About 20% of businesses fail in the first year, according to recent statistics from the Small Business Administration. Only about 50% survive after 5 years. The reason is not that people are incapable or decide they don’t like being business owners. The reason, I think, is because new business owners don’t plan much beyond the first year and they don’t do the right research before they start. They neglect to understand who their customer is, what they want, and where the customer is going to find the product or service.
Perhaps more concerning, I see a lot of businesses forget about managing their personal finances and fail to build in adequate safeguards and contingencies with regard to their finances (personal and business). Saving up a long financial runway gives the business owner the best possible chance of success. Without it, the new business owner tends to make very reactive decisions such as taking on high debt or engaging in short-term thinking that turn into eventual failure. This is not the end of the world because we all can learn from failure. But much of this is completely preventable.
The first step you’re going to need to take once you have your idea is to validate whether this idea can succeed. I call this “market proving” your idea.
Want help? Read more about my business planning servicesHow to market prove your idea
Does your business idea make sense to anyone but you? Hopefully! But how do you know? You’re going to have to talk to people. Steve Blank, one of the founders of the Lean Startup movement calls this, “getting outside the building.”
Blank helped pioneer the idea of failing fast so that you don’t invest your hard-earned dollars on a product or service that is doomed to go belly-up within a few years. Customer development should be the focus of any startup’s business model, according to Blank. You’ve got to first seek external validation for your idea (it can’t make sense only to you), then develop the value proposition for your business (the reason why you exist), and then finally develop customer segments so you know how to reach your target audience. The following lays out a series of questions that you must answer before moving forward, taken from Steve Blank’s online lean startup course.
Seek external validation
You’ve got to get tons of data, not just through online sign-ups, email lists, or surveys. You have to talk to real-live people. Once you find someone you want to talk to (ideally someone who would be a potential target customer), start by introducing yourself and state you have an idea you’re trying to validate that does <whatever your idea does>. State your goal — perhaps something like — “to evaluate whether it’s a worthwhile idea to pursue.” And then finish up by saying all you’re looking for is information from an unbiased source (you’re not selling anything). Then jump into your questions:
- What is a big problem that you have related to <your idea>?
- How have you solved it in the past?
- Is that solution sufficient?
- How would you feel if you couldn’t have <this product/service>?
- Based on what we talked about today would you be willing to see the service when it’s ready?
- Also, would you introduce me to any other people that I should talk to?
Everyone likes to think they have a unique idea. However, finding out you have competition (even indirect competition) may be one of the very things that helps validate that you’re entering into a real market with real customers. The challenge will be in differentiating yourself from whatever alternatives exist, and that’s what some of these questions are designed to cover.
You’ll probably need to talk to a lot of people (more than 10 but probably not more than 100) to fully understand their needs. This is why having a network within the space you’re trying to break into is so valuable. The more you talk to people who say they’re ready to buy a product or service like the one you’re describing, the more you know you’re on the right track. However, don’t make the sole purpose of these interviews about selling or closing, it’s primarily about gathering information for further exploration. And, don’t put yourself in a position of asking only people you feel friendly with for feedback. You’re friends are more likely to feel bad about giving you direct, negative feedback, skewing your results.
Pay attention to confirmation bias here. Our brains will tend to place a higher weight on pieces of information that prove our current beliefs. Challenge yourself to spend extra time with someone if your idea falls flat with them. It may end up helping you further improve and iterate the service/product offering. This is another reason why you need to talk to dozens of people instead of just a handful.
If you don’t have a product that customers are ready to buy, you’re not financially ready to start your business.
Get serious about your value proposition
Once you talk to people to understand their needs and concerns, it’s time to get a few things on paper as a starting point for more research. Write down answers to the following:
- What are you offering as a product/service?
- Are you solving a problem? If so, what is it?
- Are you saving time for people?
- Making something easier for them?
- Making something faster/cheaper to access?
- Providing specialized information?
- Providing a solution that different or better than other providers?
- What are the alternatives your ideal customer will be evaluating?
You’ll need to specifically define how you solve a problem for each market segment you plan to target (see below). It’s ok to spend a ton of time experimenting with different variations to see what sticks.
Develop customer archetype(s)
Once you have an initial value proposition, it’s time to figure out how you’ll reach your target audience, informed by the interviews you’ve had. Jot down answers to the following:
- Who are your target clients or customer segments?
- What needs, demand or problem are you solving for each type of customer?
- Where do they have pains or what do they stand to gain by buying your product?
- What do they read?
- Where do they spend time?
- What do they like and where do they shop/get information?
- If they were looking for a product or service like yours who would they ask first?
- Where else would they go to find a product/service like this?
- As a business owner, how can you access these sources or marketing channels?
- How will you acquire your target customers and keep them as paying clients?
If you don’t have answers to some/all of these questions yet, it’s time to “get outside the building” and talk to more people.
A word of caution: How many customer segments are you working with? If it’s more than 5 or 10, it’s time to thin out your list. Try to find the top 2 or 3 customer segments where you stand the best chance of success. If you 1.) have a ton of data/information on these customer segments, 2.) know you have a solution that helps, and 3.) know how to get in front of them so they can find you, you’ll have a greater chance of success. With those 2-3 specific market segments, you can continue to refine your ideas by talking to more and more people in this target demographic to find out more and better ways to serve them.
Answering these questions and market-proving your idea will give you a foundation for writing a stellar business plan. In fact, answering these questions means you probably have 80% of your business plan written.
Notice I haven’t discussed anything related to financing this project or the costs of owning a business. These are very important things to figure out, of course, but at this stage, you must first find out if you have an idea that’s market-proven and ready to go. I will tackle the funding and financing aspects in another blog post.
Doing this research is time-consuming and challenging, but extremely beneficial. Always be focused on providing value to the customer. Don’t get bogged down in operations such as where you will host your website, where you will bank or what colors are in your logo until you’ve completed this comprehensive foundation for customer development.
Further reading:
The Startup Owner’s Manual by Steve Blank and Bob Dorf
Art of the Start by Guy Kawasaki
The Lean Startup by Eric Ries
The E Myth Revisited by Michael Gerber
