Product, meet market
Just build it and they won't come.
Thursday, January 26 2012 || Features || BY Christine Nikiel
In their eagerness to dive into the market, a surprising number of companies still take the ‘build it and they will come’ approach. They overlook a crucial step that will make or break their business, especially if they plan to export. It’s called market validation and involves the seemingly obvious: market research and confirmation of customers.
According to US-based entrepreneur, angel investor and author Rob Adams, 65% of established US companies don’t validate their markets before building a product. For startups the failure rate swells to an alarming 90%. That data isn’t related to recessions or other tough business circumstances either. Those numbers have been stubbornly constant for 30 years, says Adams.
There are no figures for New Zealand, but Duncan Ledwith, who started the Icehouse’s market validation programme three years ago, says seven out of 10 companies fail the programme. Why? While there’s heaps of innovation here, Scots-born Ledwith reckons our number eight wire attitude to solving problems is also applied to commercialising products or services - and it doesn’t work.
“A lot of people think, ‘I’ll hop on a plane and fly to London and meet a contact I know and it’ll be right’. That’s being product-centric rather than market-centric.”
Ledwith, an executive in residence at the Icehouse, an active angel investor and a lecturer in marketing strategy at the University of Auckland, knows the cost of failing to validate the market. The first time (he admits there were several) cost him US$4 million.
In 1998 Ledwith, then marketing director for Microsoft Europe, and a colleague decided to go to New York and get into the fledgling online music business. They bought a company that collected data about CDs — track length, recording artist and so on — something online retailers would need.
Unfortunately the data wasn’t in the format their potential customer actually wanted and they were forced to hire 600 students to reformat it.
Next time, Ledwith says, he’d get a sample of data and take it to the customer first.
“I’d say, ‘I think your problem is this, I think it will manifest itself like this and because of that the cost to you will be this. How much are you prepared to pay for a solution?’”
Chris Boys, founder of Katabolt, a consultancy designed to fast-track Kiwi companies into overseas markets, says the following three questions can be applied to any product or service in need of market validation.
“What’s the pain or problem that needs to be solved and who has it? Will my product or service relieve that pain? How much is the potential customer prepared to pay for that relief?”
That last question is a key point of the sales cycle, says Boys, because it’s the company or entrepreneur’s first lead and sales opportunity and shows how successful their sales pipeline will be before a product or service is even developed.
