In entrepreneurship, failure is common. Consider this sad statistic: out of 10 startups that are founded this year, only 3 will still exist three years from now. Of these, only one will reach maturity and make significant revenues. Many have accepted these numbers as an inevitable part of the entrepreneurial process. Others have developed theories to explain why businesses fail and what criteria distinguishes successful founders from unsuccessful ones.
Most of the entrepreneurship literature assumes that “practice makes perfect”, and so after founding several unsuccessful startups it is believed that an entrepreneur is likely to have gained the skills and knowledge to found a successful one. While this idea is appealing and no doubt has some truth to it, it has led many entrepreneurs to develop, fund, and launch products that ultimately fail.
Over confident and cashed up founders are likely to fall into the trap of ignoring customer feedback, receiving too much funding, and trying to scale too quickly. Why waste years scaling up a product that from the outset never performed the job that customers needed doing?
When considering developing and launching a new product, founders should learn from the Russian proverb: “Measure twice, cut once.” In other words, plan and measure carefully before taking action that would be difficult and costly to reverse. By doing so, founders can minimize costly errors and avoid wasting valuable time.
In this article, I will share three tips for startup success. In particular, I will illuminate a concept that, if properly understood and addressed early in the startup process, has the potential to save startups from failure. It has come to be known as product-market fit. After lack of funding, failure to achieve product-market fit is the most common reason that startups fail. Thus, achieving product-market fit should be a top priority for any founder looking to achieve long-term success.
1. Identify substitutes as well as key competitors
Everyone knows the importance of competitive analysis. That is, understanding key players in the industry who provide similar offerings to the same group of customers. However, companies often forget about their most important source of competition: substitutes. These are products that may appear quite different and yet actually fulfill similar customer needs. As a result, substitutes can provide a comparable value proposition and serve as replacements for a particular offering.
Substitutes are often the hardest strategic threat to detect and respond to, as they come from many angles. For example, Southwest Airlines competes directly with Delta and American Airlines, but also competes with car travel because of its unique business model. Thus, Southwest must keep an eye on both the airline industry as well as automobile transportation.
Another hidden substitute is for the customer to do nothing at all. If a customer is apathetic and sees little value in solving the problem, they will likely have limited willingness to pay for a solution.
Substitutes, along with other sources of competition, should be considered before any effort is put into building a solution. This will help you understand what kind of offering you will need to provide in order to have an attractive value proposition.
2. Focus on the problem, the solution will follow
Many companies are built around a product. We know that it is important to understand the needs and wants of customers, but many founders initially engage in limited market research, believing that they just need to build the perfect product. In other words, many founders build a great solution that then goes in search of a problem.
What problems do customers actually have?
Have you asked them?
Market research should be the first step in building a company in order to understand the problems that customers face. It should be carried out before branding, software engineering, or product development.
Clayton M. Christensen, the late Harvard Professor, popularized the idea that customers have “jobs to be done”. A product can fulfill any combination of social or functional needs that people have. For example, vitamins fulfill the functional need of contributing to good health, but they also fulfill a social need for family members who care about the health of their loved ones. The same is true of a shoe, which can protect the foot while walking while simultaneously providing social status to the person wearing it.
By understanding the jobs that customers need done, entrepreneurs can develop products that meet the needs of their target customers. This can involve creating products that are more functional, more socially desirable, or both. For example, a shoe company might develop a new shoe that is both comfortable and stylish, meeting both functional and social needs.
3. Achieve product-market fit, sales will follow
Product-market fit is the stage in a startup’s life cycle where the company has created a product that addresses customers’ pain points effectively. As a result, customers voluntarily choose to use the product in favor of other alternatives. Demand grows steadily, both in the form of new customers and increasing spend per customer. The product may not solve every need the customer has but rather it performs a particular job so well that turning to the product is natural for customers.
Markets are maintained and disrupted based on product-market fit. For example, the hotel industry was disrupted by Airbnb, which achieved product-market fit soon after launch. Airbnb was simpler and more affordable than traditional hotels, and served the needs of younger populations that wanted a more authentic accommodation experience while travelling. It also allowed homeowners to utilize unused space in their homes to generate income, creating a new market that didn’t exist before.
The bottom line
Failure is common, but it is not inevitable.
By understanding the jobs that customers need doing and addressing their pain points, startups can avoid building something that nobody really wants. Remember, it’s not about creating a product and hoping people will buy it; it’s about identifying and then satisfying the wants and needs of customers.
Wes Brooks is an incoming Summer Business Analyst at Cicero Group and an undergraduate studying economics, management, and strategy. He is a serial entrepreneur, works in venture capital, and enjoys singing a capella and piano improvisation.
Image: Unsplash
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