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December 12th, 2019

ELEVATE PERSPECTIVE

Test Assumptions Through Customer Validation

Eric Steele, Entrepreneur-in-Residence, Southwest Indiana

One of the key components investors typically look for before investing in a startup technology is customer validation. While there are ways to validate your product prior to spending time and resources creating it, nothing beats having paying customers using your product. Investors have dozens of questions when listening to a pitch. Among them:

  • “Does the solution address a real problem?”
  • “Is the product priced right?”
  • “How does the product do against the competition?”

Many of these questions can be addressed simply by having paying customers. Even if you have decided not to seek outside funding from investors, validating customer demand early in the process can save time and resources.

However, in some instances, it isn’t possible to build the product prior to approaching investors. Asset-intensive businesses that require expensive equipment and inventory, or businesses that rely on expensive R&D budgets may have trouble bringing a product to market without raising capital. In these cases, secondary forms of customer validation can be used to show customer interest.

Customer Surveys

For consumer products, surveys can give you insights into your potential customers. They are useful to learn about what your customer values, how they behave and what pain points they experience. However, survey data can be misleading and is better used to gather market data rather than validating your product. In general, people are nice and will tell you that they would buy your product.

Say I receive an email from a friend who has created a new ice cream that has half the sugar and still tastes the same. The first survey question asks: “Would you buy ice cream that has half the sugar and still tastes the same?” Of course. “Would I pay $3 for a pint?” Sounds reasonable, sure.

Months later I walk into the grocery and see a pint of ice cream with half the sugar. I wonder, will it really taste just as good? It’s $3, but my favorite brand is sitting next to it for $1.99. I think I’ll just stick with the cheaper, safer purchase. In this simple example, you can see how a survey did nothing to validate the product.

Customer Interviews

For enterprise products such as software sold to an organization rather than individuals, interviews may be more effective than surveys due to the targeted nature of the product. When conducting a customer interview, it is best to initially not describe the product you are looking to build. Rather, ask about their pain points and see if your solution addresses those. In addition to validating the product, use the interview opportunity to find out about the procurement process and who needs to approve the purchase.

Presales

Preselling the product takes customer surveys and interviews to the next level. Say that I am approached by a friend building an app that tracks my food consumption and exercise for $5/month. They ask if I would pay $5/month for this proposed product. “Sure,” I say. They then present me with a registration form that asks for my payment information so that I can be automatically registered when the product goes live in 60 days. At this point, I must decide if I was just being nice, or if I really want the product.

Through both survey and presale validation methods, data from people who do not buy your product is equally as important as data from people who do buy your product, helping to answer questions such as:

  • Why didn’t they buy?
  • Are they not interested in the product?
  • Is it too expensive?

Asking investors for funding for a product that people have already “bought” is exponentially easier than a product that has been validated by surveys alone.

Different investors will require different levels of customer validation prior to investing. In most cases, the more, the better. Having 100 paying customers is better than 10, and 10 paying customers is better than 100 surveys. And in almost every instance, secretively building your product without customer input is a guaranteed way to waste a lot of time, money and energy.

Lastly, in addition to proving (or disproving) the product/market fit for your business, surveys, interviews, and presales will provide invaluable information on your customers. These insights can be used to improve or pivot your business or allow you to better understand your customers’ needs and buying process as you take your product to market.

To learn more about customer validation, check out these additional resources:

Eric Steele is an Elevate Entrepreneur-in-Residence serving the Southwest Indiana entrepreneurial ecosystem. Reach him at esteele@elevateventures.com.

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