Did you know it can cost over $100,000 to develop a new product and up to $1.5 million over the next five years to bring a successful new product to market? That’s a lot of money to spend on an unproven idea. That’s why it’s important to conduct market validation before investing that kind of money.
Paul Akers has launched hundreds of new products with FastCap and he shared his wisdom with us. He shared tips on validating your idea, showing it to others, what not to do, how to perform lean market validation, and how to know whether the first reaction is just being nice or telling you that you hit the jackpot.
We’ll walk you through everything you need to know to gain a deeper understanding of market validation including the types of validation, validation strategies, the process you’ll go through, and finally judging whether or not you have a winner. Get ready to become a market validation ninja!
What is market validation?
Market validation is the process of verifying that there is a demand for a product, service, or business in your target market. The process is similar for all validating ideas, but depending on what you are trying to validate, there are slightly different steps that will need to occur before you go all-in on a product, business, or service.
What is idea validation?
Idea validation is simply confirming that potential customers agree you have a brilliant idea that will solve problems and eliminate pain points. You’ll want to talk to people you trust and verify that they don’t think you are crazy. If they are potential users and they don’t think it makes sense, you can stop there with no money spent.
How to validate a product idea
When attempting to validate a product idea, the process will be similar to all other types of validation, but you will need to create either a minimum viable product (MVP) or a prototype. For those not familiar with the terms:
- MVP – a product that can be sold and meet the minimum expectations of the target market
- Prototype – a product meant to represent what the finished product will be like, but may not be as functional as an MVP
The difference is most noticeable in software products and other digital products. This is because pictures representing the product can be created for $500-$10,000, but the final product could cost as much as $1M. This is the most important part that conserves resources as you validate product ideas.
How to validate a business idea
Validating a business idea should be primarily focused on whether there is value to the idea, meaning does the business save others time, money, or other resources. In addition, business validation should attempt to identify the size of the target market.
For entertainment products, the validation should be whether the product entertains people and for how long. These are unique because the problem being solved is boredom and they are trying to fill the most time.
If the business involves a product, product validation should be conducted to establish the scope of the problem the product solves. This type of validation is typically going to be for smaller companies with more limited resources that are looking to create a unique value proposition.
How to validate a startup idea
If you are trying to create a product or service that will change the world, you’ll want to use a similar market validation process to other types of market validation. It will be on a much larger scale because your target market goes from 370 million to 7 billion people.
When you think of companies like Tesla and Uber, their target audience is global with far-reaching demands, and they play by different rules. You may have to validate the concept in multiple countries due to the different cultures and expectations.
If you have a startup idea, the prospective customers should be in the millions (or billions) and the payback period can be far longer because the solution has to grow globally before it can focus on profitability.
This type of company might not test a single product, but an entire local market to validate whether the idea will work in a region. Product idea testing will need to be on a much larger scale for the purpose of testing whether the expected customer base has an appetite for the solution.
What is business model validation?
The business model validation process is focused on a holistic view of the company and how it will operate. One of the best ways of planning it is Alex Osterwalder’s Business Model Canvas which consists of nine blocks:
- Key Partners – Who or what is the company teamed with and what benefits do they receive because of the partnership?
- Key Activities – What actions should the company take to deliver the value proposition?
- Key Resources – What resources are absolutely necessary to deliver the value proposition?
- Value Proposition – Products, Services, and what makes the company different. This is the center of the Canvas because everything revolves around it.
- Customer Relationships –How will the company interact with customers? Transactional, long-term relationship building, allow customers to serve themselves for a fee?
- Channels – What are the lines of communication and distribution that deliver customer value?
- Customer Segments – Which segments of the market do you serve and what is each customer segment like?
- Cost Structure – What are the financial costs that are absolutely necessary including fixed costs, variable costs, and costs associated with scaling?
- Revenue Streams – How will the company make money? One-time fee, pay as you go, subscription model?
Now that you know about the main types of market validation, let’s look at how to perform market validation research.
How to perform lean market validation research
Market validation research consists of a few main steps:
- Document the strategy.
- Identify the target market.
- Create tests.
- Get input from the target market.
- Analyze the results.
- Revise assumptions if necessary.
- Accept or reject assumptions.
Let’s discuss documenting the validation strategy
Step 1. Document the validation strategy
While doing research, I found two really phenomenal resources that I feel, when taken together, really communicate the essence of market validation and the differences in strategies that people can take.
The first is an article by Ryan Robinson and explains how he took an idea and $500 to test his product concept of a California trails guide. It explains the entire market validation process phenomenally well, but at 25,000+ words it is a long read. At UpFlip we try to pack as much value in 1/10th of the words.
The other is a PDF from Florida State University that spells out the entire market validation process in three steps:
- Document your assumptions with the business model canvas.
- Test your assumption by performing customer interviews, and keep revising your assumption until you get validation.
- Prove market traction through customer reviews.
The most important aspect of creating a strategy for market validation is providing a clear vision of the problem you are trying to solve, the product idea, the assumptions, and the market validation process.
Like other plans, a market validation plan should be in writing, but be flexible enough you can change it as you learn more about the market reception.
Keep reading to learn how to identify the target market.
Step 2. Identify the target market
You probably have a general idea of what the target market is, but you’ll need to do some online research to establish a more defined target market. At a minimum you’ll need to establish the following information:
- Is your target market people or businesses?
