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Start-up Advice

Getting to Product-Market Fit

Lean entrepreneurship in five easy steps.

Paul Smith

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1. Sketch out your business model

The first step to getting to product-market fit is to sketch out your business model. Blank’s students use a business model canvas taken from the book Business Model Generation by Alexander Osterwalder. For each part of the canvas students need to answer a few fundamental questions.

  • Value proposition (or product offering).Every business has a value proposition or product offering to attract customers. Google’s value proposition is a fast and relevant free search, with targeted ads and monetising content; Skype’s is free Internet and video calling and cheap calls to phones (Skypeout). What value proposition or product offering are you going  to sell?
  • Customer Segment (or target market).Every business needs a customer or multiple customer segments to sell to. Skype is used by web users who want to call phones; Nintendo Wii is targeted at casual video game users. What customer segment do you plan to sell to?
  • Customer Relationships.A customer relationship refers to how your business will acquire and retain customers. This includes marketing and sales activities, as well as any activities that are used to retain customers, such as customer service. Coca-Cola uses traditional media advertising and excellent distribution to attract new customers and retains old customers by maintaining top of mind awareness. Facebook uses referral emails to attract new users and online advertising to attract new advertisers. How do you plan on attracting new customers? What will each new customer cost? How will your business retain new customers? How much will it cost?
  • Distribution Channels.A distribution channel refers to how you will get the product or service to the customer. This may be through a sales force, web sales, and retail stores or through distributors. Kalahari.net uses an online store and a courier company to get the product to the customer. Gillette uses retail stores to sell their razors and blades. How do you plan on distributing your product or service to the customer?
  • Revenue Stream.The revenue stream of a business model refers to how the business charges for its products and services and what price the business charges for its product or service. Common revenue streams include: sales of physical goods, rental, subscription fees, licensing agreements, and advertising and brokerage fees. For example, Pick n Pay or Spar make their money from sales of goods, while gyms and golf clubs charge a monthly or yearly fee. How do you plan on charging for your product or service? And how will you price your product or service?
  • Key Resources.Key resources are the employees, financial capital and physical resources that a business needs to function. There are four common types of key resources: human, financial, intellectual and physical resources. For example, Makro and Game require employees, all the equipment found in a retail store, as well as all the resources to manage the supply chain. Facebook requires programmers, servers and buildings to run the website. What key resources will your business need to get started?
  • Key Activities.Key activities are the essential activities a company needs to create and deliver the product or service to the customer. A newspaper’s key activities would include writing, producing and distributing the newspaper, while Skype’s key activity would be software development. What key activities must your business perform to create and deliver the product or service?
  • Key Partners. Key partners are the principal relationships with other organisations that make the business model work. These relationships may include joint venture partners, supplier relationships or strategic alliances. For example, Apple’s key partners for the iPhone include manufacturing companies and App developers. What key partners does your business need to create and deliver the product or service?
  • Cost Structure.The cost structure refers to all costs that are incurred when operating the business. When doing projects, costs are usually divided up into fixed and variable costs. What are your business’s fixed and variable costs?

2. Test your business model

Once you have laid out your business model you need to prove the idea will work in the real world. The idea is to have a plan that is based on facts and not guesswork, and to test the business model as quickly and with as little money as possible.

This is best done with the use of learning experiments. And the secret to running a great learning experiment is to ’think small’. Small experiments that are cheaper and quicker to run are generally better. There are four types of learning experiments that can be used to test if your business model will work:

  • Interviews: Talking to potential customers, industry experts, thought leaders, suppliers, adjacent competitors and potential partners. This will give you quick insight into the realities of your industry or market.
  • Personal selling: Pitching your product or service to potential customers using PowerPoint presentations or a prototype will give you a fair indication of how many potential customers will actually become real customers when the business launches. This process will also give you valuable feedback on how your product or service needs to change to meet customer needs.
  • Marketing campaigns: You can test whether the customer will buy your product by running Facebook Ads and Google Adword campaigns to see if people will click on the advert or not. If customers click on the advert in large enough numbers it means there may be a market for your product. If not, time to change your business model.
  • Minimum Viable Product: A minimum viable product is a small, cheap product that can be built quickly to find out if customers are interested in buying and using your product. In the case of web start-ups, this may be a page that gives some information about the product and asks customers to pre-register for service. In the case of physical products, this may be a building, a prototype or a small feature version of the product. Doing this will give instant insight into whether people want your product or not.

