Building a startup, especially the early stages, can feel like a roller coaster that takes the founders in endless loops without tangible milestones except the, “let’s get started” execution stage. In reality, by looking at the big picture, there are clear and quantifiable stages that every startup goes through. Knowing what, when and how to cross a bridge is critical to the journey of every startup from idea to scale.
Skipping stages or assuming any of the 5 stages below does not apply to your startup is how many companies failed or invested resources they didn’t need to move forward. Identify where you are and follow the journey without burning stages. This is how today’s successful startups became the companies they are.
1. Problem Discovery
Every idea starts with a problem. Imagine introducing solutions without knowing the problem. This stage is all about discovering customers’ pain points and needs. It entails forgetting about the ideas you had in mind and the product you planned to create in order to deeply focus on what the customer really needs and will pay for to use.
This stage can be described in one word: interviews. The goal from customer interviews is to identify interviewees’ most urgent needs. Our personal experiences and observation helps us relate to who we believe is our ideal buyer, however, only when a big enough group of potential buyers clearly and deliberately indicate a need for a solution to an unbearable problem that we have sufficient validation to move to the next stage.
Some of the key questions that every entrepreneur should answer before building a product include:Today In: Small Business
- Who is my ideal buyer?
- What competing products are they currently using?
- Why would they need a better product?
- How my product should be different?
- How much are they willing to pay for a superior product?
- What are customers’ most important features and benefits?
Even if the problem is quantifiable and well documented, the benefit of the interviews in the problem discovery stage is to obtain answers you need for the next stages like product development. It is clearly easier to move to the next stage based on answers from future buyers rather than guesses that may turn out wrong after spending months and big sums of money in product development and marketing. Plus, those interviewees will most likely be your first paying users.
You know you’re ready to move to the next stage when you have an answer to all of the key questions above and the majority of your interviewees deliberately ask for a solution. Typically, ten 30 – 40 minutes long interviews should provide you with the insights you need, however, the more the merrier if you want to increase the number of potential buyers of your product before launch as you’ll see in the third stage below.
2. Solution Hypotheses (Ideas)
The idea definition or value proposition stage is, in my opinion, the easiest of all. First, there are countless opportunities for those who are seriously looking to capture and make a difference. In fact, even small opportunities with good to have solutions can turn into a successful business with founders’ consistency and the right execution.
Second, and most importantly, having gone through the problem discovery stage, chances are interviewees have already suggested ideas for solutions that will solve their problems and address their needs. Your interviewees can be your idea generators which alleviates startup risk of building a product they weren’t expecting even if it solves their problems.
At the end of this stage, you should be able to design your value proposition statement as follows: For [ideal buyer] who is dissatisfied with [problem], our product provides [solution] unlike [competing solutions].
3. Problem/Solution Fit
Chances are, even with strong validation signals based on the interviews, certain aspects of the problem or the solution won’t turn out invalid until the problem/solution fit validation stages. Startups must assume that plan A is never the right plan. Therefore, moving straight to product development right after the first two stages adds a great deal of startup risk since the first version of the product will most likely be changed.
In fact, product iterations and pivots will exist even after taking the steps listed below, however, the degree of those changes can be significantly minimized. The most important step in finding problem/solution fit before product development is to create and sell an irresistible offer.
The logic behind irresistible offers in finding problem/solution fit is that if your interviewees, who deliberately ask for a solution to an urgent need, don’t buy into your offer even before building the solution, chances are it’s not worth their time and money.
Before presenting the offer, you are going to need a few assets. These could be product designs, a clickable prototype, a productized service and/or anything that allows your future users to interact with the product and picture its value proposition beyond just a pitch of what the product will do when it’s complete.
You know the first stage of problem/solution fit is checked off when a few people have committed to the product whether it is by prepaying for it or have taken a certain set of actions that you can define based on your product, target and market. For example, for freemium business models, these actions can entail completing a long survey, joining a waitlist and referring X number of people, applying to become a user, etc.
Committed users are going to help you turn the prototype or designs into a functional product by serving as members of your customer advisory board or by consistently providing you with feedback on features, user experience, bugs and others.
4. Product/Market Fit
In order to even start thinking about, measuring and building for product/market fit, you need data. Not the kind of data obtained from beta users or pre-launch surveys. Specifically, you need to know your customer acquisition cost, customer lifetime value and customer churn rate. The only way to obtain this data is with a launched and used product.
One of the strongest signals of product/market fit is when you can consistently acquire customers at a lower cost than what they are worth to your company while accounting for churn rates. In other words, first, you are making money from every new customer, second, the cost of acquiring a customer is going down, customers are sticking around for longer and thus you are making more from every customer.
One of the simplest and most effective tests of product/market fit is by calculating your startup’s Net Promoter Score. This metric tells you how likely your customers will recommend you to their friends and colleagues. The closer the number to 10, the stronger is your startup’s product/market fit.
The signals of product/market fit and how they are measured provide a clear direction that every entrepreneur must focus on since the beginning. Essentially, it’s about constantly thinking how to build a product people need, will recommend and use for a long time.
With product/market fit, growth simply means an acceleration of customer acquisition and release of new products and services to cover new segments and markets. Growth by expansion comes with new challenges because while a startup may have product/market fit in one segment, it’s going to have to earn it in another.
When Uber launched its food on demand service, while rider sharing contributed significantly with the network the company spent years building, figuring out and reaching metrics that justify the viability and validity of the new service started from scratch. Funding has nothing to do with product/market fit, it only signals a future potential in the business. In fact, some companies go public without the fit.
In sum, to build a successful startup, start with a vision but focus on each step at a time. Many entrepreneurs quit too soon because they took a top down approach that focuses on what it’ll take to get the first 1,000 customers or million dollars in revenue before even discovering the right problem. This is what causes a waste in time, money and interest.Follow me on Twitter or LinkedIn. Check out my website.
I help tech entrepreneurs build startup products (apps) that generate revenue quickly with a higher probability of success to serve either as a side business venture.
This article first appeared in Forbes Entrepreneur.