Great business ideas are hard to come by and when they do, you’ll need a solid execution plan. But how will you know if people even want the product or service? Knowing what to do can be the difference between setting yourself up for success, or wasting money, time and effort. Below, we set out the six steps involved in validating a business idea so you can create a business people will love.
But Wait, What Does it Mean to Validate a Business Idea?
Validating a business idea means ensuring your target market want your product. It’s the process of conducting small tests, learning and making iterative changes to your final product or service. Without validating your business idea, you are just hoping for the best.
On the contrary, you might discover certain conclusions when testing your idea. Maybe a particular niche of customers want your product, or your idea doesn’t have any legs. It’s beneficial to recognise where you might fail, or even failing early, to save yourself time and resources.
1. Formulate Your Hypothesis
What you are seeking to do is test your hypothesis. Consequently, you should specify a goal and a metric to measure success (e.g. percentages or dollar figures). Some important questions your hypotheses should answer include:
- Who is my customer?
- What is my customer’s problem or need?
- What is my solution or offering?
- How much is my customer willing to pay for my solution?
For example, let’s say you had created an app which allowed your users to sell second-hand goods. You intend to take a percentage from all the transactions done on your platform.
Your hypotheses to the questions above might be:
- My customers are men and women aged between 25-35;
- Men and women aged between 25-35 have a lot of goods which they do not use, but which they perceive to be too high quality to throw out;
- My platform will help men and women aged between 25-35 to receive value from their old goods which they are not using anyway; and
- Men and women aged between 25-35 are willing to pay me $2 for every $30 they receive.
Now, the reasons for your hypotheses can be data-driven or wholly based on your hunch. Your hypotheses could also be all completely wrong. The best part is, all you need to do is test them to find out.
2. Find Your Test Subjects
This is the stage where you start approaching and talking to your potential customers.
Who Should I Speak to When Validating My Business Idea?
Depending on your product or service, take care not to narrow the group of people you approach. For example, with our second-hand app – you might discover that people aged 40-45 have considerably more second-hand goods they want to get rid of then our original hypothesis. You would have overlooked an entire demographic had you only set out to speak to men and women aged 25-35.
Alternatively, if you are aiming your product or service at a particular industry, it might make sense to target a specific group of people. For example, you might only want to speak with realtors if you were building a CRM tool for real estate agents.
How Many People Should I Speak to When Validating My Business Idea?
There is no hard and fast rule however, you want a sufficient sample size that allows you to identify trends and patterns.
How Do I Find My Test Subjects?
There’s no shortage of ways to find and speak with your test subjects, but we’ve listed six below to get you started.
- Ask your network: Facebook, LinkedIn, Twitter – it’s never been easier to reach out to your networks. Ask for introductions, message people, post in groups – warm introductions make the conversation much smoother.
- Cold call: Although this might seem ‘old-school’, it’s still highly effective. For example, if you wanted to speak with restaurant owners, you could pick up your local directory, and call every listed restaurant.
- Use LinkedIn: LinkedIn lets you search by industry types as well as occupation. It can be great if you want to target a segmented list. You can also use LinkedIn Inmail to message people directly.
- Attend trade shows or industry events: Organised events are often a great collection of like-minded people. It may not be the ideal place to conduct interviews but it’s a good place to meet someone who might want a call or meeting at a later date.
- Visit places your customers visit: In our second-hand app example, you could go to second-hand stores or thrift shops. Speak with the customers at these stores or talk to the shop owners.
- Search for groups online: Finding niche groups online is a great way to find people. Consider engaging with Facebook and LinkedIn groups, Reddit pages or even forums. There’s also usually a wealth of information in amongst people’s posts which will help with your research.
3. Ask the Right Questions
The next step in the business validation process is to speak with your list of contacts. Whether you speak with them over coffee or on the phone, remember to have meaningful conversations.
It won’t hurt to prepare a set of questions to get you started. However, try to steer the conversation towards a discussion rather than an interrogation. Ask open rather than closed questions (i.e. “why” as opposed to questions that form a “yes/no” response).
For our second-hand app, some questions you might ask include:
- Explain to me what sort of second-hand goods you have but don’t use anymore?
- What do you usually do with these second-hand goods?
- If there was a way for you to dispose of your second-hand goods, what would be ideal for you? Why?
Your job is to dig deeper into the problem and understand their issue. It’s not to ask your contact whether they like your idea or if they would pay for it. Hopefully what will emerge from these discussions is a trend or pattern. You will know this is the case once the answers start beginning to sound the same. Rather, these conversations should help you gain a clearer picture of your customer and answer those questions you set out in your hypotheses.
4. Record Data
After your conversation, you should record the data so you can refer to what your contacts have said. At this stage, you might choose to refine some of your original hypotheses. You should then use this data to shape your product or service, keeping in mind your intention is not to please everyone. Use the trends and patterns to build your product or service around the pain points you have highlighted.
5. Validate Your Business Idea
Armed with your data and a refined product or service, you want to test each hypothesis and ensure your assumptions are valid. However, this does not mean you engage in full production mode – at least, not just yet. You want to deliver your potential customers your offering in the simplest and easiest way possible via a prototype, minimum viable product (MVP) or even a replica.
From here, there are two options. Based on the responses you receive, you could go back to the drawing board or ask your customers to fund your product (or least a commitment to do so).
No doubt, your customers will object but this is also the point. You need to be able to justify your product or service is worth the price for their problem. Understanding how much your customer is willing to pay is important. Ideally, you would want to receive full payment. However, where it’s hard to do so, you can also:
- Ask for a deposit;
- Pre-pay an amount for a future discount; or
- Grab credit card details for the future.
6. Don’t Give Up
As already mentioned, what you will find is that your original idea or plan is not always correct. There will be countless setbacks. Your data will suggest things far from your original hypotheses. Your customer reactions might do the same.
Pivoting, or the idea of adjusting to the market based on your learnings, is an integral part of building a product or service your customers love. Question your assumptions, interview more people and continually build new prototypes or MVPs.
Validating your business idea is the first step you should take when building a successful business or startup. Without business validation, you are hoping that your idea will pick up steam all by itself. However, validation will ensure there is a market-fit and that your customers will love your product or service. That is because you truly understand their concerns and you have built an offering around it.
How do you test your ideas? Let us know your thoughts on LegalVision’s Twitter page.