Market Validation
1. Definition
“Market Validation is a process applied to the unstructured, serendipitous task of doing a
complete evaluation of the market for a product before the product is built.”
Rob Adams, If You Build It Will They Come?
2. Time and Cost
Time: 60 days
Cost: 10% of the expected cost of developing the product
3. Philosophy
Fail fast by testing whether your proposed product/service will work in the market before you
build/create it.
4.
The Process – The World in Three Stages
A. Ready
Two day triage of your idea to determine if more time and effort is required.
B. Aim
This 60 day process uses primary research to develop a product with unique, differentiating
features that will compel customers to purchase.
C. Fire
There is no time limit associated with this stage but it needs to be accomplished as soon as
possible to take advantage of the identified opportunity. It is dependent on management’s
ability to take the market data collected and turn it into product features that allow the
product/service to be quickly shipped.
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5. Stage 1 - Ready (2 Days)
This stage involves extensive use of secondary research about the market from standard
industry publications and analyst reports from the major brokerage houses and major players in
the overall market. This research can also involve industry specific reports prepared by third
party consulting firms that are available for sale. Primary research using a convenience sample
of identified potential customers can also be used especially if the underlying concept is based
on the work experience of the lead entrepreneur. The purpose of this stage is to quickly identify
if there is sufficient cause in terms the available opportunity to undertake an in-depth analysis
under Stage 2 – Aim.
A. Topics to Cover
a.
b.
c.
d.
e.
Domain Knowledge
Market size and growth rate
Lifecycles and trends
Competitive analysis
External data sources
B. Domain Knowledge
a.
b.
c.
d.
Describe how you developed the basic function of your proposed product or service
Discuss if the proposed product or service is based on your work/job experience or
Discuss if the proposed product or service is based on your experience as a consumer
Demonstrate that you understand what it takes to make money in your proposed sector
in terms of target market size, sales volume and margins keeping in mind that:
i. Consumer goods are expensive to market and have tight margins
ii. Medical and IT, high gross margins do not necessarily lead to success
iii. Large markets do not always lend themselves to large sales
C. Market Size and Growth Rate
a.
b.
c.
d.
e.
f.
g.
h.
What is the size of the overall market in both dollar and number of customers?
What are the sub-markets? How did you determine these sub-markets?
What are the sizes of these sub-markets in dollar terms and number of customers?
What is the growth rate of the overall market? Each of the identified sub-markets?
Which sub-market are you attempting to reach? Why did you select this market?
What is the growth rate of the overall market?
Is your sub-market growing above, at or below the overall market?
Is this growth rate expected to increase, hold steady or decrease over the next five
years? How did you establish this fact?
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D. Lifecycles and Trends
a. What is the lifecycle of the proposed market in years?
b. At what stage is the market currently at – Innovator, Early Adopter, Late Adopter, etc?
c. What are the key external trends impacting your market?
i. Population
ii. Expanding and contracting industry sectors
iii. Technology adoption
iv. Competition
d. What is the primary business model used by the industry? How was this model
identified?
i. Consumer
ii. Manufacturing
iii. Life Sciences
iv. Technology
v. Services
E. Competitive Analysis
a. According to potential customers, who are the competitors?
b. According to potential customers, why are these competitors successful?
c. According to the competitors’ customers, what do they do best? Where do they need
to improve?
d. According to potential customers, what are other potential substitutes for your
product/service?
e. From a potential customer’s perspective, what are the economics involved in using the
proposed product? This should consider the payback period involved and the total cost
of ownership that includes any modifications to the facility or operations the customer
will have to make. Typically customers expect a payback period of 12 months or less
and don’t like having to make changes to their physical plant or operations.
f. Provide an indication of how much effort is involved in getting the customer to part with
their money, i.e. beating the “do nothing” competitor. One way to accomplish this is to
reference the last time the industry adopted a new innovation and the issues and time
involved in introducing this innovation.
F. External Sources of Data
a. Do any analysts from the major brokerage houses cover the market?
b. If yes, who are they? What firms do they work for?
c. According to these analysts, what is the estimated size of the market in terms of dollars
and customers?
d. What are the major trends these analysts have identified in your proposed market?
