“Disciplined Entrepreneurship” Summary and Review
Keywords: Assumptions, Customer, Entrepreneurship, Market, Plan, Product, Segment, Startup, Scale, Value
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There’s nothing magic about being a successful entrepreneur. It’s a learned skill, and in Disciplined Entrepreneurship, Bill Aulet details the 24 steps to a successful startup.
Aulet organizes this path along six sections:
- Who is your customer?
- What can you do for your customer?
- How does your customer acquire your product?
- How do you make money off your product?
- How do you design and build your product?
- How do you scale your business?
Aulet borrows ideas and models from different sources and folds them into one system. He references many books such as Geoffrey Moore’s Crossing the Chasm and The Lean Startup by Eric Ries. This approach works well. It provides natural avenues of research for readers who wish to delve deeper.
Each of the 24 steps is illustrated with examples which do a fair job of showing how the ideas under discussion apply to real life. Readers without a lot of time on their hands may opt to skip the examples.
This book provides a good overview of what a startup needs to do to succeed, but you’ll probably want to find additional resources for deeper research. And an entrepreneur or company manager will probably want more depth and detail than this book offers.
Step 0: Getting Started
There are basically three different reasons that people start new ventures:
- They have an idea; they thought of a way to improve something or to make a positive impact on the world.
- They have a technological breakthrough; they have a new gizmo that changes how people live or work.
- Finally, they have a passion; they know they want to be an entrepreneur, even if they don’t know yet exactly what their product will be.
Some say that an entrepreneur needs to identify a customer pain, a problem that the customer will pay to fix. But it isn’t strictly necessary to start this way. Sometimes people invent things to help with a problem they are personally experiencing. This is called “user entrepreneurship,” and almost half of innovation-based startups that survive to the five-year mark are founded by user entrepreneurs.
It’s also possible to follow your interests and enthusiasm, and eventually you’ll discover something the customer wants. If you’re going this route, you need to know what you can do well and what you’d enjoy doing for an extended period. Once you answer this, you can evaluate your situation further, considering your education, your specific knowledge base, and your talents and abilities. You might know influential people who can help you. Finally, whether or not you can invest money will affect your decision.
Once you have an idea, start through the 24 steps that make up the rest of this book. At any and every step, staying focused is essential — you don’t have a lot of time or resources when you start up, so you really need to honme in on the important stuff immediately.
And Sstart building a team that provides the skills that you lack. Your group might change membership over time; this is a natural evolution for teams. For help finding good co-founders, check out The Founder’s Dilemma.
Step 1: Market Segmentation
Customers are the single most important factor for a business, so build your company around customers, not products. There are limits, however, to letting customers guide your decisions. You needn’t chase after every potential customer on the planet.
Create a profile of your target customer. And Tthe universe of potential customers includes end users (primary customers) and economic buyers (secondary customers). Often these are the same entity, but not always. Focusing here on the primary customer, conduct a market segmentation.
Start by brainstorming a wide variety of market opportunities. Even at this early stage, start talking to customers to see what they think. Analyze your potential market, and look at the industries where you can market your product. Write a list of people in that industry who might benefit from your product.
Next, narrow the field. List up to a dozen of the best, most interesting market opportunities for your product. (A market opportunity includes a specific end user and one or more applications.) Then, answer the following questions:
- Can the customer afford the product?
- Can the customer be reached directly, without going through an intermediary?
- Does the customer have a good reason to buy your product?
- Can you deliver your product now?
- Is there competition?
- Once you get this segment, can you get other segments?
- Is the market a good match for the goals and values of the founding team?
Finally, do your primary market research. Talk to potential customers; listen to their ideas; understand their pain points. Don’t try to sell anything.
In each market, you’re trying to understand several categories of things. You want to know who the end user is and understand how your product will be used. What are the benefits of your product? Evaluate whether anything else is required to use your product. Identify influential (lead) customers, and predict who your likely partners will be. Figure out the market characteristics, including size. Understand your competition. Consider other factors that you need to understand given your circumstance.
Spend a couple weeks at least on this. In the case of multi-sided platform, do each step for each side of the market.
Step 2: Select a Beachhead Market
A beachhead market is like a beachhead in war, like the invasion of Normandy. The allies picked Normandy; they picked one place from which to launch their attack and spread out from there. In the same way, you want to pick a market and win your early battles there.
