Make sure the problem you solve is a problem people care about being solved. The worst products are something that no one wants.
This note is about figuring out and refining your business idea. How to find problems and how to create solutions people are willing to pay for.
There are two main ways to start defining a business idea.
1. You have identified a problem that needs solving. 1a. Accounting is troublesome => accounting service. 2. You have assets you want to turn into money. 2a. You have superior knowledge how to build cheap but efficient solar panels. => sell solar panels for individuals => use the solar panels and sell the electricity 2b. You own an oil well. => sell that oil forward => make plastic from the oil and sell it forward
Solving a problem is the best way to start. It's rare that a starting entrepreneur has unique assets other people don't have access to so it's more productive to focus on solving problems using assets available for everybody.
// an example how to create and evaluate a business idea STEP -> KEY WORDS 1. What problem do you want to solve? -> Problem Hypothesis 2. Who are you focusing? -> Market Segmentation 3. What are your users like? -> End User Profiling 4. How are you solving the problem? -> Solution 5. Why would they use your solution? -> Competition / Differentiation 6. Who pays for the solution? -> Monetization 7. Is it profitable? -> Revenue Estimation 8. How will you develop your solution? -> Persona
Using existing assets is a great way to expand. When you have an existing product and some presence on specific markets, it's usually more productive to expand your influence using the existing assets.
1) A new solution for the existing market. 2) Slightly customized solution for a new but related market.
Business idea should align with your company vision. More about it in company vision notes.
Stay true to your vision, but don't force it. Educating a market that doesn't see the need for your product is a losing battle. Stick to your ideals and vision, but respect the trends.
If you believe the world needs more poetry, sell hip hop, not sonnets.
It's easier to notice problems to solve than the finding people that have a motivation to pay for an existing product. This is why it makes more sense to start by finding problems to solve.
Focus in having a meaning. When a thing has a meaning in person's life, that person is willing to pay for it.
1. Improve quality of life. 2. Right a wrong. 3. Prevent the end of something good.
Create a solution for a problem. Find out what people do but dislike doing and make that obsolete or fun. Your target audience should already know that they have the problem. When you have a solution to a problem that none recognizes, you are either delusional or forced to explain why the problem needs solving.
Improve an existing solution to a well-understood problem. Find out what people are currently doing and make that more easy or efficient. Usually involves taking out process steps with technology.
Google = Searching information on the web. Dropbox = Sharing files. LinkedIn = Maintaining professional connections. Facebook = Maintaining personal connections.
Make a wanted activity possible. Find out what people would like to be doing and make it possible. Usually finding a new way of entertainment.
Blizzard = Entertain people with games. reddit = Entertain people online with discussion and sharing links.
Market segmentation is a systematic categorization of potential markets for your idea. When you have a hypothesis what might be a problem worth solving, you start to prove that you are on the right tracks. Go out and talk with the people that you think experience the problem.
Your target is to find multiple homogeneous groups of customers. Each market segment should contain people that:
...have a similar need.
...can understand and accept your solution.
...to whom you can deliver your solution at similar cost.
...would buy your solution at similar price.
...have similar sale cycle and buying process.
You have engineered a engine layout that makes power transmission 10% more efficient which reduces the problem of fuel usage.
INDUSTRY -> MARKET -> SUBMARKET -> END USER Automotive -> Non-electric -> Sports cars -> Design Engineers (Flight) Hybrid -> SUV -> Assembly Engineers (Space) Electric -> Motorcycles -> Maintenance -> Car Enthusiasts
In this scenario, interesting market segments could be:
- Automotive -> Non-electric -> Sports cars -> Design Engineers
- Automotive -> Hybrid, Electric -> SUV -> Assembly Engineers
- Automotive -> Non-electric -> Motorcycles -> Maintenance
Watch someone working. You can validate problems by following someone working:
- What tasks take the longest?
- What tasks are repeated the most?
- Does some tasks annoy the worker?
- Does worker feel there might be a better way to do it?
- Does worker use any external tool e.g. computer, software?
Speak with the people. You can validate problems by doing interviews.
- Ask about past, not future.
- What tasks do you do most often and repeatedly?
- What kind of problems do you encounter often and repeatedly?
- Why are you doing the thing the way you do?
- You should interview minimum of 10 people with each batch of questions.
Think differently. Successful founders seek additional problems in processes or existing problems from another point of view. Always play with a though: what can be done better with this new technology or in this context.
Choose a single beachhead market segment. The market segment you choose to target and dominate first. Focusing on a single market segment is psychologically hard, but worth it.