Learning experiments have the advantage of being low cost, and low risk, allowing you to get a good idea of the potential demand for your product before investing large amounts of money and time. Learning experiments also unearth unforeseen obstacles and challenges that can never be planned for.

3. Improve your business model using real world feedback

Every business model has a number of assumptions or best guesses: unforeseen obstacles, non-compliant customers, hidden costs. As new knowledge comes in from your tests, you need to change and adapt your business model to find what works in the real world.

A number of studies by leading researchers have shown that successful entrepreneurs seldom succeed with their first idea. In one study, Harvard Professor Amar Bhide looked at 100 of the most successful start-ups in the USA and found that 67% of them had radically changed their original business idea before succeeding. It is, however, not easy to fundamentally alter the strategy of your company.

It is often painful and no one likes to be wrong. But the research shows that the ability to change your business model when real world feedback says you are wrong is the mark of a great entrepreneur.

A famous example is Evan Williams, the founder of Twitter and blogger. Both companies were ideas that changed radically. When Williams started Pyralabs, a project management software company, he found that customers were particularly attracted to the note-taking feature.

Using real world feedback, Williams abandoned the project management software idea and launched blogger, which was later sold to Google. Similarly, Twitter was founded as a spinoff of Odeo, a failing podcasting software business.

When developing your business idea it’s important to take note of the real world feedback, and use the feedback to adapt your business model to what the marketplace wants. Adapt and change price points, product features, delivery channels, and marketing propositions until your business idea evolves into something that can become the next big thing.

4. Only start building your business once you have reached product-market fit

Traditional theories of entrepreneurship go as follows. Entrepreneur finds an opportunity, writes a business plan, raises funds, gathers a team and then gets on with the task of building the business, using the plan as a guideline.

This model is fine in the predictable world of known business models, known markets and known products, but in the uncertain world of new ideas, new businesses models, new products and new markets this method usually spells disaster.

Researchers call this type of disaster ‘premature scaling’. A business is considered to be scaling prematurely when it starts spending money on growing the business (ie. advertising, hiring employees, expansion infrastructure) before it has proved all of the assumptions of the business plan.

For example, WebVan, one of the famous dot.com era’s most spectacular flameouts started to expand its operations even though a number of the assumptions in its business plan were wrong. Customers cost more to acquire than originally planned, the customer retention rate was lower than planned and delivery costs were higher.

Even so, the company signed a R7 billion deal to expand by adding 24 distribution centres.

The result: bankruptcy in two years and R5,6 billion wasted. The reason: WebVan started to expand before testing all of the assumptions in its business plan. They scaled prematurely. When you are setting out on your start-up journey, ensure that you don’t start spending money on marketing, hiring and growth until you are sure that all of the assumptions in your business model have been tested and proved, and you have reached product-market fit.

5. Company building

With a proven business model, it is now time for the business to scale. On a graph, this usually appears in the form of a 45 degree growth line. It is time to let the world know about your product. This means launching a PR blitz, ramping up your marketing and sales activities and ensuring that you increase your business capacity to meet the flood of new customers.

By this stage, your business should have found a consistent and predictable way to acquire and retain new customers, while making a profit. However, many businesses fail in the growth stage by not managing the growth process properly.

Three areas must be managed in conjunction with each other: the rate at which new customers are acquired, the capacity to deliver the service and product to the customer and the business’s finances.

Too much investment in capacity and no customers leads to cash flow issues as seen in the WebVan case; too many customers and no capacity leads to angry customers. This is part of the reason Friendster (one of the first movers in the social networking space) didn’t become Facebook.

