A guide for startup founders
Launching digital products 101
Time to put theory to practice. These workable tips will help you get started on product-market fit, pricing, and the initial product rollout.
As I’m writing this article, the raging pandemic of COVID-19 has been dominating our lives for over a year now. It seems that nothing is what it used to be — social distancing forced us to look for alternative ways to be “close” to our friends and family, and local and national lockdowns forced many of us out of our jobs. While headlines today warn of the imminent economical crisis, one sector is seemingly thriving: information technology. Companies and institutions that historically relied on in-person meetings and transactions, are now undergoing an accelerated digitization process, looking for ways to move most of their business and operations online. We use Zoom video calls instead of professional “face to face” meetings, Uber Eats instead of dining out, Houseparty instead of going out with friends after work. If you happen to have launched an online tool that helps move real-world services online, then business sure is booming.
There’s little doubt that we’re living through the golden era of businesses and products launched online, and while the popular belief that more than half new startups fail in their first year has been somewhat rebutted, many prospective entrepreneurs that I talk to are apprehensive of pursuing their product idea simply because they are not quite sure where to start. There’s a plethora of articles available online on how to increase the chances of your startup succeeding (like this one in Forbes) but the vast majority of them remain somewhat vague on the specifics. In this article, you will find a number of practical tips that will allow you to get started on your product strategy — this list is a result of 10 years of experience working with startup founders in Europe and in the US alike.
What this article does not cover, is how to raise funding, how to select the right engineering partner, and how to market and sell your product — each of these topics is its own beast and deserves a dedicated piece.
In simplest terms, product strategy is a description or a plan of what business objectives you’re planning to achieve and how you’re going to do so. There’s no one universally acknowledged or revered template for documenting your product strategy, though I have to say I’m quite partial to anything that can fit in a single page — product strategy canvas or business model canvas are the type of format I’d choose over lengthy documents with a ton of text in them, especially if it’s the first take on the business or product strategy.
The challenge that we sometimes encounter with these canvases, however, is that while they are fantastic when working on the so-called “big picture”, the output they provide is often skimpy on the detail how you put the theory into practice — in such cases, I find it helpful to further break down the strategy work into further areas of focus:
- product-market fit
- planning the initial rollout
Product-market fit, defined by Wikipedia as the degree to which a product satisfies a market demand is an unquestionable #1 of things any entrepreneur wants to validate before they make any substantial investment (be it time or actual money). When working on the product-market fit, you should do the following:
- Clearly define the problem that your product will solve for your users — you’ll need this later, when you assess the competitive landscape.
- Do the competitive analysis. This is one of the most grossly overlooked aspects of product strategy among new startup founders, who are often inclined to think their idea is so unique that no one (literally, NO ONE) has thought of. There’s a saying in business that if you think you have no competition, then clearly you haven’t looked hard enough. Pono extended classification is a very useful tool for mapping your competitors — not only the direct and indirect ones, but also potential competitors (so businesses that are targeting the same customer group and could easily expand into your domain).
- Define your unique value proposition (UVP; sometimes used interchangeably with unique selling proposition, though they’re not quite the same). Make sure you’re clear how your solution is better from the ones offered by your competitors — Matrix of Competitive Advantage (MOCA) is a simple tool that you can use to identify the key benefits that you should communicate to your customers in your messaging.
- Segment your customers. Look at the data gathered so far and try to pinpoint the specific group of customers that are most likely to benefit from your solution. Focus on them, the specific needs your product could help address, and try to categorize them into ca. three groups of customers — this information will be crucial when working on pricing strategy and feature bundling. There’s no single method on how to do customer segmentation (Forbes lists 14) but I like to group them, taking into account the maximum of three dimensions, one of them always being how much the customer is willing to pay for the product (we’ll talk about this more when we get to Pricing). Note: you might feel tempted to go more granular with your customer segments (i.e. have ten of them vs. three) — if you do so, you’re running the risk of trying to solve too many customer problems and not being able to target any customer group well.
- Write your elevator pitch. There’s no better way of capturing your product-market fit than putting it into a six-sentence pitch format that takes 30 seconds to deliver. It’s useful when talking to prospective investors, potential partners, and explaining your product vision to the engineers. Here’s a good elevator pitch template.
- (alternatively) Go blue ocean and discover an uncontested market. Blue ocean strategy is an approach to business that focuses on value innovation and discovering market opportunities that have not yet been discovered by other players (so you don’t need to compete with them). The approach has been increasingly popular ever since the book’s release in 2004. I personally found the reading to be something of a revelation.
If there’s anything that stays with you after reading this article, let it be this: pricing should be validated early — there are too many failed startups created by brilliant enthusiasts who simply forgot that they built their product not only to realize their personal passion, but also to bring in revenue. Monetizing innovation is one of the better “in-a-nutshell” reads that offers not only the walk-through on how to design and validate your pricing but also a number of case studies on how successful companies (e.g. Linkedin and Uber) went about their monetization strategies. Here’s the crash course on what to pay attention to when working on pricing:
- Validate your target customers’ willingness to pay (WTP). Forget about cost-plus pricing and focus on what value your product delivers to your customers and how much they are willing to pay for it. This, effectively, is their willingness to pay that you can reference in your revenue prognosis and cost structure analysis. There are some subtleties to WTP (e.g. contextuality) but the general rule is that you should try to price your product close to the maximum pricing threshold, but not exceed it — if you do, then any extra margin you might have made on the higher price might be cannibalized by the drop in the volume of sales (read on to find out how price elasticity can help prevent that).