How do these compare with the trends you’ve identified?
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e.
If not, why not? Is the market not mature enough to warrant an analyst? Not large
enough? Is there any indication an analyst will eventually be warranted? When?
f. Are there other sources of data that can be drawn upon to provide credibility for your
market?
g. How does one go about obtaining a copy of the reports produced by the analysts and
other sources?
6. Stage 2 – Aim (60 days)
Now that a market has been identified and that it has an unmet need or needs, the next task is
to develop a product/service that provides a sufficient value proposition for potential customers
to consider your product/service. This stage begins with a primary research study involving
potential customers. These potential customers will become the basis of the beta group used in
Stage 3 – Fire to refine your product/service and your set of launch customers. Once the data is
collected it needs to be analyzed by a market research professional and turned into actionable
information management can use to design the product/service as well as the accompanying
launch program. As few start-ups possess the necessary skills to perform this analysis on their
own, an outside firm will need to be hired. This requires the firm knowing how to select and
work with a market research firm to develop the methodology, questions and data analysis. The
final step in this stage is using the information produced to develop a strategy to get the market
ready for the product/service.
A. Topics to Cover
a.
b.
c.
d.
e.
Primary market research
Selecting who to interview
Conducting the interviews, interpreting the data and analysis of results
Use of outside firms
Preparing the market for your product
B. Primary Market Research
a. Description of the type of data to be collected. At this stage, you are looking to
collect data on the following:
i. Market segments in your overall market and their relative sizes in terms of
number of customers
ii. Addressable market, i.e. the market you can reach given the resources
available to you at the current time
iii. An estimate of how much each customer intends to spend in the coming
year on products/services like yours
iv. An identification of light, medium and heavy users in the addressable
segment
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v. An identification of the shortcomings members of the addressable market
see in the current product/service offerings
vi. A rating of these shortcomings in terms of importance to the potential
customers
vii. An identification of the purchase decision process involved
viii. Identification of the number of potential customers looking to make a
change within the next year
b. A discussion of the types surveys that will be used to conduct this research
i. Qualitative – Executive interviews or focus groups. These are usually done
with a select group of potential customers to ensure the ideas and
assumptions being used by the new venture and the same as those held by
the potential customer base. At this stage, open ended questions are used
to elicit the broadest response and these are summarized into similar topics.
ii. Quantitative – This type of research involves formal questionnaires,
conducted in-person or electronically, being used. The questions are
typically based on the information gathered during the qualitative phase
and are closed-ended to aid in the data analysis.
c. Types of questions
i. Open ended – These questions are designed to obtain the broadest opinions
from the interviewee. This type of question is typically used during the
qualitative stage to provide the guidelines for the closed ended questions
discussed in the next section. An example of this type of question is: “Based
on your experience, what products are available to solve XXXX problem?”
The benefit of initially using such questions is they allow the potential
customer to identify the characteristics and set the boundaries. The
downside of such questions is the responses are difficult to analyze as the
sample size gets larger.
ii. Closed ended – These questions give the user a set number of options from
which to choose. These responses to these questions are easier to analyze
as the data falls into clearly defined “buckets” but if the incorrect question
is asked the responses will not provide useful information. An example of
such a question is
Based on your experience, which of the following products can be used to
solve problem XXXX?
Product A
Product B
Product C
Product D
Other (List)
None
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d. Developing an interview methodology
i. Initial Interviews – These are usually done with market or opinion leaders to
get a broad sense of the problems, their severity, options under
consideration and an assessment of the competition. These interviews will
form the basis of the questions. A small sample size of potential customers
should also be tested with the completed questionnaire to test the
effectiveness of the questions.
ii. Mid-stage interviews - These are conducted with enough potential
customers to develop a reasonably sized data set to perform the necessary
data analysis on market size and customer segmentation. These interviews
can also be used to refine the questionnaire.
iii. Late stage interviews – These are conducted with the final group of
potential customers required to complete the data analysis.
e. Selecting interview subjects
The goal should be to complete a minimum of 35 but preferably 100 interviews with
potential customers. When completing this process, it’s important to think of it in the
same terms as obtaining a sale, i.e. a funnel approach. At the top of the funnel is the
total number of potential customers or target market. Lists of members from this group
can be obtained by purchasing data bases from associated trade or industry groups.
