One of the biggest mistakes that novice entrepreneurs make is pushing forward with a product idea without the slightest bit of market research to gauge whether a market exists for their idea. The excuse for this is simple: market research is unreliable and expensive, and I can’t afford it. This is just not true and this is one of the most dangerous and expensive traps business owners fall into.
How do I know? It happened to me not just once, but three times! In hindsight, spending north of $500,000 dollars on each tentative business without understanding the depth of the potential market is ludicrous. Why then do so many others make the same mistake? Maybe bravado is telling you that you’ll create the market and create the demand?
If you are able to create a market, generally it is very, very profitable but another axiom in business states that the rewards are generally proportional to the risks. Flying into a product idea without market data is akin to throwing darts blindfolded. There’s a better way.
The Two-Pronged Approach
There are two phases to economical market research that will keep you out of trouble and your budget mostly intact. The first of these phases is to go slower in order to go faster. Let me explain. The WRONG way to launch a product is to spend six months and a whole lot of capital producing version 1.0 of your offering. For argument’s sake, let’s say you’re developing a new social website. You’ve pitched the idea to friends and family and they think it’s the next “Facebook” – a killer app for sure. Encouraged, you hire a graphic designer to get the look of the site right. Meanwhile you busy yourself hacking together back-end pieces.
Six months later, the money you were going to use to buy that kickin’ Harley has been converted to a bunch of jpegs, html, and css, but that doesn’t matter, you’re ready to go! You hold your breath, launch, you’re live and on your way! You wait and…. Crickets. Nothing, nada, zippo. The next three months brings a measly 100 free account sign-ups and zero pay account conversions. Now what? Now how much would you have been willing to pay for a little market insight now? This brings us to the first prong: be skeptical and do the research. Make conservative assumptions about the market and do the math! We’ll look at the specifics of this a little later in this article.
The Second Prong Is to Go Incremental
Don’t ever build or commit more than you have to until you start to see results. How does this work? Simple. There are several tricks of the trade. Let’s say for example, you’ve done the preliminary market research and you think a website that allows you to keep medical records for pets would be a good idea. The site could send out appointment reminders, connect to 1-800-pet-meds.com to order medications, and keep important information centralized for Good Samaritan pet sitters. The site has blogs, a social component where owners can share stories and pictures. It’s totally web 2.0.
After you do the research, you realize that there are very few competing websites that offer this kind of service. Better yet, your search engine analysis leads you to believe that a high number of people are searching for this kind of service, what now? It’s tempting to want to “jump the competition” but building out a full-fledged website, with reminders, a social component and B2B integration is going to be time-consuming and expensive and we really don’t know yet if we can generate sufficient traffic.
What we need to do is put together a trial. Think of a trial as a low-risk offering that you can put out there with minimal effort but more importantly is going to serve as a barometer for your assumptions.
In our “FidoWorld.com” example, maybe we want to hone in and trial the reminder portion of our site. For this we need people to find our site and provide some information, and internally we need to generate a reminder when it’s time to reorder the flea medication. Somebody from Elance.com can put this type of site together relatively easily with off the shelf pieces assuming you don’t have the skills to do it yourself. The important thing here is to put some sort of test out there to gauge your assumptions on only moving forward with higher levels of commitment (read investment) as those assumptions are proven right and NOT to spend a ton of money or time doing it!
This approach works well not only for websites that offer experience or service based products but physical products as well. If, for example, you are planning to launch some sort of exercise product or supplement, you could offer an e-book or some other type of easily produced content to measure interest and traffic and only move forward when your assumptions are proven correct. You can always move more aggressively into the tangible product or fully built out website as you verify demand.
Doing the Research
Here are some helpful resources to measure demand and competition online:
- Determine how much traffic a given website gets with Alexa
- Search trends and emerging markets from Google
- Search volume and traffic on Google (follow the “Get Keywords link”)
Before you move forward with a project, it’s best to know what you’re up against. Generally, you’ll find one of two scenarios. First, there’s little indicated demand for a given product. A situation in which you’re faced with a potentially bigger upside– who knew we needed EBay until it came along, right? The reality however is that for every eBay, there’s a thousand ventures that just fizzled. The other scenario is that you’re the David among all the Goliaths. In this situation, chances are that you’re going to hear the roar of the crickets again. You need to look for the demand that doesn’t already have a market dominator. Be safe, do the homework and go incremental.