So, of the six to 12 market opportunities that you identified, pick one. You might find you have a lot of decent options in picking your beachhead. You probably want to start in a small market with little or no competition, if that’s possible.
Consider the variables listed in Step 1 in making this decision: Does the customer have money? Are the customers accessible to your salesforce? Do they have a good reason to buy your product? Are you able to deliver a whole product to them? Is there competition in this market? If you win this market, will it help you with the next one? Is the market consistent with the goals and values of the company’s founders? Don’t overthink it — it’s more important to get started than anything else.
Be disciplined about this and focus all your energy on that one market for the time being. Ignore the others, hard as that may be. You can’t be dispersing your resources all over the board. Once you totally own that market, you can move on to others. And if you pick a market that turns out to be a total dud, you can usually go back and change your decision.
Once you’ve identified a beachhead market, see if you can narrow it down further until you’ve identified a segment that meets these conditions:
- All the customers buy similar products.
- Customers have similar sales cycles and expectations, so they can be served by similar strategies.
- Customers are networked somehow so that information and opinion can be shared among them.
Step 3: Build an End User Profile
Now that you know your beachhead market, you can focus in on understanding the customer. You’ll need to use market research to help you visualize the typical end user in your beachhead market segment.
Each customer has two roles: the end user and the decision-making unit. Sometimes there are two or more separate people, but often a customer is one person who serves in both roles. The end user is the person who’ll use the product, usually a member of the household or the organization that bought the product. The decision-making unit is the person or people who make the decision to purchase the product, and this designation can be broken down further into more roles:
- The champion wants the customer to purchase the product.
- The primary economic buyer has the power to authorize the purchase.
- Other people who might affect the purchase include people such as influencers, veto power, purchasing department, etc.
You want to focus on the end user, because if the end user doesn’t want your product, the customer won’t buy it.
Primary market research is crucial for understanding the customer, so throughout the entire process, you’ll be in close communication with your target customer. You will want to talk to, observe, and interact with the target customer in a continuous process of information gathering.
Choose a specific demographic within your chosen market, a subset with similar characteristics and needs. You need to pick a target customer, because most likely, not everyone in your market is the same. The sales strategy that works on 25-year- olds likely won’t work on 50-year- olds, and vice versa. You can’t be all things to all people, so narrow your aim down to one user in a way similar to how you picked your target market.
Also, craft an end user profile, which might include characteristics such as: gender, age, income, location, motivation, lifestyle, etc. You might not know all these characteristics about your user — not yet anyway — but you’ll learn more in time. If you have someone on your team with the characteristics of the end user, take advantage of that to build an in-depth profile.
Step 4: Calculate the Total Addressable Market (TAM) Size for the Beachhead Market
After having identified your target market and your end user, you’re in a good position to estimate the Total Addressable Market (TAM). TAM is the amount of revenue you’d make if 100% of the market became customers.
To calculate this, start by figuring out how many people there are who fit your end user profile. Then multiply this number by how much each user is worth. The resulting figure is the TAM.
To go into more detail, do both a bottom-up and a top-down analysis to figure out how many people might fit the end user profile. The bottom-up analysis is basically a process of counting noses. Use customer lists, trade membership rolls, and whatever other sources you can get your hands on to estimate the number of customers. Then, figure out how many end users each customer represents. For the top-down analysis, use demographics to figure out the size of the market. Use secondary research, for example industry reports, to determine the number of end users that fit your profile. The bottom-up analysis is very specific; the top-down analysis is more general. The bottom-up figure will likely be the smaller of the two, but these two analyses should be somewhere in the same ballpark.
To determine how much each user is worth, decide how much money a customer will likely spend on your product in a year. Look at customers’ budgets and how much money they are currently spending to do the job that your product accomplishes. Consider what they’ve paid for other new products. Estimate how much value your product will create for them.
The sum you expect the customer to spend in a year X multiplied by the number of estimated total customers = TAM.
You usually want your TAM to be about $20M — $100M. If it’s under $5M, you might need to identify a different beachhead market. And if your TAM is too big, it probably means you need to segment some more. (If you come up with a TAM over a $1B, that could be a sign that you aren’t being realistic about the market’s possibilities.)
The TAM is an essential calculation that will help you communicate with others. Be prepared to explain how you estimated this figure.
Step 5: Profile the Persona for the Beachhead Market
Create a persona to serve as an exemplar. The persona represents the primary customer for the beachhead market, making it easier for everyone to think and talk about the kind of customer you are trying to reach.
