Alex Laats is President and COO of ZeroTurnaround.
I’m a bit of a workout enthusiast and was trying out a new “upscale” gym. As I was leaving one day, feeling healthy, there was a man at the exit handing out free plums. He told me they were local-grown plums and at the same time told me they were opening a new store for this kind of local fresh produce “just around the corner.”
As an entrepreneur and business enthusiast, I thought, “Hmmm … this guy has a pretty good idea of his product-market match.” He has fresh, local produce and a small store where he sells the produce at premium prices to health-conscious people willing to pay higher prices for things like gyms and better food. Cool …
When you have a great new technology, it’s not always easy to determine how to package the technology in the form of a product that will appeal to a certain market. A good product-market match is difficult to achieve, and it’s a core reason as to why most tech start-up technology businesses end up in failure. So, how can we stack the deck in favor of success? A good way to start is by selecting a few common assumptions that can easily become pitfalls, and some suggestions on how to avoid them.
Assumption #1: If we build it, they will come
Technology entrepreneurs are often so smitten with their technology they think that’s all that is necessary in order to attract customers. What matters is not whether the technology is great, rather whether or not the technology creates a performance or price advantage that will motivate a customer to buy.
Assumption #2: HUGE market = we will take all of it!
Many entrepreneurs take too broad a view of their target market. In 1999, I started a company whose goal was to enable access to applications from mobile devices using a combination of VoiceXML and wireless access protocol. Our definition of our target market was initially ‘mobile phone users.’ We had a false sense that we were going after a huge market, when, in reality, we hadn’t done a good analysis of which mobile phone users would derive the most value from this functionality and for what content or applications. If your analysis is based on a high-level view of the market and it boils down to a few technical employees saying, “This market is huge!” I encourage you to go back and do a deeper analysis.
The reality is your actual target market is probably a sub-segment of the overall market. In the case of my first company, we developed a VoIP-based replacement for a traditional business telephone system. The overall market for business telephone systems was $10B, but the portion of the market that was addressable by our technology was the small business segment. This segment of the market was still greater than $1B in annual sales, so there was still plenty of room to build a company.
Assumption #3: Just wait — this market is going to emerge (and we’re going to make it happen)
When you’re disrupting an existing market, you know there are many customers who are spending money for an existing solution. The challenge is to use your technology to create a product with a price and performance improvement, where your technology has a competitive advantage over others.
If the market has not yet emerged, it’s a greater challenge because you must predict the market will emerge and your product will have the correct price and performance. This proves extremely difficult, but there are certainly success stories (Apple) that fit this profile. Entrepreneurs (Steve Jobs) who can ‘intuit’ the emergence of a marketplace are few and far between. However, if you can do it, you may have fewer competitors in the early going, especially if your solution basically enables the market to emerge.
Assumption #4: I can see the market clearly, so I must be able to connect with it
Product-market match is not just a function of figuring out what the features and pricing of a product need to be in order to win sales from a segment of a target market. It must also contemplate the ‘path to market’ via marketing and sales. If the marketing and sales is not cost effective, you don’t have a business.
Referring back to the case of my first company, once we decided on the small business target market, the question was then how to set up our sales and marketing in order to reach the small and medium business customer. Answer: go where the typical small to medium business customer buys their business telephone system. In the US, that is the independent reseller, so we structured our marketing and selling effort to enable resellers all around the US to sell our system, and we generated pull by selling directly to small businesses and handing the deals over the resellers as a means of generating momentum. It was a ton of work, but it was successful!
Final Assumption: I have enough gas to finish the journey ... right?
Often, technology entrepreneurs start a business and discover their product-market match via an iterative approach of trial and error. Build something. See if someone buys it. If not, modify and try again. This process works under certain circumstances, but it’s the equivalent of exploring a cave with no light. It often results in dead ends, and most entrepreneurs don’t have the resources to explore endlessly. Think about value from the end-user’s perspective, and identify a market segment where the price-performance advantage is most acute. Spend a moment to examine whether the market segment is big enough to make it worth your while, and don’t forget to figure out what it will cost you in terms of sales and marketing to reach the market. Whether you are mortgaging your home or raising venture capital (or both), you don’t want to run out of cash before you’ve found your product-market match. Once you’ve found it … everyone wins.
The views expressed are those of the author and do not necessarily reflect the views of BusinessNewsDaily.