Thursday, September 27, 2007

How to determine if your product will sell, part 1

Over the last two years I've consulted with a number of startups, sometimes helping them launch products, sometimes writing product plans, sometimes helping them raise funding. I've also looked at over three dozen product plans either via interviewing or competitive analysis. Most of these companies are founded by people smarter than me with Ph.D.s from fancy computer science departments.

Despite the quality of the teams, I've found that many startups seem to miss one fundamental principle. That is that the product has to deliver value that a customer cares about. Seems pretty obvious huh? Unfortunately I'd say about half the startups are working on products that don't deliver any value that a customer cares about. Even after they test the product with customers or launch the product and get minimal adoption these startups continue on, sometimes for years, with the same product plan. Hope springs eternal, perhaps because the entrepreneurial bias towards optimism clouds a frank analysis.

Determining value is not rocket science - do some focus groups, test the product yourself, compare the product to competitive solutions. One source of the confusion seems to come from how to measure "value to the customer." Something that I see often is the customer is asked "Do you want X?", where X is a feature that is unique to the product the startup is working on. The customer usually says yes, because more is better. This yes is taken as proof that the product plan is a winner, if only [fill in obstacle of the month].

So how do you measure value? Obviously adoption is one clue, but usually we need some indication early on when designing the product. The thought process I use is

                differentiation x customer's problem rank
value =    ______________________________

                  relative price

Differentiation is the feature set unique to your product - presumably these features solve one or more customer problems. Customer problem rank is the priority of the problems the product addresses. For example, if you're selling a product that solves three minor annoyances near the bottom of the customer's priority list, chances are your product will not be noticed. On the other hand if it solves the top priority, chances are your product will be purchased. Relative price is the price of the product, compared to both competitors and to substitutes.

Again the above seems pretty simple, but most of the time these components are not accurately grasped. To measure the priority of the problems the product solves you really have to understand the entire environment the product is used in. Maybe you're selling a new type of ethernet router which is undeniably faster than every other router. But the customer won't buy it if their bottleneck is in the server.

To address this I explicitly ask the customer what their problem ranking is at the start of every customer interview. Not just about the category of products I'm working on, but overall. If the customer says something vague like "Its important", don't take it as a given that the benefit is high on their priority list. For an item to be high on the priority list two things are usually true:

1. There has to be a visible monetary benefit to the customer that will substantially impact their business bottom line. Dollars saved or dollars earned. This is of course an business focused question - for consumer goods, there are other considerations.

2. Ask the customer where they would use the product. If the customer is really interested in your product, they will immediately begin thinking about this anyway. If they aren't thinking about it, they're probably not serious. This question will also help identify dependencies and integration points that can make or break your product.

Often product categories go through adoption cycles that may last years - during the 90's enterprises and ISPs were buying routers like hotcakes because the router was a bottleneck. The faster router could win the deal, but after a while, the category ceases to grow, the vendor list shortens to two or three, and upstarts won't get much traction regardless of how differentiated their product is because the customer simply doesn't have any issue with that category of products. If your startup is working in a category like this, you either have to be an order of magnitude cheaper, or you should consider a different market.

Since price is often a differentiator claimed by startups, I'll address price in a future post.

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