Eliminate Assumptions - Work with Facts
In Part 1 of this series, we discussed some of the pitfalls of market analysis and the challenges organizations face when they don't regularly incorporate market feedback into their product development and business strategy planning. We also introduced the idea of gathering intel that could disrupt your business model, and suggested that leaders should be asking their marketers to monitor signals from the market that would cause the business to fail.
To refresh, the 6 Steps are captured below:
1 - Documented Assumptions: What do you need to test?
2 - Know Your C’s Intimately: Who are your competitors & customers?
3 - Direct and Indirect Research: What evidence supports a failing business or product plan?
4 - Set a Goal: What revenue target is reasonable?
5 - Validate: What critical metrics need to be monitored that would signal a failing product/business?
6 - Optimize: Modify your business plan such that you have addressed any identified failure points.
In Part 2, we'll elaborate further on each of these steps and provide practical examples of how you can begin to easily adopt the process so you can connect the dots between revenue generation and market uptake.
I mentioned in the previous post a quote by Eric Ries, author of Lean Startup, and if you've read the book you'll recognize much of the philosophy behind our process is in similar thinking to his methodology of validated learning. The quintessential focus is to eliminate assumptions. He recommends rapid product iteration and integrating customer feedback early in the Build-Measure-Learn cycle, but in order to do this you must first create a Minimum Viable Product (MVP), which requires resource investment. As Eric describes in detail, the MVP doesn't have to be a major cash outlay, but rather can be simple tools that help you understand if the product idea has merit.
But what if you are creating a new piece of equipment or are interested in entering a market, such as oil and gas, that has a very steep technology adoption curve? What if you have a product that serves an existing market quite well and you are ready to enter a new vertical? How do you get your executive leadership or investors to endorse and fund your investigation so you can join the Lean Startup Revolution? And if you are an existing well-oiled organization, how do you assess the market's long term ability to support your business and incorporate data - not instinct - into the decision-making process? How can you proactively pivot instead of re-actively course-correct?
Our market analysis approach is designed to reinforce the Lean Startup principle of eliminating bias and waste. It's time for organizations big and small, new and old to get real. Using honest and objective market assessment throughout the business and product lifecycle, organizations can grow and thrive by simply incorporating both the confirmation and rebuttal data into their revenue projections.
Here's How It Works:
1 - Documented Assumptions - What do you need to test?
Every business plan is built on a few key factors or assumptions that, if true, lead to success. Your job in step one is to identify these assumptions that would create a failing business if they were proven false? Start with this one simple question and document your answers. Writing it down helps you address any white elephants in the room and further holds you accountable.
For example, one of the assumptions we made for our own company is that companies serving the oil and gas and manufacturing industries will need an integrated product management, marketing and sales process along with a new way to market and commercialize their products and services to remain competitive. The questions we should be asking in step one are as follows:
What evidence supports a different view?
What will happen to our business if they in fact don’t need a new way of marketing?
How do we know this market is large enough to support another consultancy?
Are the clients in this market familiar with our product category?
What if CMOs don’t care about marketing ROI?
Do they recognize a need for integrated commercialization strategies?
What if they don’t have product management and marketing?
What could the widely accepted mass communication, ad agency approach do to alter adoption of our services?
What would have to happen to make our products and services obsolete?
If the price of oil rises/falls, will a sudden hiring/layoff spree have a positive or negative impact on our business?
Is our product/service dependent on any other product/service adoption? If so, what happens to our business if people don’t adopt the prerequisite?
Is now the right time to enter the market with our offering?
Questions like these can help your team dive into worst-case scenario, crisis mode acceptance. Notice we used the word acceptance, not planning. With a truly pessimistic outlook, you can understand the ramifications on your business if your assumptions are wrong. The goal in step one is to tear apart your product/business idea from the outside in. Don’t think about this from the product development point of view where you can address each obstacle with a new feature. As soon as you can accept these potential short-comings, you can identify which ones are critical to further investigate.
Critically and objectively assess the conditions under which your product/service will fail.
