II.How to learn from customers
Developing the product and business through iteration is a concept that every smart startup CEO agrees with, but how to do this in practice often remains unclear. Depending on the nature of the startup, there are different ways to learn from customers. No matter how the startup interacts with its customers, the critical thing is to structure the feedback gathering and have clear learning goals.
In addition, we want to emphasize one thing new entrepreneurs often forget. Reaching product/market fit is about finding a sustainable model for all the business fundamentals. For example, by giving heavy discounts in the early days, a startup will not receive feedback about their pricing, so this should be a last resort. You should also avoid trying to reach customers through different channels than the ones that are in your long-term plan. That said, many startups have to do the kinds of things mentioned above. In that case, it’s important to remember that your actual long-term business is not being validated by activities like this, so you should have clear plans about how to do it later.
The majority of pre-product/market fit B2B-companies run on pilots. Pilots resonate most with innovators and early adopters, who get excited about new things and want to position themselves as thought leaders and barrier breakers within their industries.
In theory, pilots are a win-win scenario for both the startup and the corporate customer as they de-risk the relationship on both sides before committing to a long-term partnership. In practice, agreeing on the terms can prove somewhat tricky.
A pilot should be treated as a stand-alone business opportunity. In addition to having the chance to test drive your minimum viable product (MVP) in a real environment, there’s often a lot of excitement attached to the potential for future revenue, the benefit of being able to reference a big company, and the potential corporate venture tie-in. However, each of these are separate aspects of the relationship and should be planned and negotiated separately. A pilot is also a way to test your pricing, terms and conditions, onboarding, deployment and service level.
The tone of discussion is heavily dependent on your technology’s role in the customer’s value chain. There’s a big difference whether you’re offering an internal tool promising to make a backend process more efficient, or providing them with something that will become visible to the end customer. In the latter case, it’s likely that your technology has caught the pilot customer’s eye as something that could potentially provide them with a competitive advantage – which often opens a discussion on exclusivity, a joint venture or even shared intellectual property (IP), depending on how presumptuous the customer decides to be.
For an early-stage startup, sharing IP with outsiders should be completely out of the question. It’s always best to seek out pilot partners that do not require exclusivity, but sometimes it’s the best (or only) option available. In these cases, the exclusivity should be strictly limited — both in geography and time and, if possible, in features — and should always come with a revenue or volume target clause.
Once the pilot has been successfully completed, the startup finds itself standing on the edge of a chasm. The initial momentum gained from newness and excitement has worn off, and the customer properly begins to contemplate the actual value of the product and the effort involved. This is where the needs and expectations of customers on both sides of the chasm converge. The effort in question can be anything from existing supplier relationships and long-term subscriptions with a competitor to organizational learning or just plain inertia. The startup should learn as much as possible about how to turn the pilot into a continuing customer relationship and, if the required iterations are feasible, then do them.
For B2C startups, pilots are usually not applicable. Before the actual launch of the product, doing a “soft launch” is good practice. Soft launching means launching the product to a limited audience to gather feedback about the product, value proposition, marketing channels, and so on. A soft launch might be limited to a certain geographical area or as simple as limiting your marketing efforts.
To launch and market a consumer product is often expensive. By doing a soft launch, the startup has a chance to learn from users without incurring large costs. Like pilots for B2B companies, soft launching gives a B2C startup a chance to learn how to serve customers while they are using the product. Doing this with a smaller number of customers is naturally easier than with a big customer base.
Reward-based crowdfunding campaigns
Another way for B2C startups to learn about their product/market fit is reward-based crowdfunding campaigns – an especially relevant option for consumer hardware startups.
Reward-based crowdfunding means that customers pay a certain amount of money for some reward, in most cases the startup’s product. The startup usually delivers the product after some pre-defined time period after the crowdfunding campaign has ended. For a startup, there are several advantages in carrying out a reward-based crowdfunding campaign.
A startup can test the attractiveness of their product or different value propositions and marketing channels in a low-risk way. Usually campaigns have a goal they need to reach and if they don’t reach it, all the deals are canceled. The customers pay upfront and only after that the startup has to deliver the product. This is especially beneficial for hardware startups as they don’t need a large amount of working capital in this setting.
Crowdfunding campaigns are usually done on dedicated web platforms such as Kickstarter. This makes it easier for startups to reach consumers, as early adopters frequently visit these platforms. The platform usually takes a small percentage of the revenue the startup is able to acquire.
Extending the product
The initial “secret sauce” of a startup might be a very specific thing – a feature, an algorithm, or a hardware component. This innovative element might be enough to excite the innovators and early adopters, but it is not enough to convince the mass markets. They want something that adds proven value, is simple to take into use, and easily fits in their day to day life, whether they are individual consumers or companies. Even when the core component itself would theoretically bring great value, as an isolated feature it will be unable to do that. One of the common things startups need to do in order to reach product/market fit is to extend the product. To do this you need to learn how the product is used by the customer.
Based on that information, the company often needs to build an extended product around the core element to show how the product works and performs in an ideal setting.
Let’s look at a few examples of what extending the product means:
- A fintech company with a new payment platform needs to take over tech integration with card providers and provide localized customer support services.
- A company that manufactures AR glasses needs to create software and content relevant to the end customer to showcase the value of the hardware.
- A medical technology company with an algorithm for analyzing ultrasound images needs to provide integration to existing hospital workflows, imaging devices and image analysis systems currently in use.
In the long term, many of these extended features may become obsolete or overtaken by others in the value chain. Yet the burden of proof when searching for product/market fit and mitigating any related effort lies with the company, and doing that successfully requires showcasing the benefits of the tech as part of a whole product and showing as quickly as possible where and how the value is generated.
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