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Startup Roadmap: Identifying and
Validating Your Target Market
Value Creation And Entrepreneurship
STEP 0: GETTING STARTED
There are three main reasons why people start new ventures:
They have an idea to improve something or make a positive impact on the world. They have a technological breakthrough that changes how people live or work. They have a passion for entrepreneurship, even if they don't know their exact product yet.
Some entrepreneurs identify a customer pain or problem that the customer is willing to pay to fix. This is called "user entrepreneurship," and almost half of innovation-based startups that survive to the five-year mark are founded by user entrepreneurs.
It's also possible to follow your interests and enthusiasm, and eventually discover something the customer wants. Once you have an idea, you can evaluate your situation further, considering your education, knowledge base, talents, and abilities. You might also know influential people who can help you, and your ability to invest money will affect your decision.
After you have an idea, you should go through the 24 steps outlined in the book. Staying focused is essential, as you don't have a lot of time or resources when starting up. You should also start building a team that provides the skills you lack. The team's membership may change over time as the business evolves.
STEP 1: MARKET
Customers are the single most important factor for a business, so you should build your company around customers, not products. However, there are limits to letting customers guide your decisions. You don't need to chase after every potential customer on the planet.
Start by creating a profile of your target customer. The universe of potential customers includes end users (primary customers) and economic buyers (secondary customers). Often these are the same entity, but not always.
Conduct a market segmentation by brainstorming a wide variety of market opportunities. Even at this early stage, start talking to customers to see what they think. Analyze your potential market and look at the industries
where you can market your product. List up to a dozen of the best, most interesting market opportunities for your product.
For each market opportunity, answer the following questions:
Can the customer afford the product? Can the customer be reached directly, without going through an intermediary? Does the customer have a good reason to buy your product? Can you deliver your product now? Is there competition? Once you get this segment, can you get other segments? Is the market a good match for the goals and values of the founding team?
Conduct primary market research by talking to potential customers, listening to their ideas, and understanding their pain points. You want to know who the end user is, understand how your product will be used, identify the benefits of your product, evaluate any additional requirements, identify influential (lead) customers, predict your likely partners, understand the market characteristics (including size), and understand your competition.
Spend at least a couple of weeks on this market research, and in the case of a multi-sided platform, do each step for each side of the market.
A BEACHHEAD MARKET
A beachhead market is like a beachhead in war, where you pick a market and win your early battles there before spreading out. Of the six to 12 market opportunities you identified, pick one to focus on as your beachhead market.
Consider the same variables from Step 1 when choosing your beachhead market:
Does the customer have money? Are the customers accessible to your salesforce? Do they have a good reason to buy your product? Are you able to deliver a whole product to them? Is there competition in this market? If you win this market, will it help you with the next one? Is the market consistent with the goals and values of the company's founders?
Don't overthink it - it's more important to get started than anything else.
Profiling the Persona for the Beachhead Market
Create a persona to serve as an exemplar of the primary customer for the beachhead market. Gather information about the persona, including their place and date of birth, where they grew up, their education, family, job, income, and purchasing criteria. The persona can be helpful throughout the company to guide decisions, and should be updated as more information is gathered.
Developing a Full Lifecycle Use Case
Gather information about how the customer will use the product through primary market research. Map out how the persona uses the product, including how they find out about it, buy it, use it, and whether they tell their friends about it. Create visually rich materials, such as charts and flowcharts, to demonstrate the sequence of events over time. This exercise helps you understand how the product fits the customer and identify potential barriers to usage.
Quantifying the Value Proposition
Determine the customer's top priority and how your product can provide value that addresses this priority. Describe the "as-is" condition (how the customer is currently addressing the need) and contrast it with the "possible" state (how your product can improve the situation). The difference between the two is the quantified value proposition, which should be communicated through a simple, easy-to-understand visual. Avoid exaggerating the product's capabilities and maintain credibility.
Identifying the Next 10 Customers
Identify 10 potential customers that fit the description of the end user persona. Contact these people and show them the work from the previous steps, seeking their feedback and gauging their enthusiasm. Use the feedback to validate or update your assumptions and hypotheses about the persona and the market.
Validating the Core
Describe what your business gives to customers that other companies cannot provide, which is your company's core. The core is what differentiates you from everyone else and is usually something that is hard or impossible for others to duplicate. Examples of potential cores include network effects, outstanding customer service, or other unique capabilities.
Elaboration of the Text
Satisfied Customers and Market Advantage
Satisfied customers are more likely to recommend the good service they received to their friends, which can attract new customers. Low cost can be a great core feature that appeals to many customers. Another potential core feature is the overall user experience, where the entire team focuses on continuously improving the user experience. The core feature of a company or product depends on the specific business and product, but once the core is identified, it should be maintained, as changing the core can be risky.
