Starting a Company, Part 3: Developing a Product

The previous post in this series was a method for identifying your customers. This post is about developing a product. The next and final post will be about ramping up your business.

What is a product?

Product is a pretty vague word. Let’s start by trying to define it. Open up a text editor, or grab some paper and a pen, and write down a definition of what a product is. Take as long as you need, I’ll still be here whenever you’re finished.

I’m serious, do it!

Done it yet?

I’m going to assume you’ve either written it down now, or that you’re not going to bother. If you haven’t written it, then at least spend a second getting an idea in your head.

Done?

OK, so let’s think about some things you might have written down. Did you say something like “a product is a tangible item that people will pay money for”? This is MBA-speak for a product, used to distinguish products from services, where what the customer gets isn’t an object. It’s the difference between a Mars bar and a massage. I’m going to treat those two just the same because, when you’re starting out with your business, the difference doesn’t matter. The MBA definition of a product is where you want to end up, but doesn’t help that much while you’re still building your product. It’s obvious that you want to make something that people will pay you money for, but how do you know what that is? If you make the wrong tangible item, no-one will pay you anything.

Maybe you said something like “a product is an output, a deliverable created at the end of a process.” This is project management-speak and it’s good because it includes the idea of the process involved in making a product. Unfortunately, it misses out on the idea of making something people will pay you for. It also suggests a product as the end of a process. The best products are developed iteratively, by continual refinement using a process of trial and improvement, they’re not outputs at the end of a process, they’re the subject of a process which continues indefinitely.

If you’re being a smart alec and you remember your maths lessons from school, you might also have defined a product as “the result of multiplying two numbers”. Obviously, this misses the whole side of a process to develop something, but it does make for a nice metaphor for the fit between your customers and your business idea. Just as a mathematical product depends on x and y, the product you make should depend on your idea and your customer. That second bit, the customer, is vitally important. Lots of people leave it out, then spend ages making something that customers don’t really want. That is a waste of your time.

For the purpose of this series, a product is whatever you have to do or make to validate with customers that you’re making something they’ll pay for. Remember this diagram from part 2?

The development of customer and product hypotheses.

Developing customer and product hypotheses.

Remember how I said that actually making the thing you sell was only a byproduct of the important task of understanding what customers need? I really meant it. A product is a single step on the journey to understanding as much as possible about your customers. Even when you have a product that is making you lots of money, this loop remains the same: you should continue with making variations on the product to improve it and make it more profitable. More on that next time.

Humble beginnings

It’s day one of your business. Like everyone else on the planet, your time is precious. It’s the only thing you’ll never have more of. We need to help you find out who your customer is as soon as possible.

Product #1: Google Trends  Google Trends is amazing. If you’re new business has any kind of online component or is likely to appeal to people who are heavy users of the Internet, Google Trends will show you whether people are already looking solutions to a problem. Knowing that these people exist is an amazing thing for your business. One day they could all be your customers.

Let’s take the dog-sitting example from the last post. Immediately, you can tell a lot from the search trends. There’s a lot of people searching for it in the UK, where I’d be starting out, which is good news. Lots of people instead search for “pet sitting,” which could mean that some of my customers aren’t that interested in whether I especially love dogs. There are also a reasonable number of searches for “dog house sitting,” which is an even smaller niche of business which would be worth looking at. However, the search “dog sitting business” appears as “breakout” in the rising searches, suggesting that there’s a big upsurge in people considering starting out as dog-sitters. This is probably a bad sign for my dog-sitting business as I’ll have lots of competition. If I refine the search to just the UK, I can see that demand is highest in Bristol and Milton Keynes, so those are probably the cities where I’d try to find my first customers. The search for “dog sitting business” is on less of an upsurge here, so maybe I don’t need to worry about that. I can also see that “dog sitting London” is increasing in search volume, even though London isn’t one of the highest-demand cities. Maybe people in London assume there are specific dog-sitting agencies that only cater to London, and people everywhere else assume they can use a national directory to find a local dog-sitter. That sounds like a promising concept for my business.

Phew! All of that came from a single search on Google Trends, and we already have a bucket-load of new ideas for who our customer might be and what they’re looking for. You can do more detailed searches to get more ideas.

Product #2: WebPage + adverts Now that we have some ideas of what our customers might be searching for, we can try to catch some of them. Take what you’ve learned a create a webpage that lets users sign up if they’re interested. This webpage might be a blog post, or it might be a landing page (LaunchRock is a company that specialises in helping you make landing pages so try them if you’re not very tech-savvy). This page needs to have three things:

  1. Show the customer you understand their problem (“You’re busy but you love your dog. Work keeps you late and your dog’s alone all evening.”)
  2. Tell the customer you’re solving their problem (“CanineCompanion gives you the peace of mind that your dog is being looked after when you can’t get home.”)
  3. Give the customer an incentive to give you their email address (“Give us your email address below to be one of the first members on CanineCompanion.”)