// most important aspects of a beachhead market Money: Does the customers have enough money for your product? Accessible: Can you easily get your product to your customer? Value: Does customer have a strong desire to buy your product? Delivery: Can you deliver the whole solution, not just a part of it? Competition: Is there competition that could block you? Expansion: Does the market give you advantage to spread into other markets? Alignment: Does the target market share values of the company? Word-of-mouth: is there some degree of communication between customers? Catching 3 rabbits at a time is hard. Catching one rabbit at a time is easy.
End User Profiling
A single market segment can contain different kinds of end users, the people that are in the end using your product. You should always target one beachhead market segment, but that market segment may contain multiple different types of end users. You should also divide that market segment to different kinds of end user groups and mainly focus on a single end user profile.
End user profiling is a systematic categorization of users of your product. What kind of categorization you should be using depends on your product and market, but here are some frequently used differentiators:
- Similar demographics: Gender, Age, Income, Location
- Similar motivation: What motivates then, What they fear the most, Who is their hero
- Similar behavior: Where they go for vacation, Where they go for dinner, What newspapers do they read, What TV shows do they watch, How they use your product.
Product must be tailored for the market. When you decide your first business idea and try come up with a solution for it, you must first get into the product-market fit.
Think about the alternatives. Alternative might not always be a competing product. "Doing nothing" is one of the most problematic alternatives to tackle.
- What are the pros and cons of each alternative.
- What are the key differences between the alternatives.
End user is the person who uses your product. Customer is the person who pays for your product.
Business requires a paying customer. When you have a paying customer, you have a business. There are different approaches to creating a business but in the end all boils down to having paying customers. What a customer is buying is called a product, it being services or goods.
Think about the customers. Without paying customers or a way to monetize the product, you have nothing.
- Who will pay for the product?
- How do they view the solution?
- How they buy stuff?
- How to contact them?
- How they discover about new stuff? Your weekly growth should be over 5%.
After you have your beachhead market segment and end user profile suggestion, you must estimate if that focus is profitable enough.
Revenue estimation tools:
- Total Available Market (TAM): The annual revenue dollars per year if you achieved 100% market share on your target market segment, meaning there would be no competition. TAM = Number of Existing People fitting the End User Profile multiplied by Annual Revenue per User - Serviceable Available Market (SAM): TAM after taking competition, distribution and scaling into consideration. How many can I reach, attract and serve with my sales channels.
Estimate your TAM. For a successful enterprise, your TAM should be between 20 million and 100 million dollars. Over 100 million means you are not focused enough, you will fail to competition. Less than 20 million means you are targeting a market which is too small to sustain a bigger business.
Population of Finland is 5,400,000 (2014) 65% of population is between ages 15 and 64 (2013) => 3 510 000 70% of ages between 15 and 64 have a paid job (2014) => 2 457 000 20 million / 2 457 000 => 8.14 You would need a product that costs 8.14$ (6.90€) a year and targets every single working person in Finland to sustain an enterprise. Finland has about 18 000 lawyers (2011). 20 million / 18 000 => 1111.11 You would need a lawyer service that costs 942.22€ (1111.11$) per year, or 78.52€ per month to sustain an enterprise. All people enjoy listening to some music. There are 3 045 102 800 Internet users on earth (2015) Population * Spotify costs 5$ per month * 12 => 182 706 168 000 TAM Spotify is going to be f*cking huge. (well, already is)
Sometimes your TAM can can be lower. If your beachhead market segment has a potential to open more profitable market segments, you might try an assault tactic and take the beachhead market fast but then you will be racing against the clock.
Estimating SAM is hard. Estimating SAM is so hard that estimating it is usually skipped. You cannot estimate how big market share you are going to get and so on. But you should always try to think about it, especially if competition is so fierce you will never get 100% market share.
Think about the profit. Without profit, you cannot grow. Without growth, you cannot fulfill your vision. Always consider the following after estimating the revenue.
- Is it profitable right now? (revenue minus costs)
- Is it profitable in the future?
- How does your competitors generate revenue?
Think about the scale focus. Global companies must compete with everyone, whereas a local companies only compete with other local providers.
Creating a search engine => greater potential but fierce competition. Creating a barbershop => only local people will use but low competition.
Persona makes your end user profile concrete. Personas direct the product development, you should always consider how would a feature change affect the persona.
Persona should be a real person but change his name. Name, Birth date, Concrete family members, picture and look, schedule, company they work at, purchase criteria in order (service, quality, brand) It might also be good to make personas for people that you don't target. Best is if you can even call the persona and ask about feature changes. In B2B, personas are still important. There is always a human making the buying decision.