In part 1 of “The Street Smarts for a Scalable Business Model” we talked about thinking big and getting creative as preliminary steps for building scalable business models, while in part 2 we looked at what can be done initially to validate that an idea has big potential. Now, we are going to talk about how to ensure a scalable business model is realistic by validating the idea through real customers.
In the original Startup Article, referenced in part 1 of the series, the author talks about the need for startups to monetize customers and prove that an idea has real traction in the early stages. The best way to accomplish this is to develop a small group of customers and test an initial version of the product or service on them.
Nowadays, the Lean Startup Methodology is becoming immensely popular with technology startups because of its belief that validating a vision through customers is the key to building an effective business. This methodology outlines a process called Customer Development, whereby a startup takes their minimum viable product (MVP) and begins testing it on customers. Once the MVP is out there, the company can begin iterating the original version into something that customers love, thereby validating that the product being created will be valuable enough to the end user that they will pay for it.
Whether or not you subscribe to the Lean Startup Methodology is not important. What is important however, is the idea of basing the original vision in reality by learning from real customers who are using the actual product. Customers will not know whether or not they want something until you put it right in front of them; therefore, a company with a scalable business model needs to be able to test the idea out with customers before building the whole structure of the business and raising big amounts of capital. Clearly there will be a need to deploy some capital to fulfill this step, but it will be a modest amount compared to the amount needed to fund the entire idea.
Now, the essential part of going through a customer validation process is to ensure that you know what to look for when testing the product on customers. If you were to skip the second step of our process, and not go about conducting a feasibility study of some kind, then it will be very difficult to understand which customer responses are meaningful and which ones are not. You need to know what behaviors to look for and what questions to ask when talking with the first group of customers. With no baseline understanding of the customers and the competition, this would be very difficult.
Once you know the questions to ask and the behaviors to look for, it is critical to identify the right type of customer to test the product on. The right customer is the one who you will want to buy your product and who is similar enough to other customers in the other markets you have identified. It is important to test the idea on quality customers rather than a vast quantity of customers who you know nothing about. The key to this entire step is learning. When you know the exact reasons that your product is making customers happy, then you can prove that your entire business model is scalable.
After identifying the right customers, the next step is to create a strategy to connect with them and ensure they are compelled to be involved in the testing process. Customers won’t become involved in the process unless there are good reasons to do so. It is important to ensure that the initial pitch to them is intriguing and well-organized, reassuring them that it won’t require tremendous amounts of work on their part to be involved. In many cases it’s necessary to create basic sales material or a website, as it adds legitimacy to the entire operation.
Once the strategy is in place, it is time to reach out to these customers and start talking to them. For many startups, it may be difficult to find customers willing to participate if you have no previous experience or connections in a given industry. In this case, a little creativity and gumption is required to reach out and convince them to help you through the initial phase.
Overall, customers can help ground the vision behind a new product or service in reality, thus ensuring it has traction and that people will pay for it. This can be a very challenging process, which is why we can help in certain areas. Join us in the final part of this blog series as we talk about putting all the pieces together.
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