2 - Know Your C’s
The C’s in market analysis are your competitors and customers. If you are not intimately familiar with both, your product-market fit will be volatile. If you are the technical or domain expert, don’t make the mistake of thinking all customers are exactly like you. Also beware if you think there are no competitors. There are always competitors. Clients have this wonderful thing we call free will. They get to decide which competing interests will get their money. Even if you don’t have direct competition, you probably have indirect competitors. These are the products and services that can solve the exact same problem for your client using a different method.
Your job in step 2 is to list out everything you know about the C’s and do your best to fill in any gaps. Be sure you label which descriptions are fact-based and which are assumptions. For example, we worked with a client one time who said, “People will want our product because it’s superior to the competition.” ‘Superior’ is subjective and an adjective. It’s not a tangible proof point that demonstrates a clear difference between you and your competition. This is a rather large assumption that should be flagged and tested.
Another example: I worked with a group that said, “Customers buy from us because of our expertise.” This is a good start, but you need to dive deeper into what expertise you have that the customer agrees is of value.
Go beyond a standard SWOT and target audience definition during step 2. You need to understand how your competitors win business, how long the sales cycle is for a product of your caliber, what process is used by your clients to purchase (RFP, direct award, etc.), who will be involved in the buying decision, how competitors will react to your product, how does your competition market their product, who are the big influencers of technology adoption in your segment, etc. Remember, we said know them intimately. That means gather as much intel as possible about both C’s.
Once you have completed steps 1 and 2, it’s time to begin systematically gathering data that supports a failing plan. This leads us to step 3.
3 - Direct and Indirect Research
You are going on a hunt to find all the evidence that negates what you believed, and gives you tangible facts to overcome the bias of your assumptions. What data exists that renders your plan obsolete or will dramatically alter your trajectory?
How do you gather this evidence? You conduct direct and indirect research. Indirect research includes things like market reports, industry-relevant articles, keynote speeches on the state of the industry, review of competitor websites, customer surveys, etc.
Direct research is talking to actual competitors and customers. Getting product demos and pricing information from the competition, talking directly to your target audience about your product idea, or analyzing historical sales and win:loss reports. Don’t talk to your friends or former colleagues, but rather aim to find potential customers that are unknown entities and strangers so you can eliminate bias. Take your idea to the most skeptical people and get their opinions. If you have an MVP (Minimum Viable Product), let these skeptics be the first to give you feedback. Run A|B tests on messaging using a microsite and email marketing.
During this step, you want to conduct both direct and indirect research that challenges your thinking. Find all the evidence that turns your assumptions upside down and creates a failure for your business. If you find supporting evidence that validates your assumptions, hang on to this information because it’s useful and will help later when you are ready to conduct market segmentation, create value propositions, and generate a go-to-market strategy.
Your number one priority during this stage is to find all the facts possible that will kill your business and/or delay your product/service’s uptake.
4 - Set a Goal
This step really brings out why you are conducting the in-depth research. Assuming you are not a non-profit organization, there’s no sense in analyzing the market and creating a product if you don’t intend to make money. Step four is all about setting a realistic revenue target that can be used pre-commercialization for breakeven analysis, and post-commercialization for annual quotas.
Start with a year one goal. What kind of revenue goal is achievable given the information you’ve gathered and what you now know about your product-market fit? You need to work this question from the top down and bottom up.
For example, if I make the assumption that my product can generate $5 million in revenue, but the SAM is only $25 million and there are 6 competitors plus me, how realistic is it to think in my first year of operating that I’m going to successfully take 20% of the market? It might be 100% accurate, but if I were in your shoes, I would be looking for every shred of evidence that blows a hole in this projection using a top-down approach.
For example, of the 7 companies, if three of them own 80% market share and the remaining 20% is split between four companies, is it reasonable to assume that potentially three of those companies might not make any sales or that you, as a newcomer, are likely to take market share away from all the incumbents to that magnitude? Is there anything in your supply chain that might stop you from achieving this number? Is there a major market downturn that will make it harder for your product to enter the market? Does $5 million cover development and overhead costs plus profit? These are the factors you want to consider in the top down method.
Next, I would do a bottom up approach to try to corroborate the target, which would look something like this.