Use an actual person on which to model your persona. Some companies use a composite of several different people, or they create a very generic sort of persona. But it’s better to choose a real person, because then you don’t need to guess what they really think or how they really live their lives. While you might not find someone who is an exact match for your end user, you can probably find someone who comes close.
The information that you should gather for your persona includes the following: place and date of birth; where they grew up; their education; what their family is like; their job and related metrics such as income and job performance; etc. Also, list the persona’s Purchasing Criteria:
- How do they prioritize what they want?
- What is it that they worry about the most?
- What are their important goals?
Look for gaps in your information about the person and what they want, so you can interview them again with these questions.
The persona can be helpful throughout the company to help guide decisions. Keep updating your persona as you get more information. And some companies (particularly large, complex organizations) use more than one persona. Starting out, though, just have one persona for each side of the market. This helps your team stay customer focused.
Step 6: Full Lifecycle Use Case
Now that you’ve gathered detailed information about your target customer, you need to gather equally specific information about how they will use your product. Build a use case.
Through primary market research, learn as much as possible about how your customer will use your product and what they think of it. Start by mapping out how your persona uses your product. It’s important to see this from your customer’s point of view, not just your own.
Do a full lifecycle use case. Explain how existing products aren’t currently meeting the persona’s needs. Describe how a customer first finds out about your product. Explore how they buy the product, use the product, and whether they tell their friends about it. Be as detailed as you can possibly be. The use case should be visually rich, with materials like charts and flowcharts demonstrating the sequence of events over time.
This exercise helps you see how the product fits the customer and what sort of barriers there might be that could prevent the customer from using your product.
Step 7: High-Level Product Specification
Now that you’ve defined and analyzed the customer, you can turn your attention to the product. Some argue that considering the product should come earlier in the process, but if you want your product to be a success it will, first and foremost, have to appeal to the customer. So, even if you start with an idea for a great product, you should still begin by identifying your beachhead market and end user, and developing the persona.
Create a high-level product specification, a visual representation that shows what the product will look like. You don’t have to know every detail about it yet, but you should be able to sketch it out. Use storyboards and schematics as appropriate. But keep it high level. You don’t have to build a prototype at this stage — and probably shouldn’t even try. They are expensive to produce, and there’s a danger that you’ll fall in love with it and be resistant to changing it as needed.
A drawing or similar visual aid will help you communicate with your customer. (You still aren’t trying to sell the product at this point.) You want customers’ opinions, to aid in your own understanding of the product’s strengths and weaknesses. This exercise helps you visualize your product, giving you something tangible to discuss with your team and something to show customers. It will also help you to stay focused on the customers even as you work out the features. Like many other steps in this book, you’re likely to come back to this and refine it several times.
Step 8: Quantify the Value Proposition
When the customer buys a product, they are expecting to receive some sort of value from it. The quantified value proposition measures this value, focusing on the customer’s needs, not on technology or features. In other words, it shows how the customer will get value from the product, expressed as a tangible metric. It will help you quantify how well the product aligns with the persona’s top priorities.
To calculate the quantified value proposition, start with the persona’s top priority (or priorities). Your product should provide value that addresses this priority. For example, if the customer’s top priority is to reduce time to market, and your product provides value by reducing production costs, then your value proposition isn’t in alignment with the customer’s priority. Your product might have several benefits, so pick the benefit that most aligns with the persona’s priorities.
Describe an “as-is” condition — that is to say, how the customers are taking care of business without your product — and contrast this with a “possible” state. The difference between the two is the quantified value proposition.
It’s useful to create a simple, easy-to-understand visual describing the value proposition. You want to communicate the “as-is” and the “possible” states so that the customer can easily understand them. But don’t exaggerate what your product does. Entrepreneurs want to convince people that their product is wonderful, but it’s important to maintain your credibility, too. Don’t promise what you can’t deliver.
The quantified value proposition can be extremely valuable throughout the process of launching a business. It’s worth the time it takes to create the best value proposition possible.
Step 9: Identify Your Next 10 Customers
The persona you’ve developed is useful, but you need to identify other customers to make sure you aren’t being too specific with the persona. This isn’t too likely to happen if the persona is created correctly, but just in case, identify 10 potential customers that fit the description of your end user. These people should all be like each other and similar to the persona. (If you can’t find ten 10 customers to participate, reconsider your beachhead market.)
