Why is market validation so important and how do you do it?
How do you know if your innovative idea will succeed in the marketplace? For example, do you know what your customer thinks is important and whether your solution meets it? To determine that, a market validation is indispensable. Just doing a market survey is not enough for that. You won't be the first entrepreneur to assume too easily that there is a need for his new product. Without proper market validation, that's a dangerous assumption. Yet that is one of the biggest and most common mistakes in innovation.
What is market validation?
Market validation involves researching and testing whether there is a market for your idea or product. You examine what the market need is (what problem do you identify and how do you solve it?), the behavior of your potential customers and what they think of your product or service. With a market validation you avoid making large investments without knowing whether there is sufficient sales and growth potential, and whether your revenue model is correct. Unfortunately, coming up with a product for a certain target group and doing market research does not yet mean that the market is waiting for your product. Validating the market is therefore incredibly important, preferably early in your innovation process.
Why is market validation so important?
Developing an innovative idea into a marketable product or service takes a lot of time and money. And chances are you will need external funding to do so. Innovation offers opportunities but also involves (financial) risks. Unfortunately, only a small percentage of innovations are successful. Of course, a good market validation does not eliminate all risks, but it does increase the chances of success.
A market validation allows you to understand your customer's wants and needs and also provide evidence for them. Consider the PDO method: Need, Solution and Proof. You first determine the need, then you develop a solution to this need, and finally you go on to prove that this is indeed the right solution to the need.
In this way, a market validation not only helps you make the right decisions regarding the market and what your final product should look like. It also gives you insight into the feasibility and viability of your idea. Not only in terms of market potential, but also with regard to required and available resources, financial resources and planning.
This is how you arrive at a product-market combination
A market validation is essential to achieve a good product-market fit or product-market combination. That means having the right proposition for your target market. In other words, you have the right solution for the right problem and the right person at the right time. That depends on all kinds of factors, such as price, sales channel, delivery time and, of course, value to the customer. And whether you have the right target group in mind, because that too is not a given!
Your product or service must offer a valuable solution to a problem, the customer must experience this problem as such and must also be willing to spend enough money for your solution. In addition, your product must be scalable and have sufficient growth potential or offer opportunities for upselling.
How do you conduct a market validation?
Hopefully by now you are convinced of the importance of market validation. But how exactly do you go about it? The main steps are to determine your target market, formulate assumptions about the market and customer behavior, conduct experiments and test your assumptions. Finally, you will evaluate your ideas based on them and make adjustments as needed. This is usually an iterative process. You repeat these steps until you get a good product-market combination.
1. Determine target market and conduct market research
Market validation begins with determining your target market and mapping the market. You do this based on market research, analysis and formulating assumptions. Ask yourself the following questions, among others:
- Who is your target audience and your ideal customer?
- What is the size of the market, in terms of number of users and potential revenue?
- How is the market to be reached, through what channels?
- Who are decision makers and influencers?
- Who are the early adopters in the market?
- Is the market scalable?
- Are there opportunities for upselling?
- Who are your competitors and what is their proposition?
- What are your unique selling points over the competition?
- What does your ideal customer's customer journey look like?
- What are the trends, opportunities and threats in the market?
A common calculation used to determine the size of your market is the TAM, SAM, SOM. These abbreviations stand for Total Available Market, Serviceable Available Market and Serviceable Obtainable Market.
2. Testing assumptions with your customer
You will then test your assumptions about the market with your target audience. That means getting out from behind your desk and getting out there! Only by talking to your target customers and observing their behavior can you find out whether you have the right target group in mind and what they think of your product. Consider the following questions:
- Is your customer actually experiencing a problem?
- Does your product offer the right solution to this problem?
- What value does your product have for the customer?
- Does the customer have money to spare for your product and how much?
- What are reasons or barriers to buying or not buying the product?
- What is the ease of use of your product?
- Through what channels would customers want to buy and how do they want to pay?
- How do customers make their choices and trade-offs?
It is very important that you approach the right people. Determine in advance which people are truly representative of your target audience and fit within your ideal customer profile. So don't "randomly" ask a handful of people, and preferably not friends and family either.
3. Asking the right questions
So you test your assumptions by gathering information from your target audience. This can of course be done by means of a questionnaire, for example in the form of an online survey. But face-to-face in-depth interviews are much better. This offers the opportunity to ask real questions and also observe behavior and non-verbal communication. To get useful information, it is very important that you ask good questions and formulate them in the right way. We provide four tips below:
- Ask open-ended questions that allow ample room for your own input and experiences.
- Stay objective, and don't base your questions on your own presuppositions.
- Stay away from suggestive questions that (unconsciously) aim to get your own assumptions confirmed.
- Ask about actual behavior shown, not intended behavior or opinions. The latter gives unreliable results.
Really assume the role of researcher, not salesman. Or have someone more distant from your idea do the research. It is critical that you get the truth out. Because that could also mean that your target audience is not the right audience at all. Or that you need to adjust your product or revenue model.
Don't be afraid to adjust your ideas. It is a common mistake to stick too much to your original idea. It is common for entrepreneurs to get started right away, only to have to adjust their business model or product afterwards.
4. Other ways to gauge interest
Interviewing your target audience is an important part of your market validation. But there are other ways you can research whether there is a need for your product or service. Consider a simple online sales page, offering a product through a sales channel such as Bol.com or Amazon, or a campaign on LinkedIn. Your product doesn't even have to be ready then, but you can test whether people are interested and would want to buy it. Another way that works well is to raise funding through crowdfunding. With that too, you can find out if there is interest in your innovation. With a little creativity, there are many things you can do to test your idea in the marketplace.
5. Testing and experimenting with prototypes
Now that you know who your target audience is and whether your solution meets a need, it's time to start experimenting and testing. You do this by developing prototypes or mockups of your product, which you then have your target audience test. By conducting these kinds of experiments, you find out whether your solution works and how your target audience experiences its use. This provides valuable and sometimes unexpected insights.
The challenge in this phase is to develop a Minimum Viable Product (MVP). This "minimum workable product" clarifies the essence of your solution. This is often sufficient for testing purposes. The idea of an MVP is that you keep development costs as low as possible. This allows you to get the feedback you need with minimal investment.
So don't spend too much time and money developing the "perfect" final product without testing in between. That way you will know in time whether your solution is catching on and whether it offers the right customer experience. You can then adjust your concept in time.
Tools and resources for market validation
There are countless models and tools available to perform a market validation. Well-known tools are the Validation Canvas and Value Proposition Canvas. These tools are a deepening of Alexander Osterwalder's well-known Business Model Canvas. The Lean Startup method is a great way to validate your ideas with minimal resources. This is because it revolves around developing and testing ideas and prototypes in short sprints.
Want to know more?
Want to know more about innovating and funding for innovations? Then download our free white paper "From innovative idea to commercial product.
In this white paper you will learn:
- What the innovation process looks like and what challenges you face along the way
- What opportunities there are to fund this early stage of your idea/product
- In what ways NOM as an investor can help you
Please note that this whitepaper is only available in Dutch at the moment. We are in the process of translating this whitepaper.