In order for my company to generate $5 million in revenue, how many units must I sell and at what average price? Is that price competitive? How many contacts do I have today that are viable prospects? How long is my anticipated sales cycle? Is my product differentiated enough to replace or take away market share?
Your end result would look something like this:
I need 25 units sold at $200,000 each.
The competitive price range is $150-225k.
My anticipated sales cycle is approximately 3.5 months, therefore I need to sell 8.33 units per quarter (with zero sales anticipated the first 3.5 months)
I have contacts in approximately 10 buying organizations, but really only have relationships and buying signals from 8.
If all 8 of those companies purchased 1.5 units each, I would still need to cultivate relationships with at least 9 additional companies (assuming each purchased 1.5 units on average).
My company will probably win 1 out of 5 bids, so I actually need to find and build relationships with more than 85 prospects in 12 months.
To be able to do this, I need a lot of marketing and sales support.
Did I allocate enough budget and resources to meet this objective? Have I factored in all the possible dynamics that might alter the trajectory? Are there 85 companies that will want/need my product within my target market?
Notice that in both cases, I used a very simple back-of-the-napkin approach. I didn’t overthink it; I simply asked what would it take for me to miss the target (top down) and what would it take to make the target (bottom up).
Modify your revenue target until it converges and makes sense from both top down and bottom up.
5 - Validate
Decide on the critical metrics that need to be monitored in order for your business to fail. What signals should you watch for that would make your plan crumble? Often I see people monitor the market for the positive confirmation metrics that are great for financial accounting and product adoption. This is incredibly important and we highly recommend you track conversion rates, profitability, cost per lead, etc. We also think the innovation accounting system suggested in Lean Startup is incredibly valuable. These types of metrics give you a near-real-time understanding of product-market fit, marketing return on investment, sales effectiveness, operational efficiency and more.
But when the market swings in the opposite direction, companies are often scrambling to course-correct. Rigorous annual market research and monitoring of the events that would have a negative impact on your business can help you early identify potential threats to your market position and revenue stream. Measuring these factors will help you make pivot-related decisions before your market becomes saturated and your product enters the decline phase of the product lifecycle.
For our business, we would probably track the following:
Marketing technology abandonment - How many companies are eliminating key martech platforms?
Decrease in new product commercialization
Rise in the number of competitors with a similar method and message
Price sensitivity
Increase in the number of oil companies that exit the market
Rise of affordable alternative energy options
Increase in ROI-driven marketing professionals entering the job market
Companies that monitor these ‘negative metrics’ before they enter the market and regularly thereafter, gain valuable early insight and can delay market entry (in the case of a startup) or can look for diversification and innovation opportunities, or possibly consider an exit strategy (in the case of an established business).
6 - Optimize
Once you have completed steps 1-5, you are well on your way to discovering what ideas about your product and business model might need to evolve in order to build a sustainable business.
For startups, going through this 6-step method will arm you with confidence and ammunition for a credible conversation with investors. You can describe your methodology and how you tested your assumptions to build a solid business plan by eliminating confirmation bias. You will also be able to defend your financial projections with greater ease, and can set your course to commercialization based on fact - not guesstimates. In step 6, your objective is to adjust your business plan and make decisions about your product that help you address all the areas where your assumptions were wrong.
For established businesses, market research can help you systematically break down barriers between departments and can realign your business to address real problems, not perceived issues. By using this 6-step method, you can better understand the market drivers impacting your product’s adoption. If the market is strong enough to support another vendor and you still aren’t seeing uptake, then perhaps you need to work on making the product commercially viable by using direct research to gather more intel about the two C’s. During step 6, it’s ideal to decide how you will address the assumptions that were wrong and build a plan that implements change. Conducting a gap analysis of resources and actions can be very helpful during this stage. Any course-corrections that are necessary will require change in the organization. Management teams will be able to defend the reason for the change as it is backed by data and not gut instinct.
Step 6 of the process for all organizations is to modify your business plan, products and revenue projections so you build a strategy that supports product-market fit. We would recommend you go through this process on an annual basis and provide visibility to your organization of the results. This creates synergy and transparency that keeps the organization focused and moving in the same direction.