Contact the people on this list and let them know you’re seeking information, not sales. Show them the work from sSteps 6–8six through eight, and question them to see if your assumptions and hypotheses are on target. If the customer is enthusiastic, try to gauge the depth of the enthusiasm. It’s good if someone says they like something; it’s better if they say they love it.
If they like what they see and agree with what you show them, you can be confident you’re on the right track. This will also be helpful for convincing others, like partners and investors, that your idea is sound. On the other hand, if there are signs of trouble, you can go back and fix the problems while still early in the process. You’re bound to get negative feedback about something at some point — you should welcome it. It can be difficult to hear, but it can be the most helpful thing in the world. If you’re surprised by what the customers say, take good notes and try not to overreact. You are there to listen to the customer, not to convince them of anything.
Once you’ve generated more data, evaluate your previous assumptions based on the new information. Look at the information you’ve amassed, and see if this validates your persona.
Step 10: Validate Your Core
In this step, you describe what your business gives to customers that other companies cannot provide. This is your company’s core. The core is what differentiates you from everyone else; it’s what you do better than everyone else. Your core is usually something that’s hard or impossible for others to duplicate.
Every company has its own products and faces unique circumstances, and so there’s no formula to follow for identifying your core. Consider, however, some examples of things that can be core.
If network effect is your core, you will dominate your field by reaching a critical mass so that it doesn’t make sense for customers to go elsewhere. The value of a network is related to how many people are on that network. The company with the most users becomes the most valuable. New customers gravitate to the biggest, most valuable company, ignoring a positive feedback loop.
A company that features outstanding customer service retains a higher portion of customers compared to the competition. This reduces churn, which reduces expense. And satisfied customers will be more inclined to tell their friends about the good service they received, which will draw in new customers.
Lower cost can be a great core. People like low cost; for some customers, this is the deciding feature in a product. Another potential core is the customer’s overall user experience, where everyone on the team is focused on continuous improvement of user experience.
There are plenty of other features that can constitute the core — it depends on your company and your product. But once you have found your core, be prepared to keep it. Change your core at your peril.
There are things that can give your company a market advantage, but they aren’t core. For example, innovative technology is one of these things: it’s great and it can make you piles of money, but it’s extremely hard to maintain this edge over the long term. Core also isn’t the same thing as competitive position or first mover advantage.
Defining your core isn’t easy, but it’s an important part of maximizing the value of your business.
Step 11: Chart Your Competitive Position
With the competitive position chart, you analyze how well both you and your competitor fulfill your customers’ two highest priorities. You want to show that you meet the customer’s priorities better than the competition and better than other existing products. If you can’t demonstrate this, then you should probably reevaluate your market selection and your core.
Create a graph to compare your persona’s two top priorities, using the x axis for the persona’s top priority and the y axis for their second highest priority. Where these lines meet is the origin, and the closer to the origin a certain feature is, the worse it is. The further from the origin, the better. (If you’re having trouble visualizing this, page 135 has a picture of the chart.)
Use this chart to map out your product, your competitor’s product, and the results of inaction and the status quo option. Hopefully you find your product located at the top right corner of the chart. If you aren’t, you might need to reevaluate your product.
Show the chart to your target customers, and refine it in response to their feedback until it accurately reflects how well you and your competition address your persona’s two top priorities. This chart is a good way to communicate your qualitative (as opposed to quantitative) value proposition.
Step 12: Determine the Customer’s Decision-Making Unit (DMU)
It’s important to verify that your customer will be able to buy your product, so you need to identify who will make the purchasing decision for the end user.
There are three main roles in the Decision-Making Unit (DMU):
- The champion is the person who wants to buy the product. Often, this is the end user, but sometimes there’s more than one champion.
- The end user is the person who will actually use the product.
- The primary economic buyer is the person who pays or signs off on paying and is usually the one who has the ultimate decision-making power.
There can also be additional roles in play. Influencers often have a lot of experience and advise the DMU. People with veto power can include a variety of institutional forces, like IT and compliance departments.
To sell to the customer, you must understand who makes the decision to buy. To research this, talk to the customer. (Again,: remember that you are asking them questions and not trying to make a sale.) You can also get information about influencers from the research you did while developing the persona. After you’ve done the research, map out your findings and show your results to your customers. Continue to revise this tool until it accurately shows the DMU.
