I see this mistake all the time… Build your product and automatically customers buy it at the exact price you originally intended.
Many entrepreneurs make a fatal mistake of believing that just because they see the vision and value for a given product, the rest of the world, or at least enough market share to support their company, will see the same. This could not be further from the truth. Now in some cases, people and companies get lucky, but we may as well not deal with luck here, rather solid market insight which should provide a more predictable outcome.
Test Test Test
When you are thinking of launching a product, and you’re in the visionary state, begin to discuss the idea with some trusted, confidential advisers. Find smart business people who can give you their opinion on whether or not it’s a good idea, or will suggest changes that might make it a great idea (I have a whole section on advisers and advisory boards here). I find entrepreneurs are very protective of their intellectual property, which is justified in many cases, but when you’re thinking about whether or not a product will work in the market and sell at the price you need to justify your margin, you need to figure out if this is feasible ahead of time. Entrepreneurs that go about it backwards, launching, taking capital, hiring (and thus taking on liability), and find that their product could flop in the market.
Once you have run your ideas by your initial advisers, and you’ve received enough positive feedback to proceed, the next and immediate step should be to reach out to prospects and ask them if they would have a confidential, early-stage conversation with you. Talk with your would-be customers to understand if your product is going to add value, and even better, what changes or enhancements should be made, and what price is acceptable?
Don’t Fool Yourself
One of the biggest mistakes I see with entrepreneurs is even if they get the product right, they don’t have any indication of what the customer will pay. It’s easy to fool yourself when customers say they would love to have it. It’s harder to fool yourself when after customers say they want it, you then ask them if they’re really willing to pay the price you want to charge. Everybody wants the Ferrari, but most don’t want to pay the cost. So you have to be careful here. When asking for feedback from your prospects, be sure to discuss pricing. Tell them that it will be X amount to purchase the product, or per month or per year, and really understand if they are willing to pay that price for that value. Many entrepreneurs don’t want to have this conversation because they aren’t sure how to do it.
Make It Hypothetical.
Ask them in a manner that allows them the ability to creatively imagine how they would use the product and subsequently ascertain the value, and then compare that to the cost. Something like this might work, “suppose I could bring this widget to you that would change your life in this way. It would make it much easier and less expensive for you to do business, and it would have a return on investment estimated at this. Would you pay $1200 a year for that?” By using a supposition, the customer feels relieved that they don’t have to commit to anything because it is all imaginary. However the insight you gain is valuable.
Ask Enough People
Be sure that you take the above scenario to enough customers and advisers to gain the feedback you need. Using social networking or business networks like LinkedIn, reach out to people and ask for a phone call or presentation. Don’t rely on email to gain your insight as it’s impersonal and asynchronous. But rather talk on the phone or meet in person because you might learn more through the customers intonation and tone, than you will from their words.
Competitive Information Avoids Competitive Decimation
Or, we find that we have a great idea for product but we didn’t know that a company like Google might be developing the same just to launch it for free. Look at what happened with digital maps and mapping. Google Earth, and Google maps essentially put many companies out of business. By giving away mapping for free and then integrating it everywhere, mapping companies got blindsided. I’m going to guess, and I don’t have proof, that there may have been some mapping companies that were thinking about launching right around the time that Google gave maps away for free. I’m hoping that those companies sought advice, and made the appropriate changes so that there wasn’t significant loss.
By testing in the market, and speaking with your advisers, you may gain competitive information which would lead you to a new approach for your product, or may have you scrapping the product altogether. You’d be amazed at what your customers or potential customers might know about other solutions. Your advisers may have insight on potential competitive products.
Be a Marketing Madwoman
By aggressively reaching out to dozens of potential customers far before your product is ready, you accomplish all of the above but additionally, you are seeding your market and you can re-approach the same prospects when your product is in beta or ready for market. You might want to try rewards-based Crowdfunding for your product. I worked for the company that successfully launched a crowdfunding campaign prior to raising their series a round of capital. They pre-sold the product and then shut the campaign down once they hit the numbers they needed and this proved there was demand for the product at specific prices. Again, you’re reducing market risk if you have prepaid orders. For more on Crowdfunding click this link.
Investors Love This
I recently I spoke with the company who successfully deployed the above strategies. They went out to over 100 customers, gained enough positive feedback and validation that when they went to investors, they actually had prospects who would give them hypothetical testimonials. In other words the prospects were so excited about what was coming, they were willing to let an investor know via phone that they would buy it when it was ready if it delivered on the product marketing promises, and was at the discussed price. Of course the investors found this extremely valuable and investment capital flowed easily to this company. Generally investors look to reduce risk and increase upside. When you can reduce market risk, then you’re left with technical risk management risk and a few other types of risk. By using the above strategies, you’re making it easy for investors to invest, customers to buy, and most importantly you’re justifying that you should launch.
Negative News Can Be the Best News
You might also find that you cannot get customers to care about your product. Or they care but they’re not willing to pay the amount you plan on charging. Better to know this early so that you don’t waste an enormous amount of time and effort, along with investor capital. It’s critical to understand your customer traction and the earlier the better. Again my suggestion is to got your customers before you even start building your product to understand whether or not you should launch the company. The fact is that 90% of businesses fail. By deploying early market validation strategies, you can be part of the 10% that succeed.