How to validate your business idea

How to validate your business idea

It is grim statistics of modern-day business practice that 7 out of 10 new products or services fail to deliver on expectations. Yes, a bit more than 70% of all new products fail to meet their revenue targets. This data came from a consulting giant Simon-Kucher & Partners, which conducts its survey every other year, mainly among the B2B sector respondents.

If you need your next product to escape this trend, you may need a better business planning decision framework, that will allow you to use market feedback to build the right product. Perhaps, it is better not make anything until you sold it, although it may sound like a paradox.

Why must a modern business plan have to include business idea validation? Let’s look into this professional opinion.

“We have had teams at Lean Startup Machine or Startup Weekend get checks or online payments before building anything because their idea solves a painful enough problem customer will pay in advance… almost every Kickstarter campaign basically is this model already. Cash is the ultimate validation metric. And the sooner you get it the more risk (time, code, cost) you have reduced. The question is “Sell before you build, is it a myth?” We’ve answered the question: No, it’s not a myth.”
Sam McAfee, Startup Patterns

Testing business ideas need a framework of thinking. It begins from the thought that testing before implementing and scaling increases the success of any venture and decreases the risk of wasting time, money, and resources on bad ideas. Let’s close the knowledge gap between strategy and experimentation/validation.

1. How to reduce risk in my business idea

Split the idea into chunks of testable units. Define what exactly are you testing and then formulate and run some experiments.

Exploration of your business idea may include customer interviews, expert shareholders interviews, partner and supplier interviews, and surveys of prospective customers. Get real-world data and perform some data analysis. It may include Internet search trend analysis, web traffic analysis, opinions survey at discussion forums, sales managers feedback, customer support analytics. You may find it useful to analyse your prospective clients’ intentions via interest discovery: online ads, email campaigns, social media campaigns and referral programs data can help you. You can make discussion prototypes: 3D print, pager prototype, storyboard reactions, brochure and explainer video, and use those in pretend to own experiments.

Each experiment has associated cost, setup time, run time and evidence strength. Look at how much you desire to experiment with each option at hands, and then mark how feasible they are to execute in your custom environment (make sure that you have the right infrastructure in hands and the right partners). For assessment of the viability of particular experiments in your mix, look into their cost and potential revenue from a business feature for which you test.

Analyse weak and strong signals from your prospects. For example, if you ask for an email from landing page, this is a weak signal, it may register some interest, but it is feeble. Quite the contrary is the situation when you ask for payment for some feature or minimal product, that is strong evidence. Alternatively, if you think of planning the mix of discovery experiments, customer interviews will provide you weaker evidence of willingness to pay, than a referral program (which will also give you a view upon a desire to sell your product).

When before bringing the technology and automation into your actual business process, you test the prototype of your business in manual mode, then you receive a piece of robust evidence. Try to create customer experience you desire, and deliver value from it manually. You can try both options – when people behind the process are visible to the customers and when you bring value from anonymous service and see – what is more desirable for your customer. This kind of actual business operation simulation can often open your eyes and allow you to refine your process or even adjust the business model because in the process of testing the real value exchange happens.

2. How do we measure strategic risks

– Do people want this? Is there a market need? Is the MVP believable? Answer these questions with an evidence-based opinion, and you shall measure the desirability of your product for the market in mind.
– Is this a viable business? Answer this question with a financial model, and you shall measure the viability of your business idea.
– Can you support infrastructure for this business operation and get the right people? Answer this question, and you shall have a proof for practical feasibility.

Where to start?
Product design has to be done earlier since it directly impacts the desirability of your offer.

Analyse your team capabilities in design, product delivery and management, technology competence, availability of legal advice and assess legal aspects of your business model, think about your marketing capacity.

Practical chain of actions may look like this:

  1. Design your minimal viable product (MVP)
  2. Design customer experiences that bring value.
  3. Try to exchange that value for money.
  4. Analyse the feedback.
  5. Consult a legal advisor before scaling your discoveries.
    (This last one mainly applies to regulated markets you are willing to enter.)

Validation experiment planning and execution take time, and as an entrepreneur, you must think of it as a valuable investment. Instead of spending much time on preparation before entering the market, you may find a productive approach in entering the market and collecting feedback with business experiments. Such a procedure will cost you less in planning efforts, will adjust your processes to market reality and will decrease time to market.

At Oracle Capital Group, we believe that only through active involvement in the lives of others can a person enrich their own experience. We help entrepreneurs to find the right answers in changing environments during the challenging times.

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