I’m a bit of a workout enthusiast, and, at the suggestion of one of our salespeople here at ZeroTurnaround, I am trying out this new “upscale” gym in Boston. This morning, I was leaving the gym and feeling healthy, and there was a guy at the exit handing out free plums. He told me that they were locally-grown plums from Lancaster, MA, then told me that he was opening up a new store for this kind of local, fresh produce “just around the corner.”
As an entrepreneur and business enthusiast, I thought, “Hmmm… this guy’s got a pretty good idea of his product-market match.” Why?
1. He’s got fresh, local produce
2. He’s setting up a small store where he sells the produce at premium prices
3. He’s close to health-conscious people who are willing to pay higher prices for things like gyms and better food.
When you have a great new technology, it is not always so easy to figure out how to wrap the technology up in the form of a product that will appeal to a certain market. A good product-market match is really tough to figure out, and it is the main reason why most tech start-up technology businesses end up in failure. So, how can we stack the deck in favor of success? A good way to start is by selecting a few common assumptions that can easily become pitfalls, and some suggestions on how to avoid them…
Assumption #1: If we build it, they will come…
Technology entrepreneurs are often so smitten with their technology that they believe that great technology is all that is necessary in order to attract customers. What matters is not whether the technology is great but rather whether or not the technology creates a performance or price advantage that will motivate a customer to buy.
In the case of my current company, ZeroTurnaround, the JRebel product is great because it saves Java developers an average of five, full 40-hour work weeks per year of productivity by eliminating the application server restart process in Java EE development. This description of “great” is very different than the technical details that make JRebel great.
Assumption #2: “Huuuuuuuuuuggggge” market = we will take all of it!
Many entrepreneurs take too broad a view of their target market. Back in 1999, I started a company called Informio. Our goal was to enable access to applications from mobile devices using a combination of VoiceXML and wireless access protocol. Our definition of our target market initially was “mobile phone users.”
Of course, this was way, way too broad. We had a false sense that we were going after a huge market, when, in reality, we had not done a good analysis of which mobile phone users would derive the most value from this functionality and for what content or applications. If your analysis is based on a high level view of the market, and your analysis boils down to a few technical dudes sitting around saying “this market is huge!!” then I encourage you to go back and do a deeper analysis.
The reality is that your actual target market is probably a sub-segment of the overall market. In the case of my first company, NBX, we developed a VoIP-based replacement for a traditional business telephone system. The overall market for business telephone systems was $10B, but the portion of the market that was addressable by our technology was the small business segment. This segment of the market was still greater than $1B in annual sales, so there was still plenty of room to build a company.
Assumption #3: Just wait – this market is going to emerge (and we’re going to make it happen)…
Most of the time, technology provides a capability that does not yet exist, so there might be a great market, but customers are not looking to buy something that they previously could not imagine. When you are disrupting an existing market, you know that there are a bunch of customers out there who are spending money for an existing solution. The challenge is to use your technology to create a product with a price and performance improvement, where your technology has a competitive advantage over others.
If the market has not yet emerged, then it is a greater challenge because you must predict that the market will emerge and that your product will have the correct price and performance. This is really hard to do, but there are certainly success stories (Apple) that fit this profile. Entrepreneurs (Steve Jobs) who can “intuit” the emergence of a marketplace are few and far between. However, if you can do it, you may have fewer competitors in the early going, especially if your solution basically enables the market to emerge.
Assumption #4: I can see the market clearly, so I must be able to connect with it
Even if you identify the product with the correct combination of features and price that will appeal to a market that is big enough to support a business, then you need to come up with a cost-effective sales and market approach so you can actually connect customers with the product. A strong product-market match is not just a function of figuring out what the features and pricing of a product need to be in order to win sales from a segment of a target market. It also must contemplate the “path to market” via marketing and sales. If the marketing and sales is not cost effective, then you don’t have a business. (Cost of customer acquisition is a topic for a separate article.)
Going back to the case of NBX, once we decided on the small business target market, then the question was how to set up our sales and marketing in order to reach the small and medium business customer. The answer was to go where the typical small to medium business customer bought their business telephone system. In the US, that was the independent reseller, so we structured our marketing and selling effort to enable resellers all around the US to sell our system, and we generated pull by selling directly to small businesses and then handing the deals over the resellers as a means of generating momentum. It was a ton of work, but it was successful!
Final Assumption: I definitely have enough gas to finish the journey…right?
Often, technology entrepreneurs start a business and discover their product-market match via an iterative approach of trial and error. Build something. See if someone buys it. If not, modify and try again.
This process can sometimes work, but it is like exploring a cave with no light. It often results in dead ends, and most entrepreneurs do not have the resources to explore endlessly. The lessons derived from the pitfalls in this blog can help. Think about value from the end-user’s perspective, and identify a market segment where the price/performance advantage is most acute. Spend a moment to examine whether the market segment is big enough to make it worth your while, and don’t forget to figure out what it will cost you in terms of sales and marketing to reach the market.
Whether you are mortgaging your home or raising venture capital (or both), you don’t want to run out of cash before you’ve found your product-market match. Once you’ve found it … everyone wins.