If the persona isn’t the primary economic buyer or the advocate, create fact sheets for each person in these roles. The goal is to figure out how to appeal to them so that they can agree to purchase the product.
Step 13: Map the Process to Acquire a Paying Customer
Once you know who will make the decision to purchase your product, you need to understand their decision-making process so you can make your product fit that process. How long will it take for delivery and payment, from the time you present your product to the purchaser? How much will it cost for you to acquire new customers? Finally, what, if any, obstacles stand in the way of making the sale?
Once you learn these things, you then need to be able to articulate them so that investors and lenders are assured that you’re solidly grounded in reality. A map of the process of acquiring a customer can be a helpful tool.
Your map will be industry dependent, but it should include things like lead generation, access to influencers, purchasing, sales cycles, installation, etc. And Tthese items will likely have subcomponents. Don’t forget to include plans for complying with standards and legal regulations.
For each component, you should identify the key DMU players, their influences, and their budgetary authority. You should also detail how you will be paid, who has the purchasing authority, and whether the cost comes out of the operating budget or the capital budget. It’s crucial to understand who the budgeting and purchasing authorities are in this situation. You also need to have a solid understanding of how much time is involved — for example, if a company accounts for such purchases in their annual budget, you need to know that so you can plan accordingly.
Look for any potential pitfalls; identify obstacles that could slow you down.
Step 14: Calculate the Total Addressable Market Size for Follow-on Markets
Your attention so far has appropriately been on your beachhead market. Now take a moment to consider what other markets might be good for your product. This should be a brief exercise, because for the most part, your focus should still be on the beachhead market. You do, however, want to be sure you have somewhere to go after the beachhead.
There are two kinds of follow-on markets:
- You can sell new products to your same customers, which is known as upselling. Because you have a substantial amount of information about these customers, it would be cost effective to sell them more products. They (hopefully) already have a positive opinion of you, you can leverage this as long as you don’t do anything that contradicts your core.
- The other option is to sell the same old product to new customers in adjacent markets. Doing so allows you to leverage resources that you already have. You might want to make some tweaks and change the packaging, but your core is the same.
Once you dominate the beachhead, you can pick one of these strategies for moving forward. Or you might decide to develop a combination of the two for expanding to new markets.
Calculating the TAM for follow-on markets shows your potential. It can also be useful in helping investors understand the direction your company is heading. You’ll want to identify about five or six follow-on markets, although if you hope to grow into a large company, you might look at up to 10 follow-on markets. To attract venture capitalists, the total TAM for your beachhead plus follow-on markets should be at least one billion dollars.
For the most part, though, you want your energy on the beachhead right now.
Step 15: Design a Business Model
The business model answers the question: “How will your company make money?”
An innovative business model can reshape the entire market, so it’s worth taking some time to think about it. Once you have customers, it will be hard to change your business model, so try to get it right early in the process. Maybe try testing a few different ones.
Don’t worry too much right now about pricing.
Think about it from the customer’s point of view — what is the customer willing to do?. Revisit the decision-making unit information, the quantified value proposition, and the customer acquisition process for guidance during business model development. Also bear in mind what the competition is doing and what the distribution channel is like.
It’s good to remember that free isn’t a viable model. Some startups figure they’ll get the users on board first, and decide how to monetize the platform later. Sometimes the idea is that users will ultimately pay for enhanced features. These things are not business models. You need to know before you start how you’re going to make money and where the money is coming from.
There are many different types of business models (Aulet lists 17), but there are many more possible types. You can also think beyond existing business models and make up something new.
Step 16: Set Your Pricing Framework
The pricing process starts here, but pricing is likely to change several times as you go through the steps and experiment with different price points. Identifying specific dollar amounts won’t happen until a bit farther down the road. Ultimately, you want to estimate the lifetime value of an acquired customer and the cost of customer acquisition. This will be a step in the direction toward those goals.
Price should be based on how much value the customer gets from your product, not on how much it costs you to produce the product. (Your costs are on a need-to-know basis — don’t tell anyone who doesn’t need to know.) Calculate how much value customers get, and then charge a fraction of that, so they get some left-over value.
You need to understand the customer’s budget, and the DMU research and customer acquisition map will help you. You also need to understand the pricing of competing solutions. And different kinds of customers are willing to pay different prices.
When you start out, it’s better to set your process higher so you can drop them if you need to. It’s easier to drop the price than to raise it.
