Series entrepreneur, angel investor and founder of reformulate.
Too often, entrepreneurs start out with a product in mind to fill a need they have personally or a need they have sensed in their lives. While life events and personal issues can be great sources of inspiration, it is important to approach a market carefully by listening to customers and assimilating their needs before embarking on a solution.
Here’s how to get started:
1. Define the customer problem.
Define the customer’s problem as completely as possible and assess how many people have that problem before building a product around it. Even if you’re dedicated to a specific industry, it’s helpful to ask, “Which industry should we be in?” Collecting data about demand logically leads you to a product that can meet it. A good way to assess this question is through keyword research.
When it comes to keyword research, it’s important to understand how customers search for your product and what keywords they use. This allows you to assess whether there is sufficient demand for your product and understand how customers search for your product. If you can identify the most popular keywords, you can target those keywords in your digital marketing efforts and drive organic traffic to your product.
After determining how much demand there is, collect data about customers’ willingness to pay. You can look at industry or analyst reports how much money is being spent in this sector or in particular on this issue over time and whether it is increasing.
2. Limit yourself to a first target market segment.
It is often imprudent to go after a large, undifferentiated market without first understanding which segments can help you achieve the highest return on your effort and investment. You can’t be everything to everyone, and you never should be, because you can build great businesses by fitting a single product into a single market.
To do this, it’s important to focus on a specific customer segment and build your product or service around their needs. In this way, you can create a more targeted and personalized offer that is more attractive to your target market. By focusing on adequately meeting their demand and understanding their willingness to pay, you can set your prices accordingly and optimize your marketing efforts to reach them more effectively.
One way to assess how valuable a particular segment can be is to see how much other companies are willing to spend targeting specific keywords in specific demographics. If the costs per click are high, you can reasonably assume that there is a high willingness to pay among customers in that segment. In addition, many keyword search tools also indicate the degree of purchase intent associated with a particular keyword or phrase. While such phrases have fierce competition with paid ads, there are many cost-effective ways to compete for such terms and clicks.
3. Dive deep into existing solutions.
You learn almost as much about your customers by studying existing solutions as you do by studying the question itself. At worst, competing products can give you insight into how a problem is currently being addressed; at best, they can serve as templates that you can use to create something that delivers even more value to customers.
To understand the value propositions of existing products, compare their functions to the tasks customers are trying to perform. Identify any points of inconvenience, confusion, or overall poor user experience. Also note which products are doing well and which customer experience principles they adhere to, as you want such principles to guide you in your own product development.
4. Analyze competing business models.
Look at your competition’s business model. What are the key components of their business that make it difficult for new entrants to compete? Do they benefit from upsells or cross-sells, or can they offer their products at attractively low prices? You should also look at your competition’s distribution channels. Do they have exclusive relationships with distributors or retailers, or do they sell directly to customers?
Finally, you want to understand customer loyalty. You can best understand loyalty to existing brands by looking at their churn or the percentage of existing customers who cancel or don’t renew their services. You can also look at the rate at which existing customers drop out or downgrade to cheaper products, but the latter is often hard to find in publicly available information.
5. Guessing how this market will evolve.
It’s easy to get excited about the high market demand and the recently growing demand for a particular type of solution. Many entrepreneurs raise money on the assumption that such growth will continue, linearly or even exponentially extrapolated from recent trends.
However, it is important to conduct a scenario analysis to understand not only opportunities for growth and expansion, but also to account for potential headwinds such as new competitors saturating the space, declining demand due to obsolescence ( think DVDs) or reduced consumer spending due to macro forces such as inflation. Taking such headwinds into account and strategizing for profitability in light of them will give you a margin of safety that will enable your business to be resilient in the face of adversity and remain stable in the face of poor fundraising conditions.
While much of what you can do in forecasting scenarios is wavy by hand, you can see concretely how customer acquisition costs have changed relative to product prices over time and begin to estimate what to charge for what kind of product and how much you’ll have to pay to bring customers to you. Once you have a good idea of this, you can start ranking solutions based on what seems most feasible. If you do this right, a product that fits into its market and is the most attractive option should be a logical consequence.