It acquired too many new customers, more than the site’s infrastructure could handle. The site crashed a number of times, and customers became irritated. The key to successful growth is balancing the rate of customer acquisition with building the business capacity to deliver the company’s products and services.

Paul Smith is a writer and startup scientist. He currently manages an accelerator, Ignitor, which helps entrepreneurs start and grow their businesses. Ignitor has developed a new model that significantly improves early stage start-ups odds of success. His primary research interests include understanding the behaviours of expert entrepreneurs, as well as, how to most effectively support high potential start-ups. Follow him on Twitter and visit his website.

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Start-up Advice

Put On Your Wellies: It’s Time To Wade Into Risk

Entrepreneurs aren’t all leaping into the unknown like lemmings off a cliff, but they do need to consider it…

Chris Ogden

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You’ve had a great idea. You’ve looked into its development. You’ve recognised that it has potential beyond just what Auntie Mabel and Mike From The Grocer think. And you’ve clearly nailed a pain point that can make money. Now it is time to take the risk of running with it.

Every big idea comes with risk. You can’t step out into the world of entrepreneurial thinking and business development without it. Your idea may fail. It will also be time consuming, demanding, hungry for money, and hard work. It is unrealistic to expect that your project will leap out into the world and be an unmitigated success.

It is also unrealistic to assume that it isn’t worth taking this risk.

There are steps that you can follow to ensure that your risk is managed so you aren’t blindly leaping off that cliff…

Step 01: Do your research

No, canvassing your neighbours, friends and family is not doing research. You need to know that your idea will appeal to a broad market and that it will have significant legs. This may sound like daft advice, but you would be surprised how many people think an idea will take off just because Susan in Accounting said so.

Step 02: Understand the costs

Projects are hungry for money and investment. Realistically work out your budgets and how much it will cost to take your project off the ground and then stick to it.

A calculated risk is a far better bet than one that shoots from the hip and hopes for the best. You can also use this as an opportunity to draw a clear line under where you will stop investing and end the project. If it keeps eating money and isn’t getting anywhere with results you need to be able to walk away.

Step 03: Know when to walk away

As mentioned before, this can be defined by a line you’ve drawn in the proverbial sand (and budget) but no matter where you draw this line, you have to stick to it. Often, when time, money and energy have been poured into a project it can be incredibly hard to walk away.

You think ‘but I have put so much into this, just one more’ and then it gets to a point where the ‘just one more’ has taken you so far down the line that walking away feels impossible. Leave. Learn the lessons. Apply them to your next project.

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Start-up Advice

Mind The Gap

The entrepreneur’s guide to finding the gaps and building the right solutions.

Chris Ogden

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Innovation may very well be the key to business success but finding the gap into which your innovative thinking can fit is often a lot harder than people realise. Some may be struck by inspiration in the shower, others by that moment of blinding insight in a meeting, however, for most people finding that big idea isn’t that simple. They want to be an entrepreneur and start their own high-growth business, but they need some ideas on how to find that big idea.

Here are five…

1. Network

It sounds trite but networking is actually an excellent way of picking up on patterns and trends in conversation and business problems. The trick is to note them down and pay attention. Soon, you will find patterns emerging and ideas forming.

2. Look for pain

Just as networking can reveal trends in the market, so can spending time reading. The latter will also help you find common business pain points. These are the touchpoints that frustrate people, annoy business owners, affect productivity, or impact employee engagement.

Be the Panado that fixes these pains.

3. Luck

luck

This is probably the most annoying of the ideas, but it is unfortunately (or fortunately) very true. Luck does play a role in helping you capture that big idea. However, luck isn’t just standing around and random people offering you opportunities. Luck is found at networking events, it is found in research and it is found in conversations with other entrepreneurs.

4. Luck needs courage

You may have found the big idea through your network, a pain point or pure blind luck, but if you don’t have the courage to take it and run with it, you will lose it to someone else.