Step 17: Calculate Lifetime Value (LTV)
Lifetime Value (LTV) is the average profit you’ll make on a new customer and includes factors such as revenue streams, costs, customer retention rates, and so forth. The LTV, along with the Cost of Customer Acquisition (COCA) can give you an idea of how much is to be made in your beachhead market. If your COCA is too high, you likely won’t make money, no matter how high your sales volume.
A new company calculates LTV for a five-year time span. Your customer will still be valuable to you after five years, but it’s easier and more realistic to stick with this timeframe. Figure out the gross margin and retention rate for each year, considering how often the customer will have to replace the product. Then, figure out the profit across all revenue streams. Next, calculate the present value at above cost of capital, which takes into account the profit that your investors are expecting to receive. The value at year 0 equals that year’s profits. The equation for the other years is:
[IMAGE HERE INSTEAD OF TEXT TO CAPTURE SUPERSCRIPT] Present Value = Profit x (1-Cost of Capital Rate)t
t = the number of years after year 0.
The LTV, however, won’t tell you the whole story. In order for the LTV metric to be meaningful, you have to know the COCA. And even when you know your COCA, you’ve got to remember other expenses not accounted for in these numbers. Some venture capitalists recommend that your LTV be at least three times greater than the COCA, to account for these expenses.
This might be a bit off-putting for the mathematically averse, but it’s very important to understand. Disciplined Entrepreneurship explains these details as clearly as anyone could hope. Go through it several times if need be.
Step 18: Map the Sales Process to Acquire a Customer
The Cost of Customer Acquisition (COCA) asks how much will we spend on acquiring new customers. It’s easy to optimistically underestimate this expense, but be as real as possible when you go through this calculation.
There are important factors to include in your calculations: sales staff salaries, brochures and website costs, tradeshow exhibits, advertising, etc. Costs also include those sales and marketing efforts that were unsuccessful in securing customers, not just those that successfully reached new customers.
For new enterprises, the COCA usually starts high and then falls. You will want to plan for short, medium, and long term separately. In the short term, you’re trying to whip up demand for the product and fill existing orders. Your product is new, so you’ll have to spend lots of energy communicating directly with the client, explaining the product to them. Direct sales people are expensive, but the good ones are worth their salaries. Internet strategies like email and social media marketing can lessen your reliance on sales staff.
In addition to order fulfillment, medium-term sales strategy includes focusing on client management to retain existing clients and create additional sales opportunities for them. Distributors are useful here, freeing up your expensive sales staff to focus on customers with the highest LTV.
Finally, in the long term, you’ll continue to fulfill orders and client management, and adjustments will have to be made as competitors emerge.
Map the sales process. Think about the sales channel you’re going to use and how it will change over time. Consider factors such as how you intend to make sales and how you collect money. Pay attention to the length of the sales cycle.
Once you have a plan, show it to someone in the industry who can verify its reasonableness and give you advice.
Step 19: Calculate the Cost of Customer Acquisition (COCA)
The cost of customer acquisition (COCA) is an important measure of cost. Pay close attention to the details when calculating COCA; it can be a tricky calculation.
To figure out the COCA, you determine the sales and marketing cost per customer. COCA doesn’t include any overhead or other costs that are outside of the marketing department. It does include the expense of marketing to people who don’t eventually become customers.
In the beginning, COCA is greater than the LTV of an acquired customer. It falls over time, but the question is how fast. (The sooner it drops below the LTV, the better.)
Using a bottom-up approach — adding factors like salaries, travel costs, phone bills, brochures, websites, and so forth — is very time consuming and often leaves room for error. Instead, take a top-down approach, adding sales and marketing budgets over time and dividing that number by the number of customers you acquired over the same timeframe. In order to demonstrate change over time, it’s good to calculate for several time periods. For example, you might calculate COCA for year one, year two, and year three.
Very roughly, COCA is total marketing and sales costs (TMSE) over time (t) divided by the number of new customers (NC) over time (t). If your TMSE includes a lot of money spent retaining existing customers, known as install base expense (IBSE) over time (t), this will have to be subtracted from the TMSE.
The COCA should decrease over time, and there are ways of reducing it (for example, by automating processes). And again, it’s easy to be optimistic in your estimates, but be realistic while running the numbers.
Step 20: Identify Key Assumptions
You are creating a new kind of business that’s never been attempted before. By necessity, you make a lot of assumptions about your product, your market, your customer. Now, you must systematically go through and test them all.