Next, sign up for some adverts that people can click on that will go to the page you just created. I recommend Facebook ads for targeting demographics and locations, Google AdWords ads for finding people who are already looking for solutions to a problem and StumbleUpon ads for high-volume mass-market ideas. Which one you use depends on who you’re appealing to. It’s normally a good idea to use different adverts to target different people.

Hopefully you can see how powerful this is. Not only do you get to test your understanding of your customer with the copy you write on the webpage, but you start gathering a list of email addresses of people who are really keen to use what you’re planning to make. At this stage, you can start using split testing (more on that next time) to try out different versions of your pitch to customers to understand exactly what they’re looking for.

This only takes a day or two to set up and run, and a bit of cash for the adverts, which is at least 10x faster than developing a  tangible thing and trying to sell it.

Solving the problem

By this stage, you’ve got a really strong idea of what your customer is looking for. Now it’s time to present them with your idea for a solution and validate that it’s what they need.

Product #3: Mock-up

Building a real product is time-consuming and expensive, but building a mock-up of a product is much cheaper and tells you just as much. A mock-up can be a “wireframe” of a website or app, or a video showing how it will work when it’s made. Lots of companies help with this.

It’s crucial at this stage to be open-minded about changing your ideas. Think about what the simplest solution to your customer’s problem would be, then sketch that out. Show it to your customers and check out their level of interest. Do they ask whether it’s ready for them to use? Or do they ask why you’ve chosen to do x instead of y? If you didn’t include a price for your solution in your landing page before, include a price and business model (one-off payment, subscription, freemium, etc) in your mock-up of the product.

The ideal mock-up at this stage is a video that you can include on the landing page you’re directing adverts to. You can then include the price on the landing page and see how it affects sign-ups with split-testing. If you have two different solution ideas, you can split-test to see which videos attracts more sign-ups, and which solution people are happy to pay more for. This is so much quicker than actually making two different products but it avoids you wasting your time on the less successful product.

Product #4: Solution You’ve come a long way. You now know that demand exists for the problem you want to solve, you’ve learned as much as you can about the customers and what they want, and you’ve got a strong idea of what the solution should look like. And you’ve done it all without spending time and money on developing a product.

Having gone through this process, building the first iteration of the solution itself is now easy. There’s little doubt about what it needs to do, how it should work and how much it should cost. Make it, and contact the early users who expressed interest. Like everything else, it’ll need refinement, but the groundwork you’ve done means you can be confident that you haven’t gone a long way in the wrong direction.

Summary

A product is something you do or make to understand more about what your business should be doing – it doesn’t have to be a tangible thing. You can learn a lot about what your customers want without wasting time and money on dead-end solutions that customers won’t really want. When you go ahead and build your solution, you already know who you’re selling to and you already know that they want it.

Thanks to Tom Carver for reviewing a draft of this post.

Starting a Company, Part 2: Identifying your Customer

The previous post in this series was about changing your thinking from a project mindset of making something that people like, to a business mindset of making a sustainable product with paying customers. This post is about working out who your customer should be.

Your hypothetical customer

One of the most pressing problems for any startup is making that first sale. You need a product to be able to sell something but, as I said in the last post, you don’t know what to build until you know who you’re building it for. Without customers, this looks like a vicious cycle — where do you begin when the customers are needed before you can make the product, and the product is needed in order to draw in customers?

The answer is to start with a hypothesis for both, a best guess of who your customer is and what the product they need looks like. The next post in this series is about developing products.

Once you have a hypothesis about the customer and product, you can cycle between improving your hypothesis of the product and improving your hypothesis of the customer. Only part of this process is actually recruiting the customers and actually building the product.

CustomerProductHypotheses

You read that right. More important than building the product and recruiting customers is refining your understanding of the customers and what they need from the product. The latter is how you set yourself up for long-term success.

An example

Let’s say that we want to start a dog-sitting service. Perhaps you love dogs but don’t have one yourself and you think there’s a gap in the market for looking after other people’s dogs. Customers pay you to turn up at their house and take care of their dog when they’re unable.

Disclaimer: I’ve never owned a dog and am not much of a pet person. If this idea sounds mean to dogs, then I apologise. If you think it sounds like a ridiculous business that would never work, then you should Google for “dog sitting service” and be surprised, like I just was.

Customer hypothesis 1: My customers are any dog-owners who want to be able to send someone to care for their dog when they’re busy.

Customer hypothesis 2: My customers are middle-aged commuters with desk jobs who live near me. They constantly feel busy and love their dogs, who are always waiting for them when they get home. On nights when they have to work late, they feel very guilty about leaving the dog on his own and waiting to be fed. Existing dog-sitting services are frustrating because they will look after the dog over holidays, but won’t come to the house for an evening. They’d love a way of sending someone to care for their dogs while he can stay working at the office until 10pm.