Being bold in business is highly underrated because most people assume that everyone is bold and prepared to take big leaps into the unknown. However, not all brilliant entrepreneurs were ready to throw their family funds to the wind and leap into an idea – they were courageous enough to figure out a way of harnessing their ideas realistically.

5. Pay attention

This is probably one of the most vital ways of finding a gap in the market. Often, people are so busy that they don’t really pay attention to that niggling issue that always bothers them on a commute, or in a mall, or at a meeting. This niggling issue could very well be the next big business opportunity. Pay attention to it and find out if that issue can be solved with your innovative thinking.

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Start-up Advice

5 Things To Know About Your “Toddler” Business

As you navigate this new toddler phase of your business, here are five things to bear in mind.

Catherine Black

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Ah, toddlers. Those irresistible bundles of joy bring a huge amount of energy, curiosity and fun to any family – but there’s also frustration and worry that comes with their unpredictability, as they grow and start to become more independent. If you own a business and it’s successfully past its “infancy” of the first year or so, it’s likely it will also go through a toddler stage of its lifecycle.

Pete Hammond, founder of luxury safari company SafariScapes, agrees with this. “Our business is now three and a half years old, and we’ve found that we’re not yet big enough to justify employing a large team of people to handle the day-to-day admin tasks, yet we still need to grow the business as well,” he says. “As a result, our main challenge is finding the time to step back and see the bigger picture. Kind of like when you are raising a busy toddler and you spend most of your time running after them!”

As you navigate this new toddler phase of your business, here are five things to bear in mind:

1. This too shall pass

Everything in life is temporary – and that goes for both the good and the bad. It’s as helpful to remember this when you’re facing the might of a toddler temper tantrum, as it is when you’re facing throws of uncertainty in your business. If your new(ish) venture is going through a rough patch in its first few years, it can be easy to think about giving up – but don’t. As long as you have an overall big idea that you believe can add value to your customers, keep pushing through the rough parts until you come out the other side.

2. Appreciate what this phase brings

The toddler years mean that the initial newborn joy is officially behind you. But these small humans also bring their own kinds of joy, as you watch them learn new skills, say funny things, and give affection back to you. While your two-year-old business may not hold the same exhilaration for you as it did during those first few months, there are now different things to appreciate about it: Maybe you’re expanding your product range, or employing new people who can take the workload off you.

3. Establish boundaries

Toddlers thrive on boundary and routine – and your toddler business will too. As it grows into a new phase, try and establish limits in terms of the type of clients you want to work with and the type of work you’ll do. It’s also a good idea to make a decision about the hours you’ll work and when you’ll switch off, which will help you establish a good work-life balance.

4. Take a break

Every parent with a toddler needs a break every now and then, even if that means a walk around the block (on your own!), a dinner out with friends, or even a few days away. The same is true for a demanding small business: every so often, remember to take time out to rest properly, where you switch off your laptop and completely unplug. You’ll return much more inspired and resilient to deal with the everyday uncertainty that it brings.

5. Give it space to make mistakes

While the unpredictability of a young business can be stressful and tiring, it’s also a time for trying new things without the risk of huge consequences if they don’t quite work. After all, it’s much simpler to change your USP if you’re a small business employing a few people, rather than a big company where 50 people are relying on you for their salary, or where you’ve received a huge amount of investment capital. While you may fail in some of the things you try with your business (in fact, this is almost guaranteed), see it as a toddler that’s resilient enough to pick itself up, dust its knees and keep moving forward.

During this phase of business growth it’s also essential to have the right type of medical aid cover. There are medical schemes such as Fedhealth which has a number of medical aid options and value-added benefits to ensure that your health and wellness is taken care of too. After all, the healthier you and your staff are, the more productive your business will be – during the toddler (business) stage and beyond.

While this phase can be frustrating, it’s a sign that your business is growing and adapting, rather than remaining in its infancy, and that can only be a good thing! So embrace the difficulties, learn from them, and watch as your business strides forward confidently into the next exciting phase.

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