November 24, 2017

Stop building 'MVP'. Validate your business model

by Marta Dunajko

The common problem of founders is that they want to see the product before selling it. At skygate we teach them to forget about the product. They should focus on talking with their customers first. First things first.

When should you build product?

Let’s state the definition of a Product[1]: Item that ideally satisfies a market's need.

Let's jump into these definition for a little bit.

#FirstThingsFirst #skygate 1. Item - something individual, unit. Before you build another social media site, focus on one class, one function, one method that you think is the core. Name it. Focus on it. Validate it is really the core.

2. Ideally - the best possible way. The best really means the best. If your target group have 3 options to choose, they will pick the best option possible. If they have 30 options, they will eventually pick the best option. Before you focus on one feature best as you can - make sure it’s the most important one.

3. Satisfies - meet the expectations, needs, or desires of (someone). Are you sure the product you're working, pitching, building and thinking of 24/7 meets the expectations? Are you really sure of that? If not, spend more time on talking with your customers.

4. Market - is a place to exchange goods for money. Are your customers willing to pay you money? Not just "register", "sign up", "set up account", but come down their credit card, wallet, maybe even take a loan - and close the transaction...today? Is their pain that much real?

5. Want or need - require (something) because it is essential or very important rather than just desirable. Do you desire Porsche? But do you really need it for you and your family? Would you like to spend next holiday on Bora Bora island? But will this happen this summer? Try to make sure your product is a "must-have" rather than "nice-to-have"

If you are sure and convinced about 1-5, then go ahead, build MVP and don't read further.

Validate your business model without a product

As a founder your role is not to build a product, your role is to find and define the repetitive business model. If building a simple landing page or creating an email helps - please do it. But you should spend 8 hours a day making sure your assumptions are correct. In the last 4 years we've learned a lot. Here are a few steps you need to focus on:

Reach Your Persona #skygate

1. State hypothesis - the simpler the hypothesis is - the better. If you are thinking of 10 features in your product - cut down the list to one, the most important one. Think again. Is just this one feature worth paying for? If it is not - probably the further 9 features are still not worth spending money on. Describe how the feature you want to build will be solving the real problem you've discovered.

2. Reach your Persona - describe your target group and contact with a few of them. Imagine somewhere in your neighborhood there is a person similar to you. They probably have the problem you're trying to solve. Meet this person. Pitch them. Listen and observe the reaction. Is this person more happy now? Can't he or she wait for you to really build the product? Do you feel more convinced about your idea now? Ask yourself if you would pay for your product in his situation. How many real end users are you pitching per day? Forget about pitching investors or random friends - you need to be in contact with your target group. Their voice should be your voice. Their problems should be your problems. Your product / vision does not really matter here. You don’t matter. They matter.

3. Define the Buyer - person that will pay your real money for your product. We've all heard of the model in which there are thousands of "registered users" and the "advertisers" are gonna pay for "displaying ads". Can't think of worst business model. How much does running your app cost monthly? How much are your visitors engaged? If your customer buys an add space - how many of your visitors will really convert for him? What is the customer acquisition cost? Imagine you've built a cool website or app for $100k and you'll spend another $5k monthly just to keep it up. Imagine you have 100k unique visitors per month. Maybe 0.5% of them will even focus on the add. This counts to 500 people. Probably 2-4% of them will convert to be your customer. Those are 10-20 people. Assume the average cart valuation is $100. Your customer have just earned $1-$2k per month. So cool... but where is your missing $3-4k per month? Where is your ROI for the invested $100k. Think again. Maybe some of your 100k unique visitors can convert into premium user and pay for consuming your site? Maybe they should pay first?

Want to learn more?

We're happy to answer your further question in comments below the original article. [1] Kotler, P., Armstrong, G., Brown, L., and Adam, S. (2006) Marketing, 7th Ed. Pearson Education Australia/Prentice Hall.

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