This group should be identified by the secondary research previously conducted and
verified by the executive interviews.
The second group is the interested market identified as those willing to take part in the
survey. Based on this group the original list will be further reduced to those that
express an interest in the opportunity identified by the management team and
expressed in the survey. Further reducing the number of participants is the number
seeking a solution to this problem. The number is further reduced by measuring those
willing to pay for a solution and what conditions need to be in place to get them to
purchase.
f. Interviewing, Interpreting and Analyzing Results
Unless experienced in the research process, this is best done by an outside contractor
like a market research house or consulting group. When selecting the right option it’s
important to locate a partner with experience conducting similar studies, experience
with your industry and access to the necessary resources. In addition to the
experience provided by the outside party, you are also using them to provide a level of
objectivity to the evaluation as they do not have a personal connection with the project.
The analysis of the results will yield two key pieces of information: the minimum
features sought in the first edition of your product or service and which group to target
as your launch customers.
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g. Preparing the Market
A major part of this stage is getting the market ready for the venture’s product. The
process used is similar to the sales process and involves moving down the funnel
beginning with an identification of the target market and proceeding on to locate
suspected members of this group willing to purchase and the identification of the
prospects most likely to act and finally developing a list of companies to close on.
h. Customer Use and Success Stories
When possible, the report should include case studies of successful customers and
references from beta customers. Such backup material adds tremendous credibility to
the document.
i. Press and Industry Analysis
Provide any press articles or coverage received from analysts regarding the venture to
show the industry, particularly prospective customers, understand the proposed
product/service. Such coverage also documents that others understand the procedures
used for evaluating the market.
7. Stage 3 – Fire (No set time limits)
A. Quick Release
The cornerstone of this stage is the identification of tightly targeted, narrow markets and a
product/service with a minimum feature set based on the research conducted in Stage 2. The
company must have the resources to reach these markets and have a developed marketing plan to
capture customers. The first customers captured under this strategy are the ones with the greatest
unmet problem and are willing to accept a basic product that addresses this problem.
The venture must also include plans to make fast product iterations based on feedback received
from the launch customers. This requires the development and implementation of a feedback
system.
B. Written Specifications
This stage of the market validation will contain the written product/service specifications to make it
easier for suppliers and customers to understand what problems the product/service addresses and
the component parts involved.
In addition, written schedules will be provided detailing such areas as the marketing plan,
procurement schedule and the venture’s proposed sales cycle. This section will also include a
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description of the feedback system to be used to ensure customer feedback reaches the
development team on a timely basis. By adding this process, the venture is able to kill features early
in the development process before large amounts of time and capital are committed.
C. Design Partner Programs
This is a subset of the target market selected to provide the venture with information on the
product/service’s usage and design. Typically, this group is selected from those customers
expressing the greatest need to address the identified problem. This group can also serve as the
venture’s early sales pipeline and provide the case studies previously identified.
D. Advisory Board Programs
The purpose of this group is also to provide information on the usage and support system required
by the venture. This group however contains industry experts, representatives from all parts of the
buying process (user, influencer, buyer, budget owner, etc.) so the venture has a more in-depth look
at the process. Members of this group can also provide the case studies cited earlier as well as form
the basis of the initial sales pipeline.
E. Launch
A sample budget must be developed for the initial year of operations. Based on the information
collected during the previous two steps, this budget shows the key development, marketing, sales
and feedback expenditures for the first year of operations. For businesses at this stage of
development, the budget is the most crucial tool for measuring the success of the strategy and
estimating the financial cost of missed milestones.
Based on best practices of successful start-ups and existing companies, the budget for the first
year’s sales and marketing must equal for development.
8. For More Information
Please contact:
Robert Warren
Director of Capital Markets Manitoba
Growth, Enterprise & Trade
Email: Robert.warren@gov.mb.ca
Phone: (204) 945-5839
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