that MVP?
Here are a few things to remember when talking to potential customers:
- Ask for brutally honest opinions.
- Don’t be shy to talk to anyone and everyone.
- Prioritize responses from people in your target audience over friends and family.
- Seek out what people don’t like about your idea, rather than what they do like.
- Ask if they think your product solves a real problem.
- Ask if they would be willing to pay for your product, and how much.
5. Market Dynamics
Research the market to understand the history, current state, and future opportunities coming down the pipe. If you’ll be building a business in this space, it’s best to go deep and learn as much about the market as possible.
Some common considerations here include:
- How big is your addressable market? *(more below)*
- What have others tried in this market? Have they succeeded or failed? Why?
- Is the market growing, stagnant, or shrinking? Why?
- What new products or innovations are moving this market currently?
- What’s coming down the pipe and expected to change the market in the next 5, 10, and 15 years?
- What are the barriers to enter this market? What defence will you have against competitors?
*Your market size calculations must be realistic, and backed up by credible sources. Avoid using generic market size statistics that don’t accurately speak to your segment of the market. It’s not sufficient to reference that the market is $10B and if you only get 0.1% of that, you’re worth $10M. This shows that your thinking around winning market share is naive.
6. Who’s the Competition?
With 7.7 billion people on the planet, chances are you’re not the only one to come up with this idea. Instead of being discouraged, use your competitors to provide insight to how well the market is responding. If it’s a relatively new or unique idea, having competition can be helpful in creating awareness around the product, which can end up saving you marketing dollars down the road.
When doing competitor research, be sure to look at:
- How many companies are in this space?
- Are there any dominant players in the market?
- How long have they been around for?
- Is their offering identical to yours, or a variation?
- How is your offering different from the competition?
- How well does the competition appear to be doing? (Think about team size, funding, partnerships, duration in market, user reviews, etc.)
- If others have tried and failed - why did they fail?
If your competitors are large legacy companies, you don’t necessarily need to be terrified. As a startup, your advantage is speed. If you can achieve more traction than a larger, slower moving company in a short period - you may be a good acquisition target. Counterpoint - it’s naive to think you can beat one of the big 4 (Google, Apple, Facebook, Amazon) at a race that they're five miles ahead on.
7. Business Model (How You Make Money)
A business model is simply ‘how you make money’. Without a sound business model, you won’t have much of a business. Having a strong business model (a good way to make money) will help your business be more attractive to investors, provide financial returns to owners, help to grow the business by reinvesting profits, or even be a target for acquisition down the road.
When exploring your model, keep in mind that you need to be able to charge customers a fee that is large enough to pay for a) your ability to market your product and attract customers, b) pay for the product itself, c) pay your staff, d) pay all of the overhead related to the business - and still have money left over (profit).
If you don’t have a business background, developing a business model may sound a bit technical. It can be, but let's start with the basics.
Ask yourself:
- How do we plan on making money?
- Who will pay our company? Individuals or businesses?
- What price are customers willing to pay?
- How often will customers buy from us?
- Do we charge a one time fee for the product or service, or a recurring fee?
Then, to start validating the economics behind your business model and pricing, consider:
- What are the expenses for every unit sold? (This is known as the Cost of Goods Sold, or COGS)
- What gross margin do we need in order to build a sustainable business?
- Do we make money on the first transaction, when including our customer acquisition cost (CAC)?
- How many purchases does a customer need to make for us to break even?
It’s unlikely you will have all of these numbers dialed in on day one, but you need to be thinking about them. As a general rule of thumb, aim for a minimum gross margin of at least 30%. Margins any thinner may pose challenges when it comes to growing your business, profitability, and sustainability. Margins will vary dramatically depending on the type of business - but again, general rule of thumb.
8. Launch an MVP & Test the Market
After getting clear on the problem you’re solving, your value proposition, your customer and their needs, the market, who else is doing this, and how you make money - it’s time stop planning, and start doing. Don’t get stuck in paralysis by analysis, or by waiting to perfect your product.
Build a MVP (minimum viable product) and try getting sales as early as possible. Even if the product is far from your definition of perfect, sales are indisputable proof that people want your product. The goal of your MVP is not to be perfect - it’s to test product-market fit, and gain customer insight and feedback with the least amount of risk (time and money). You could also build a website and try to get pre-orders for your product, even before your MVP.
As famously quoted by Reid Hoffman, founder of LinkedIn, “If you are not embarrassed by the first version of your product, you’ve launched too late.”