There are other features that can provide a market advantage, such as innovative technology, but these are difficult to sustain in the long term. The core is not the same as competitive position or first-mover advantage.
Defining the Core and Competitive Position
Defining the core of a business or product is an important step in maximizing the value of the business. To analyze the competitive position, a graph can be created to compare the customer's two highest priorities, with the x-axis representing the top priority and the y-axis representing the second highest priority. The closer a feature is to the origin, the worse it is. This chart can be used to map the product, the competitor's product, and the results of inaction or the status quo option. Showing this chart to target customers and refining it based on their feedback can help communicate the qualitative value proposition.
Understanding the Decision-Making Unit (DMU)
It is important to identify who will make the purchasing decision for the end user, as this is crucial for selling the product. The main roles in the DMU are the champion (the person who wants to buy the product), the end user (the person who will use the product), and the primary economic buyer (the person who pays or signs off on the purchase and has the ultimate decision- making power). There can also be influencers, who have experience and advise the DMU, and people with veto power, such as IT or compliance departments.
To understand the DMU, it is necessary to talk to the customer and gather information about the different roles and their influences. This information should be mapped out and shown to customers for feedback and refinement.
Mapping the Customer Acquisition Process
Once the DMU is understood, the next step is to map the process of acquiring a paying customer. This includes factors such as lead generation, access to influencers, the sales cycle, installation, and compliance with standards and legal regulations. For each component, the key DMU players, their influences, and their budgetary authority should be identified, as well as how the company will be paid, who has the purchasing authority, and
COCA vs. LTV
In the beginning, the COCA is greater than the LTV (Lifetime Value) of an acquired customer. The COCA falls over time, but the question is how fast. The sooner the COCA drops below the LTV, the better.
Approaches to Calculating COCA
Using a bottom-up approach, which involves adding factors like salaries, travel costs, phone bills, brochures, and websites, is very time- consuming and often leaves room for error. Instead, a top-down approach is recommended, where you add sales and marketing budgets over time and divide that number by the number of customers acquired over the same timeframe.
Tracking COCA Over Time
To demonstrate change over time, it is recommended to calculate the COCA for several time periods, such as year one, year two, and year three.
Customer Acquisition Cost (COCA)
Calculating COCA
Very roughly, COCA is calculated as the total marketing and sales costs (TMSE) over time (t) divided by the number of new customers (NC) over time (t). If the TMSE includes a significant amount of money spent on retaining existing customers, known as install base expense (IBSE) over time (t), this IBSE must be subtracted from the TMSE.
The COCA should decrease over time, and there are ways of reducing it, such as by automating processes.
Validating Assumptions
Identifying Assumptions
When creating a new type of business that has never been attempted before, you must make many assumptions about your product, market, and customers. It is crucial to systematically go through and test these assumptions.
Start by identifying your assumptions. Look at each step of your framework and list the places where you've made conclusions based on your research. Pay special attention to assumptions about gross margins and other important areas like customer lists and the decision-making unit (DMU).
Break down the assumptions into small, testable components. Don't worry about how you'll design the tests, as that could lead you to avoid testing assumptions that will be difficult to test. Just focus on identifying the key assumptions.
Testing Assumptions
You want to test key assumptions as cheaply and quickly as possible, using empirical data to verify that your assumptions align with reality. The specific methods for testing will depend on the nature of the assumptions.
For example, you can check cost projections by seeing how much vendors charge for supplies. For customer-based assumptions (like whether they're willing to pay for your product), you can ask them how much they'd be willing to prepay, sign a binding contract, or provide a letter of intent. It's best to meet with customers in person to get a better sense of their level of enthusiasm.
Some of the most important assumptions to test are cost targets and how enthusiastic key customers are for your product. Testing assumptions complements the market-based research you've already done, and the combination of this data will position you to create a product that can succeed in the beachhead market.
Minimum Viable Business Product (MVBP)
MVBP Requirements
In this step, you'll take the assumptions you've tested and use them to create an actual product - the minimum viable business product (MVBP). The MVBP will be one more step in validating your assumptions, integrating them into a single system test to verify the minimal product for which a customer will still pay.
The MVBP must meet the following requirements: 1. The customer gets value from using the product. 2. The customer pays for the product. 3. The product is good enough to start a feedback loop, helping you change and improve the product so you can make a better product.
Designing the MVBP
Start by listing your key assumptions, then narrow the list to the most important ones. Build a product that customers can use based on these assumptions.
Some business models have more than one kind of customer. In this case, design the MVBP so that requirements 1 and 3 are met for primary customers, and all three requirements are met for secondary customers.
The MVBP should be sufficient (it should do the job and be simple). Avoid adding extra features or "bells and whistles" that could introduce