Start by identifying your assumptions. Look at each step of your framework. List the places where you’ve made conclusions based on your research. Pay special attention to your assumptions about gross margins. Other important areas to evaluate are your customer lists and the DMU.
Break down the assumptions into small, testable components. Don’t worry about how you’re going to design the test, otherwise you might be tempted to pass over assumptions that will be difficult to test. Just focus on identifying the key assumptions.
Step 21: Test Key Assumptions
You want to test key assumptions as cheaply and quickly as possible. You don’t need anything fancy, you just need empirical data to verify that your assumptions are on track with reality. Bear in mind, even if all your assumptions check out, there’s still no guarantee that your company will be a success.
How you test your assumptions will depend on the specifics of the assumptions. For example, check your cost projections by seeing how much vendors charge for supplies. For customer-based assumptions (like whether they’re willing to pay for your product), you can ask them how much they’d be willing to prepay, sign a binding contract, or provide a letter of intent. It’s best if you can meet with customers in person to get a better sense of their level of enthusiasm.
Perhaps the most important assumptions to test are cost targets and how enthusiastic key customers are for your product. Testing assumptions compliments the market-based research that you’ve already done. The combination of thisese data will position you to create a product that can succeed in the beachhead market.
Step 22: Define the Minimum Viable Business Product (MVBP)
In this step, we’re going to take the assumptions that you tested and use them to create an actual product. This product, the minimum viable business product (MVBP), will actually be one more step in validating assumptions. It will integrate your assumptions into a single system test to verify the minimal product for which a customer will still pay.
MVBP requirements include:
- The customer gets value from using the product.
- The customer pays for the product.
- The product is good enough to start a feedback loop, helping you change and improve the product so you can make a better product.
Design the MVBP, starting by listing your key assumptions, then narrowing the list to the most important assumptions. Build a product that customers can use based on these assumptions.
Some business models have more than one kind of customer. The primary customer might get a discount or even have access to the product for free; the secondary customer pays for the product in exchange for access to the primary customers or for access to information about them. If this is your situation, design the MVBP so that requirements one and three above are met for primary customers, and all three requirements are met for secondary customers.
The MVBP should be sufficient (in other words, it should do the job, and it should be simple). It’s tempting to add features, but you want to keep it simple. No extra bells and whistles. You don’t want extra variables mucking up your research. You want to get this thing into the customers’ hands as quickly as possible.
With this step, you see if your product provides value to the customer. This can kick start a feedback loop with the customer that will help you to create better versions of the product.
Step 23: Show That “The Dogs Will Eat the Dog Food”
It’s one thing to work in an isolated environment, dreaming of the great success you will have. It’s another thing altogether to see how the product fares in real life. It’s not that unusual to see a team plug away dutifully on product design, only to find that, at the end of the day, they have a product no one will pay for.
You might think that after all this great research you’ve done, your product is a guaranteed success. But people aren’t rational beings, and all the research in the world won’t change that. Before you sink more money into it, put the MVBP in front of the customer. See if your assumptions work in the real world.
Where you decide to price your product doesn’t matter as much as showing that your customers will pay for it. Now you can start accumulating data on how much they like the product. Measure how much they advocate on behalf of the product to others in the TAM. Word of mouth is great for lowering your cost of customer acquisition.
Also, see how customers use the product. Collect data on everything that happens. Analyze that data and look for trends. And try to understand what is driving the trends. Be honest with yourself and limit your analysis to the real data you collected in the real world.
Step 24: Develop a Product Plan
You have finally reached the point where you can build a product for your beachhead market. Now you can develop a product plan.
In creating your MVBP, you put some of the features on the back burner. Now you can put some of those features back in. When you add features in, be sure they meet high standards of quality. Of course, nothing is perfect, and new products do tend to have bugs. You want your product to be as good as possible, however, so that people think positively about it right from the get-go.
You can also start thinking about expanding your market. Work the prior steps in planning your next follow-on market. Some things will differ between the beachhead and follow-on markets (for example, your marketing plan will likely be different; the channels might be different), but you should still follow your core. And your marketing to follow-on markets should make sense given your business goals.
You still need to pay attention to the beachhead market. If you neglect them at this stage, you could run out of money before you get established in follow-on markets. But you don’t want to get bogged down in your beachhead market; you should always be looking ahead. The product plan will help you with that. Expect, however, that you’ll likely have to revise your plans more than once.