When I tell entrepreneurs that they need to validate their assumptions for their business, they tell me “But we have already done that… we already have a few paying customers… they have paid us $Y for it and are using it.”.
While, having initial customers is good news and sure should be celebrated, that by itself is not sufficient validation of the business case for your venture.
A few customers buying (or even really using it if you have given your product/service free to them) is merely an indicator that at least some people have a need for the solution that you promise to offer for a problem that they feel needs a solution. But that does not tell you (a) how many potential customers exist in a given market (b) how much time it will take to make a sale and what will be the cost of acquiring a customer (c) how much will most customers be willing to pay, (d) does the product/service really solve the customer’s problem and (e) will the customers do a repeat purchase
No. I am not being pessimistic. I am not demeaning the massive effort it requires to get a product up and running and then finding someone to use it and appreciate it. All that is good. But a few initial customers do not give you enough proof to determine how your business will operate at scale.
Below are a few questions about your business that you need to have answers to in order to say with confidence that a concept is validated (and no, none of these questions are answered just by getting a few initial customers):
- Do my potential customers really feel the problem that I am trying to solve? A few initial customers, especially in a B2B sales scenario when the entrepreneurs are selling themselves (and most probably to a bunch of customers they have slightly easier access to) does not give insights into what percentage of the intended target audience feels the problem that you are trying to solve.
Often, in some cases you will find initial customers who are the most frustrated with the problem, and that initial success or quick sales closures may lead you to believe that most customers feel the pain of the problem as much as these customers do.
An example from my personal journey: I was previously the co-founder of a healthcare services company. We managed health & wellness programs for schools. When we announced the concept, 10 -12 schools in our city called us and some of them quickly signed up. We were ecstatic and felt “Wow, this is bigger than we thought!!! Forget trying to sell to customers… customers are calling us!!!”. However, the reality was that the customers who called us were among the few ones who were LOOKING for the solution we were offering. Beyond these very few schools who were actively seeking to outsource their health & wellness management programs, when we tried selling to other schools we realized that they were not keen to take on the additional responsibility of managing health issues in the schools and their policy was to have a quick response mechanism to take the child/teacher to the nearest healthcare facility in case of a medical need (i.e. they did not want medical issues handled on their premises). Selling to schools that were not already looking for a solution that were offering turned out to be a nightmare. (Well, while the company got to a level of self-sustainability but we realized that it will never really scale… and our aspiration was to scale. We shut shop after 3 years of trying the concept… some may say, and perhaps rightly so, that we should have shut shop earlier.).
- What will be my average sales cycle to close a deal? Often in the initial phases the entrepreneurs are the ones making the sale. And with their passion, and perhaps their contacts & relationships, they are able to do a few quick sales. But that is not replicable and scalable. Eventually the business may need to rely on sales persons to make the sale. And a sales person will not have the sale level of passion, insight, experience, stature or skill levels that the founders had when they made the sale. Hence, the sales person’s sales closing time may be several times more than what the founders were able to get away with.
Unless you are able to get a realistic view of how much time it will take to close a sale, the venture is likely to totally underestimate cost structures as well as their cash flow, and thus their funding needs and may run out of money sooner than planned. (Quite a few companies die because the team runs out of money a few quarters earlier than originally planned… )
- How much will my customers pay? Often initial customers either pay too little or are given the product free or pay the full price for a trial set of numbers. And most entrepreneurs showcase those numbers as ‘having proven the pricing strategy’. And as you can imagine, that may not be the case. The pricing of the product/service should be tested in an environment that is replicable at scale.
- What will be the repeat purchase rates? In many businesses repeat purchases (or annuity contracts in B2B customers) are critical to the successes of the venture. A few early adopter customers who experiment with your product are often merely checking if your solution solves their problem. And as with your product, they may be experimenting with a few other options too (including indirect competition to your products). Thus, unless you figure out a way of how the customers are using your product, how much internal resources have they committed to your solution (in the case of B2B ventures), how well is your concept addressing their problem, what does the management think about this approach, do they have the money to do this beyond the pilot, etc. you will be misguided by the initial adoption.
Friends, validate as many assumptions on your business as you possibly can. Even if you do not sell to customers, speaking to MANY to understand their needs & views on your solution is better than a just a handful customers who buy/use.