- Investigate price elasticity and find the sweet spot for your pricing. Price elasticity is a measure for how the demand for a product changes as its price changes — basically, it’s a method for assessing where the sweet spot for your pricing lies (i.e. the highest revenue potential based on the maximum price you can charge and the maximum volume of sales you can achieve at this price). There are several ways and methods of validating both the willingness to pay and price elasticity — the book on monetizing innovation that I mentioned at the beginning of this paragraph provides a detailed walk-through of several of them.
- Draft pricing models for your target customer segments. Remember how we said that you should have around three customer segments identified? Presumably, individual customers within each segment share a need or a pain point that your product will aim to solve — whatever solution you offer to each customer segment, it should be within what they expect or are willing to pay. One of the most popular is the three tier model in which you have variations of the same product that are “Good”, “Better” and “Best” (G/B/B), and which allows you to maximize your profit by making your product available to customers with varied WTP.
- Think through your product bundling and how you’ll price it. Remember all these times when you were tempted by an offer similar to this one: “Buy one item, get the second item 50% off”? Offering discounts whenever a customer elects to purchase several products versus just one is something most of us are used to and barely give it a second thought — it’s a system that seems to be working to everyone’s advantage: the buyer (who in their right mind wouldn’t like a 50% bargain?) and the provider/seller, for whom the increase in the volume of a single transaction may result in an overall decrease of other overhead costs (distribution, packaging, shipping — you name it). When it comes to bundling, digital products offer an additional revenue opportunity — in some cases, you may be able to charge a premium on a bundle. If you remember what we said about cost-plus pricing versus value-based pricing, then this likely won’t come as a surprise: if by bundling two products or two services your customer is receiving a greater value, their willingness to pay for the two may be higher than the sum of their individual prices — a good example here would be any sort of enterprise plans or integrations with customers’ existing systems (e.g. your state-of-the-art asset tracking software + the integration with the existing customer database).
Planning the initial rollout
Regardless of whether you’re financing the product yourself or you’re working with an investment partner, you need to make sure you don’t end up bleeding money left and right. If founding a startup or a product has been on your mind for some time, you’re probably familiar with the lean approach and Lean Startup in particular (both the book has become something of a bible in the startup community). Here’s how you get about planning the initial product rollout and make sure you’re spending your money wisely:
- Define what you want to achieve initially and if you really need a fully functional product to do that. If it’s seed funding that you’re after or if you’re just looking to validate your product idea with a few friendly users, then you probably don’t need a single line of code to do that — a pitch deck or a simple make-believe prototype (a set of colorful and clickable images that pretend to be the real thing) will do. Looking to see if anyone is interested in your product at all? Create a simple website (e.g. using Wix or any other tool for non-developers), describe your product and provide an option to sign up as a beta user. Or even better — hit the social media, describe your idea and poll your prospective customers there. There are tens of ways to approach this initial validation and rollout at little to no cost. Software development can take time and (depending on the product complexity) can be quite expensive — if there are alternative ways that allow you to get the result you need, you should explore them.
- Define your success criteria. Regardless of whether you’re moving forward with a click through prototype or with an early version of the functional product, make sure you clearly define how you will know you’ve succeeded. Be specific but not too ambitious — hitting $1M in revenue in the first month would sure be nice but probably is not very likely. Pick criteria that will feel achievable, and that will be clear indicators of whether you’re moving in a good direction (e.g. the specific number of “become beta user” signups or the number of friend referrals to your platform). If you’re not getting the results you were hoping to get, you can try to pivot your product or pull the plug on it entirely.
- Find a software development partner that is not afraid to say “no”. If you’ve decided to build the actual digital product, you’ll need a software development partner — the choice of words here is deliberate. I believe that if you hire a “vendor”, they may very well do a solid job and deliver their software development services per your direction. Find a software development partner, and they will work on your product as if it’s their own — even if it means that, on occasion, they will tell you things you don’t necessarily want to hear (e.g. that, in fact, there IS a similar product already competing in a similar market, or that you really don’t need that elaborate invoicing feature to start processing payments). There are a number of ways in which you can get about putting together your team — from local software shops, through freelancers, to offshore teams whose pricing tends to be a bit more competitive.
- Beware of trying to make your product “perfect”. As Reid Hoffman, the founder of Linkedin, supposedly said,
If you are not embarrassed by the first version of your product, you’ve launched too late.
I get it, the product is your baby and it is just so tempting to try to polish and fix every single glitch or imperfection in your product before it reaches your customers — but if you do that, you’re running the risk that half of your budget is gone on a functionality no one really cares about. The true validation comes from the market (i.e. users) and your goal should be to launch frequently, test the user response, and adjust — rinse and repeat.
Technology and the Internet in particular have opened up whole new opportunities for entrepreneurship, and the challenges of the early 2020s inspire us to pursue them. While all the success stories of all the Zuckerbergs and Kalanicks of the digital world might have led us to believe that to prosper you need a strange mix of skill and luck, the truth is, launching a successful digital product is more science than it is art — as is planning out an effective product strategy. So who wants to be a millionaire?