How do you do market research for a startup?

  • Talk to customers. Lots of them. Ask them about the need, the concept, the value proposition, the pricing, ease of use, etc.
  • Talk to potential investors – ask them about business case, interest in such concepts, etc.
  •  Talk to experienced entrepreneurs – ask them about challenges, watch outs, learnings from their experiences, etc.
  •  Talk to potential employees – ask them if they would join, if yes what would be a meaningful compensation (salary, equity or salary + equity)
  •  Talk to a couple of lawyers – they often can give you interesting insights about challenges or watch outs
  •  Talk to some accelerators/incubators/mentors – ask them if your plans look practical, is your assumptions look plausible

In short… talk to anyone whose perspective on the concept or the business around the concept will help you make a better informed decision 

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Is it advisable to proceed if there’s already a venture based on a similar idea that you have?

Well, as with most aspects of entrepreneurship, there isn’t one right answer to your question.

 

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Whether it is worth starting another venture in an area that already has other players will depend on a number of aspects about the environment that you are going to operate in. I have tried to outline a few thoughts, but there will be many, many more aspects that others will have a perspective on.

Size and nature of the market opportunity
Is the market large enough to support multiple players? Is the nature of the industry predominantly fragmented (e.g. restaurants – many can co-exist) or is the industry dominated by a few large brands (e.g. e-commerce).

Do you have experience or competence that makes you particularly suitable to lead a venture in that space
Even in a market with some established brand leaders, it may be possible for an entrepreneur with deep industry experience to create a successful brand. E.g. in a crowded space of organizing/aggregating healthcare in India, someone with deep healthcare industry experience with an existing network and understanding of the challenges and opportunities can create a very successful venture, even if the existing players are dominant in the market. In fact, because of the person’s understanding of the industry’s challenges and opportunities, and BECAUSE there are a few large brands whose market share the venture can snap at, it may be an easier task for this experienced entrepreneur to consider a venture in that space.

Doing it differently
Even with existing players in the market, it is possible to create a distinct identity for the brand. Either on a service differentiator (same product, better service) or on a concept/value proposition differentiator (same concept, differently positioned) or a price differentiator (lower price/higher value or even higher price/premium positioning) or targeting a different target audience (younger or older or different income bracket, etc.) even a brand personality differentiator.

How satisfied are customers with existing options
If there is a serious level of dissatisfaction among customers/consumers, and complacency among established players, there will be good opportunities for newer ventures to capture that market.

Where do you do it?
Let me illustrate with an example. In India, there are 100s of companies that have attempted to do ERP for doctors or Clinic Management Systems (CMS). Almost everyone failed. Most attempted these in either Delhi NCR or Mumbai and a few in Bangalore and Hyderabad. Clinics in these cities are fed up with startups coming to them to be beta customers and are unlikely to entertain them as most past experiences have been a waste of time – either the product was bad or the startup shut shop.

However, there is a large untapped market in tier 2 cities across India where no one has approached those clinics with a CMS. If you target that market, despite it being a product already available, you could have an opportunity.

What should you think about before starting a new venture (especially an e-commerce venture).

But when you are starting a new venture, you need to assess various risks. I have listed some below, but each business and each person’s circumstances will throw up different aspects that you would need to consider.

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Concept risk: Is the value proposition relevant for the intended target audience? (To assess this, you first need to clearly articulate what your value proposition is. ‘What you do’ is NOT the value proposition. What the users/buyers will get out of what you do is the value proposition. Check with your intended target audience if they feel that this is meaningful for them. If it is not, then evaluate if you need to adjust your value proposition (and therefore sometimes your product/service/concept itself) or you need to check if the value proposition is relevant to a different set of audiences (perhaps different age or income bracket or in a different geography or people  in different circumstances than originally intended).

Revenue streams, business model and business case: You have to evaluate if your revenue streams and business model makes a business case that makes the venture worth your while. This is a critical process  in your entrepreneurial journey and you need to take a realistic view of the costs and potential revenues.

In e-commerce businesses, you often have a disproportionately higher spend in acquiring the customer and you make monies on that customer only after a number of repeat purchases (or visits if the customer is not going to pay for services and you have alternate ways of making money – e.g. advertising or referrals)

Operational aspects: Evaluate the challenges around procurement, warehousing, logistics, etc. that you will have to deal with, and evaluate whether it is practical for you to overcome those challenges given your resources and circumstances.