- What industry and/or job title are the people?
- Age range
- Household income
- Special circumstances that apply to your target market. For instance, a wheelchair maker should be concerned with what people who need wheelchairs think about the product.
These should help you start creating user personas (fictional representations of your target demographic), but expect to revise each user persona throughout the process. Despite the benefits these create, Paul told us:
Revising as you go is an important part of running a business because you will never have complete data. Once you have this information, it’s time to move to the next step, creating tests.
Step 3. Create tests
There are a variety of tests that can be used for market validation. The most common are:
- Surveys – A list of unbiased questions to get opinions from the target market online or through the mail
- Interviews – Like a survey, but administered by a person via phone, video chat, or in-person
- A/B tests – A test comparing two different choices that are normally performed in two different ways:
- Show a person two alternatives to see which they like better. Similar to how eye tests work.
- Have two different landing pages and send some people to one and others to the other to test which design people like more for software development or written content.
- Prototypes and MVPs – Tools to establish whether people actually like the product as designed before spending more on mass production
- Check Google Trends – A website that analyzes trending searches on Google to verify if there is demand for what you are trying to create
Paul Akers told us:
Check out our interview with him about how to come up with great ideas and validate them.
Paul also talks about market research in the video so we’ll discuss it for a minute.
Performing Market Research
You need to understand a little about market research to perform market validation, so here’s some tips.
- Open-ended questions tend to get people to talk more.
- Too many interviews increase costs, while too few increase the margin of error.
- You want to know “What problem does the product solve?”
- Those with the deepest knowledge on a subject give the best input.
We went into much more detail about surveys and interviews in our Hub article about how to perform market research, but it should be noted:
For most companies, you’ll want to use each method during different stages of validation. For instance, you might want to start with online surveys before designing a prototype, then do interviews so the participants can try the prototype. Then use a style of A/B testing to verify which type of packaging, pricing, or web design works better.
Check out our hub article about how to perform market research for more detail about surveys and interviews. Next, we’ll provide some sample questions to include during surveys.
Some of the questions you might want to ask include:
- How would you expect to use this product?
- How often would you use this product? Why?
- What features do you think should be added to this product?
- What features do you think should be removed from this product?
- Where would you expect to find this product?
- How much would you pay for this product?
Once the questions and other tests are ready, it’s time to get input from your target audience.
Step 4. Get input from your target audience
The next step is to share information with your target audience. Using Facebook ads, your current mailing list, or your personal network is normally a good way to start as long as they fall within your target market.
Existing companies should consider paying customers that use a current product or service for input. Customer input is crucial for a new product concept or feature because they are part of your target market. Real users will already be familiar with your pricing model and can give better information about the product-market fit.
If you are using Facebook ads, make sure you are collecting their name, email, and phone number so that you can follow up with them. This is especially important if you are using a longitudinal study that tracks people’s perceptions over time.
Why is customer feedback valuable during market validation?
When users provide feedback about the solution through multiple phases of the market validation you:
- Reduce costs
- increase users’ knowledge
- Provide the team with in-depth interviews and insights
You might find this very valuable because the users will already be more familiar with the feature set than getting new users after the first few interviews. After you have gathered data, the next step is to analyze the results.
Step 5. Analyze the results
After you have gathered data from interviewing people, it’s time for the product team to analyze the data from interviewing customers and other prospective users. Most information will be qualitative data, such as what new feature would be best for a good product-market fit.
There may be some difficult math involved when testing how features and pricing will impact customers’ perceptions, product success, and revenue. Those calculations are the topic for another blog though. (If you want a blog about mathematical modeling let us know!)
Once you’ve analyzed the results of the interview questions, it’s time to determine if the testing validated whether your concept has value, doesn’t have value, or needs more feedback.
Step 6. Revise Assumptions (If Necessary)
After analyzing the results of your market validation, you may find that you don’t have a solid yes or no answer. In that case, you need to look at your assumptions and see if you can narrow them down. This may include:
- Following up on interviews
- Looking for patterns you may have missed
- Considering if there is a target market that you should add or subtract
- Using a different form of market validation
If you need to do this, make sure to do it. While the additional cost may seem too expensive, it is far less expensive than manufacturing and marketing a product that will flop.
Step 7. Did you get market validation?
You now have feedback on your solution and are ready to decide if users validated your idea or not. While you may have a sense that the test should be either a yes or no answer, this is not the case. There are actually three possibilities that should signal success during the testing:
- The test is a success if the feedback shows there is no market fit during early-stage research.
- The market validation is a success if the product-market fit shows that the product solves users’ pain points. This means the project can continue to the next phase in the strategy.
- Testing shows more questions need to be asked before the product manager passes the project on to manufacturing.
Paul gave the following example:
“When you ask someone what they think, they are likely to give you three answers:
- ‘It doesn’t make sense,’
- ‘That’s cool,’
- ‘How much can I buy it for?’
Only one is a real winner because when people say ‘that’s cool’ they might be trying not to hurt your feelings.”
What to do after you get market validation
We hope this information helps you test to see if your business is market-ready. If you decide to move forward with your business idea, you should read our blog on how to write a business plan. Alternatively, check out our blog on how to start a business or return to the business hub.
We love readers’ feedback. What market validation techniques have you found the most success using?