Which is the better customer hypothesis for a startup to have?

For most people, they assume it’s number 1. It’s less specific, so there are way more potential customers, and more potential customers has to be a good thing, right? It’s also less detailed, so there’s less chance of it being wrong.

These are all terrible reasons. More potential customers makes it much harder to know where to direct your efforts at the early stage when you’re still trying to get your product going. And a hypothesis that can’t be wrong is totally pointless! The hypothesis is only useful if you can test it and find out if it’s true or not, so you can test whether you really do understand your customer.

Hypothesis 2 gives you a much clearer image of who the customer is and what their problem is that you’re solving. It’s a much stronger starting position, as it gives you a statement that can be proved or disproved. Moreover, it lets you empathise with the customer, and that’s critical to being able to solve their problems.

The reality is that most companies will start out with a slightly vaguer customer hypothesis than hypothesis 2 (“The customer is a dog-owner in my city who wants someone to look after the dog when they work late in the evenings”), but only really established companies can afford to have broad hypotheses like hypothesis 1 (“The customer is a dog-owner who wants someone to look after their dog”) because it takes a lot of resources and a strong brand to target a broad set of customers.

Improving the hypothesis

Once you have your customer hypothesis as a starting point, you can start improving and refining your ideas. The best way to do this is to talk to customers and to change your hypothesis to reflect what you learn. I’ve written before about creative ways to find customers. Here I’m going to talk about the right way and the wrong ways to talk to customers. There are two simple golden rules to bear in mind here.

Golden rule 1: Ask about problems don’t tell about solutions. When you’re still at an early stage, you’ll be tempted to go to prospective customers and tell them all about what you’re creating. That’s OK later on, when you have a firmer grasp on your product hypothesis, because you already understand who your customer is. But it’s a bad idea in the early days, because you’ll end up pushing the conversation towards your current hypothesis, rather than hearing how the customer describes the problem without prompting. This could be illuminating: customers will surprise you with the problems they find, the solutions they’ve tried, and the insights they have into what’s wrong with everything else on the market. Knowing these things is a big advantage in working out your customer hypothesis.

Bad: “How would you feel about a dog-sitting service that operates on evenings and weekends? You phone up to say you’re in urgent need of a sitter and we send someone round to feed your dog, walk them and stay in the house until you get home.”

Good: “What happens with your dog when you’re late home? Have you already tried any ways of fixing that problem?”

Golden rule 2: Ask for preorders not feedback. Feedback is quite vague. Kind people will respond with praise, cynical people will respond with criticism, creative people will respond with ideas for new features, most people will respond with a mixture of all three. But these don’t help you unless you can convert the feedback into a paying customer. The most valuable feedback you can receive is an answer to the questions “Can I take a preorder?”, “Why not?” and “When I’ve done that, can I come back and take a preorder?” The reason these are so valuable is because they immediately tell the other person to think about their own opinions rather than those of another hypothetical person who they think is user. And they bring the other person’s brain straight to the issue of money and value: is this product valuable enough that you’d pay for it? Getting closer to a ‘yes’ is the goal of improving your product and customer hypotheses.

Recap

For long-term success, it’s more important to understand who your customer is and what product they want than to recruit customers or build a product. This starts with a customer hypothesis and a product hypothesis. The best ways to improve your customer hypothesis are to to meet with potential customers and to find out as much as you can about their problems before telling them about your product. The strongest kind of feedback you can get is whether a customer will preorder your product, rather than simply expressing an opinion about it.

Thanks to Tom Carver for reviewing a draft of this post.

Starting a Company, Part 1: Turning a Project into a Business

This is the first in a four-part series I’m writing on starting a company. Today’s post is about how you start turning a project into a business. The next article in this series is about how to identify your customer.

The main difference between a project and a business is that a business’s aim is to make money and a project’s aim is anything else. This has a profound impact on the idea of perfection. Perfection in a project normally means satisfying your own opinions but perfection in a business means the qualities that make your product valuable to customers. Businesses must always be trying to sell to customers in order to understand what is valuable to them, so they know what kind of perfection they should be striving for.

Project or Business?

I remember talking to a friend of a friend about startup companies at a social occasion last year. This was an intelligent 25-ish man enrolled in a PhD programme and he told me (paraphrased): “actually, I have an online business too. In the early days of Google App Engine and before Google Drive, I made an app that lets people  collaborate on a single document in real-time.”

Me: “Nice! How’s it doing?”

Him: “Great, really successful. It’s got over 10,000 users.”

Me: “Wow. So how did you make money from it?”