People resources: Hiring people in startups is a challenge. You need to have some thoughts on how you are going to assemble your core team and your initial employees. Evaluate whether you will have some of the important functions in-house or outsource or use existing platforms (e.g. technology)

Marketing and customer acquisition costs: Quite often entrepreneurs do not spend enough time to understand the dynamics of customer acquisition. Especially in e-commerce ventures, you need to be able to get a clear sense of what activities you would do, how much they would cost and what conversions you could expect…. and therefore how much it will cost you to acquire customers.

And remember, the cost of customer acquisition is NOT just the cost of marketing. But the cost of all the direct resources that are involved in the marketing process + cost of marketing itself + a portion of cost of the central office and operations.

Understand the ‘unit economics’ and Capital required: While the ‘business as a whole may not be profitable’ for a while due to the overheads of managing the operations (and that is perfectly OK in most cases), you need to evaluate if your per unit economics are healthy. Are you going to make money on each sale. And how much will you make. And therefore, how many units do you need to sell to cover the cost of operations. And how much time will it take for you to ramp up to that scale. Is that possible? And is it possible within your given resources?

E.g. if your ‘central office’ costs (founders salaries, salaries of central office staff, rent, electricity, etc.) is USD 10,000 per month (using simplistic assumptions for easy of discussion). And your revenue per unit (product or service) is USD 20. And your gross margin is 40%. In this case, you are making USD 8 on each order.

Assume that your cost of customer acquisition was USD 50, and that each customer is likely to buy 4 times in a year (when you assume your numbers, make sure you have it validated with some research or understanding of the market… and is not a random number that is assumed based on your own expectations on how the market will behave), in which case your cost of customer acquisition itself is going to be recovered when the customer buys 6 – 7 times from you.

Now, given your view of the numbers you could ramp up this business to, you need to work out whether the USD 8 that you make from each order is sufficient to sustain you through your initial phase when the costs of USD 10,000 will be there every month + you will have to invest in marketing. (In many cases, the low ticket size of the product/service makes the business unviable. If you are going to make a few dollars from each customer, you need a LOT of customers to make the business case meaningful.).

Evaluate how much money you are going to require to startup. In estimating capital required, I urge you to overestimate costs and underestimate revenues. Do not let your enthusiasm guide your excel sheets. Do not assume that you wil multi-task and therefore save costs. (Even if that is possible for you, it cannot be sustained as you scale up when you need to move from ‘doing’ to ‘managing’). Also, many entrepreneurs make the mistake of assuming that they are smarter than others and therefore would be able to do it for a lesser investment than others before them have attempted (and even if that is true, keep that as a buffer rather than assuming that your smartness will be THE reason for you to do it better, faster, cheaper than others).

When you have a view of what kind of capital is required, evaluate different funding options. (Many entrepreneurs make the mistake of assuming that VCs are the first choice of funding for startups. And that need not be so. Understand what parameters VCs use for evaluating deals they invest in. See if you are ready for VC funding. Most likely, you may not be. In which case evaluate alternate ways of funding – boot strapping, family & friends round, advances from customers, debt, etc.).

 

 

In your pitch deck do you talk about future markets that can be addressed by the product?

Yes. Your business case is based on what the potential for your concept/product/core competencies are for the future. You may have a focus on a particular segment/geography/opportunity/problem at the beginning of your journey, however, the if the possibilities of multiple revenue streams and adjacent or parallel opportunities exist, that should be included in the pitch deck.

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This can be added in the slide about ‘size of the opportunity’, where you can given an overview of what possible opportunities, including new markets and new customer segments, exist for the concept you are currently proposing.

Remember, the market opportunity is different from your plan for your venture. Think of it this way… if you were working in Accenture or Mckinsey and were to present a report on the size of the opportunity to a large multi national company, what would you say? The opportunity is open to all… the MNC may have a better chance of addressing that opportunity, and your plans may be different. But the opportunity is the same, whether you address it or not.

What should startups focus on in pilot phase?

A ‘pilot program’ is an activity planned as a test or a trial. In the context of startups, a pilot is done to test the untested dynamics of the business.

