Startup Economics: Utility and Product/Market/Customer Fit
Recently, one of our favorite thinkers on the startup ecosystem, Brian Laung Aoaeh from KEC, wrote an interesting piece on the confluence of economic theory and startups. I spend a lot of time, maybe too much, thinking about where applied and theoretical economics overlaps with the startup ecosystem. To that end, I wanted to offer my own two cents based on my experience.
One of the most fundamental aspects, arguably the most fundamental, in economics is the concept of Utility. Utility is a theoretical measure of preferences over a basket of goods and/or services. It represents the satisfaction one receives from the “consumption” of a good/service. The more satisfying something is, the more utility it gives you. Human beings are mostly rational (or predictably irrational), and therefore most of the time will pick one good/service over another if it gives them more satisfaction (increased utility).
This concept, even though it is very theoretical, is critical for startups, as every startup faces an existing competitor or secondary option for their product. Effectively this means that they have to convince potential users/customers that their product creates more “satisfaction” than the second best option already existing in the marketplace.
The hard part is defining “satisfaction”
When we begin working with early stage founders, either on behalf of the investors, or on behalf of the founder’s themselves, we ask them to answer three questions:
1. Who is the real potential user/customer and what is real relevant market?
2. Why would a potential user/customer choose this product over existing options?
3. When will a potential user/customer translate to income and by what mechanism?
In our experience, founders spend a lot of time thinking about the first question, and even more time thinking about the third. But, in reality, without answering the second question the other two are irrelevant.
The question of why a potential user/customer would choose one product or another is directly related to utility and the satisfaction that a user/customer gets from one product over another. But “satisfaction” means different things for different users/customers. For some, it could be money saved on better pricing. For others it could be a great customer experience or better quality. And for others it could be a deeper emotional connection.
This is the core of the product-market-first customer fit. Founders that deeply understand the underlying behavioral factors that affect a potential user/customer decision will ultimately convert more of these potentials into tangible cash flows. Some founders do this by deep knowledge and experience in their sectors, others by careful testing and iterations, and still others by sheer luck and spraying-and-praying.
This is why I can’t stand the word “disruptive”. Your product is not disruptive, it is increasing utility by way of increasing satisfaction — either by lower costs, increasing efficiency, providing a better experience, or opening up a whole new market.