Him: “It wasn’t really that kind of idea, I made it free. It hasn’t cost me anything so far.”

This is a project not a business. Not just because it’s not making money, but because making money isn’t the objective (the focus in this example is on getting lots of unpaying users). Making money from your users is great for them: it funds improvements in the project which, particularly in web and smartphone apps, benefits the people who paid you in the first place.

But, as he says, it hasn’t cost him anything so why should he expect to make any money from it? I disagree with the premise here: it has cost him. It’s cost him however much time he spent making the app, testing it, improving it, sorting out the hosting, telling anyone about it, seeing how many people were using it, etc. Unless his time is utterly valueless, he’s lost a lot. That was all time that could have been spent doing literally ANYTHING else. That’s a lot to give up.

And if its really useful and valuable to any of the users, they would probably be happy to pay for it. Paying for something sets up an agreement that it will continue to exist, that problems will be fixed, that new features will be added. This is part of what people pay for when they decide to hand over their money.

That’s not to say that we should only ever do things that make money: I’m not suggesting anyone demands their friends pay them by the hour next time they go to a pub. But if you’re making something that you want other people to use, then you should try to make money from it. This will give you the incentive to keep improving what you’ve made (good for customers) and rewards you for what you’ve already put into it.

Projects don’t try to make money and businesses do. Your customers benefit from paying you.

On Perfection

What is perfection? Let’s say you have a web-app for sharing photos with your friends. Should you give it every possible feature? Cropping, filters, colour correction, resizing, zooming, security controls, comments on photos, ‘likes’ on photos? Or maybe it should be designed beautifully: a modern colour scheme, with flat design, beautiful typography, rounded corners, a retina-resolution logo, with animations and the fastest loading times possible.

In a project you’re mainly answering to yourself so you have the power to decide what’s important to you and then do it. If you think it needs a feature, you can create it. If you think it needs improved design, you can improve the design. But if you’ve decided that you’re doing a business, you have to answer to your users. Your opinion of the features, design, branding and marketing are all irrelevant; it’s what your users think that matters.

This is an important distinction. If a schoolchild creates something as a homework assignment, the teacher will probably give more marks for every extra feature, or every improvement in the design. The same mentality of making everything beautiful and creating every possible feature exists in projects.

With a business, all the time spent adding features that your users don’t want, or improving design that your users don’t appreciate, is wasted. You could have spent that same time on working on things that added value for your users. Remember that you can always trade your time to improve quality later, but once you’ve improved quality, you can’t trade that back for more time.

With a project, you make and design a solution then see whether other people like it. With a business, your priority is making things that are valuable to a user. As a result, the order is reversed: you should find people who have the problem your solution addresses, find out what your customers want from your solution, then make something that does that.

As Eric Ries puts it in The Lean Startup, “If we do not know who the customer is, we do not know what quality is.

Be paid not admired

How do you know your project has been a success? Normally, because you are happy with it. Or maybe other people tell you its good. With a business, the dynamic is different: you are creating something sustainable, so it has to make money. As a result, the measure of success of your fledgling business is whether people will pay for what you’ve created.

This affects many aspects of how you improve your product. For example, when you ask a user to test a project, the critical question is “Do you like it?”, “Would you use it?” or “How would you score it from 1 to 10?” But if your aim is to create a business, the critical questions are “Will you buy it?” “How much would you pay?” and, my favourite, “Can I take a pre-order?”

If your users won’t buy, it’s important to find out why and to make sure you’re always working on things that increase value for them. Businesses should start with this in mind: projects start from things you’d like to do, businesses start from an idea that is valuable to someone and worth paying for.

This also affects how you measure your success. Think back to the 25-year-old PhD student who said his project had “over 10,000 users.” This sounds great for a project: lots of other people liked it. For a business, this is a vanity metric. It sounds impressive but the goal of a business is to make something valuable that people will pay for, and the metric of “number of users on the service” doesn’t tell us anything about that. The measure of success of a business doesn’t have to be the total amount of money made, but it should include money as a factor. Otherwise you’re measuring for a project.

A word of warning: some of the startup companies that you hear most about exist in a Silicon Valley bubble where they get explosive growth in the number of users, take some huge investment and then work on trying to make money from some of their users. These success stories are incredibly rare: the majority of companies that don’t try to earn money from their users don’t manage to find investment, don’t produce sustainable businesses and quietly fail without any media coverage. If you’re trying to develop a sustainable business, selling should be your focus from day one.

Developing a business

That’s all for now. Remember that, unlike projects, businesses aim to make money. That means only doing the work that your users are going to find valuable, so they can give you money, so that you can sustain your business and your innovation. The best way to do that is to make selling to customers your focus, and building the rest of the business around that.

Next in the series: identifying your customer.

Thanks to Tom Carver and Sam Jewell for reading drafts of this article.