In any business, especially in a startup stage, entrepreneurs have to start with certain assumptions. These assumptions could be about percentage conversations, cost of customer acquisition, repeat purchase rates, etc. They could be about processes and competencies e.g. ‘one person can handle 25 transactions in an hour’. Or the assumptions could be about the business case. E.g. We will make a gross margin of 35%. The objective of a pilot phase is to test and validate some of these assumptions, so that the final go-to-market business plan can be adjusted on the basis of validated assumptions.

Below are a few things that are tested in a concept test stage/pilot phase:

  1. The concept – the power of the idea itself: Do the consumers/customers see the value proposition in what you offer? 
  2. The business model: A business model is about ‘who will pay how much and to whom’. Each element of this should be tested in the pilot phase. i.e. are the consumers/customers seeing the value proposition as you meant it to be, how much are they willing to pay – is there price sensitivity, and if so, how much.
  3. The assumptions for your business case: As mentioned above, list all the possible assumptions you have made in your business plan and see if there is a way to validate those in your pilot. In a pilot, some of the operational outcomes may NOT be as per your plan. However, it is expected that in the initial phase your operations will be inefficient and that cost and operational efficiencies will improve as your business matures.
  4. Understanding operational challenges: Entrepreneurs often tend to underestimate the operational complexities and challenges of managing a business. While startups often manage operations with a limited number of people who are stretching themselves beyond practical limits, it is often not sustainable in the long run. A long-term business case cannot be made on the basis of the enthusiasm and give-it-all commitment of the founding team. A business case has to be based on what is practical and sustainable with an average set of people managing your larger teams.
  5. Testing processes and operational capabilities: Processes help organizations scale up. Processes are nothing but just a set of guidelines on managing activity and handling situations. Processes are usually centrally planned and locally implemented. Processes. They reduce the dependence of individual brilliance, and instill a discipline that results in operational efficiencies and consistency of experience. It also allows individuals to be clear on how a certain activity/situation is to be handled. The quality of processes can make or break an organization. Not only should processes be implemented, but they should also be measured and evaluated periodically to ensure that inefficiencies and redundancies are eliminated. In a startup, it is critical to define some processes, but yet be flexible to adjust processes quickly as soon as you see some processes becoming bottlenecks or inefficient. It is therefore important for startups to test these in the pilot phase.

How to judge whether your business idea is worth implementing?

Whether you should implement an idea should depend on whether that idea has the potential to meet what YOUR objectives are. If your goal is wealth creation, you will have to check if the business case is strong and if this is what will create wealth for you. If not, you will evaluate other opportunities.

On the other hand, if your goal is NOT wealth creation but ‘social impact’, then you will evaluate if this idea is providing the scale of impact that you wish to create.

And if your goal is to ‘enjoy what I do’, then you have to evaluate if this idea is what will give you the greatest joy.

If your goal is wealth creation, you will have to evaluate things like what is the scale of the opportunity, what is the competitive environment, why do I have an opportunity to be a dominant player, what is the scale that I can reach with this venture, what are the resources that I will need and can I gather the, what are the competencies that I will need and do I have them or do I have the ability to engage others who have those competencies, what are my exit options, etc.

 

Estimating potential for Facebook apps

Revenue projections for a Facebook app should be done like you would for any product, say a refrigerator, or service. Here are a few steps you could consider:

  1. You need to first define your target audience, then estimate how many people from your target audience are there on the platform [in this case Facebook] and in the geography you are targeting [i.e. the markets you are addressing].
  2. Once you have the number, you calculate how many people you CAN reach through your media spends and the activities that you within your control e.g. ads in the press or online and your distribution channels e.g. if the product/app is bundled with another existing brand or sold through app stores, etc. Remember, just because your app is on Facebook does not  mean that your marketing & advertising channel should also be Facebook. E.g. you could put efforts on PR – get a few TV interviews, press articles, etc. – and you could probably reach a much larger audience with your limited budgets.
  3. Then you make some assumptions on how many additional people in your target audience can be reached through means like PR, viral effect, etc.
  4. Once you have these numbers, you make assumptions on the % of people who are likely to buy/download your app.

If your revenue is based on buying/subscriptions, you estimate how many people x how much per download. If your revenue is advertising, you estimate how many impressions, and use existing media rates to estimate your revenues.

Now, to extrapolate this to the future, you make various assumptions on the base target audience size. You can use various media reports on where the target audience numbers are likely to go on the platforms you choose to be on.