One of the most shocking things to me, as an investor and advisor to startup companies, is the lack or market and customer knowledge that exists with many entrepreneurs. I can’t even tell you the number of times that I have interacted with CEOs of startups, and they are so product focused that they haven’t even spoken with a potential customer. They have a vision, develop a new product concept, and jump right into the development stage. I have yet to see a successful business that does not have customers.
Is market research really that important for a startup company? Or is market research even possible if a market so new, or even nonexistent, so there really isn’t any research available? What even is a “market”? Let’s take a look at this.
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What is a Market?
Merriam-Webster defines market as a place where products are bought and sold. Seems simple enough, but what does this really mean? A market is a collection of customers that have a similar set of problems and needs.
I’ve worked for a number of different tech companies in my career, and we usually think of the market in terms of the size in dollars or units of a particular opportunity. This is called market segmentation. The Total Available Market, or TAM, being defined as the total market opportunity for your “type” of products, and the Served Available Market, or SAM, which is a subset of the TAM, being the market for the “specific” product for you and your direct competitors. This can apply to pretty much any market, but it makes a lot more sense if you are looking at a target market, or more specifically a “target product-market segment”.
Let me give an example. In the market for broadband access solutions, there are many different technologies. If we look at a subset of that market, say wireline broadband solution, and eliminate wireless solutions (e.g., 4G wireless broadband), there are still quite a few options. In wireline broadband access, there is as also a portion of the solution that sits in the service provider’s location, and a portion that sits in the consumer’s home, which we call the Customer Premises in the business. So we can look at the Total Available Market for silicon solutions (i.e., chips and software) that are in he Customer Premises Equipment. The technologies in this market segment include cable modems, digital subscriber line (DSL), and power line technologies. So, if I’m a supplier of cable modem solutions, the Served Available Market is the overall market for cable modem chips and software. This is my target product-market segment. My Share of Market, or SoM, is the percentage of the market that I have when looking at my solution and all the competitive solutions for cable modems.
Is ANY of this important in a startup? Definitely. If you cannot identify a market then how can you service it? If you can’t size a market, how can you determine if your business makes sense, or if you can drive a growing and profitable business? If you don’t have an ideal of underlying market size and growth, how can anyone put a valuation on your company?
Do Markets Buy Stuff?
Markets do NOT buy things. A target market is a collection of customers. Customers buy stuff, markets DON’T! In business-to-business, the market is made-up of companies that buy stuff, and in business-to-consumer, the market is made-up of individual people who buy stuff.
The process of market sizing is important to determining if your business makes sense. Are there are enough customers with a similar problem or “pain point”, which need the product or solution that you are offering? Can you grow a successful revenue and profit stream over time?
What is the Importance of Market Research for Startups?
There are two key reasons to do market research for your business. We just talked about getting an idea of the potential market size and growth and using a market research panel could help with this,. But there is even a more important reason to do market research: Will real customers buy my stuff at a price and in volumes that will allow me to make a profit?
Let’s say you have an amazing idea, that you feel will really solve a customer’s problem. It is a really big and important problem. You solve the problem in a unique way that is incredibly valuable to your target customer. How do you know that? Maybe you’re an expert on a particular technology, and you’ve experienced the problem and associated frustrations yourself. Even if that is the case, it is important that you do market research to validate that the problem is really important. If you think that you have solved a hole in the market then you should get a group of people to try it in a research sample. It’s important to understand How Marketing Research Samples Add Value to your marketing efforts and your product in general. You need to validate that you offer a unique value proposition to customers, and can maintain a sustained competitive advantage. You need to validate that your business model makes sense. And by sense, I mean the business model makes money, and it continues to make a lot of money, over a sustained period of time.
What is Market Research for Startups?
At the root, market research is understanding if potential customers will buy your stuff, and are there enough of these customers that have a similar or the same problem that will also buy your stuff. There are really two forms of market research: Primary Market Research and Secondary Market Research. There is a really good article in Entrepreneur Magazine about Conducting Market Research that explains this more in-depth. In my business career, I have always used a combination of primary and secondary market research.
Benefits and Types of Primary Market Research for Startups
I never call primary research, “primary research”. I call it talking to customers or talking to customer’s customers. Basically, primary market research is talking to people who would potentially buy your stuff, or those that are in the “food chain” of people that would buy your stuff.
There are many ways to “talk” with potential customers. You can just ask questions, and ideally listen to the answers, hopefully from an unbiased view. You can do “show and tell.” This can be a demo of your product or product concept. You can “watch” the customer use current solutions and listen to their frustrations about how the current stuff works. You can ask them, “What keeps you awake at night?” You can have customers “sample” your product and ask for feedback about what the customer likes and doesn’t like. This makes it so much easier when the startups actually go on to market their product to their customers as they know exactly who will want the product. Without this knowledge, it’s hard to know where to start. You can make your marketing even more effective if you talk to someone like clickfunnels expert roxanne carah marante as they have much more knowledge on marketing than any startup CEO.
Many startups are reluctant to do too much primary research because they don’t want to disclose their idea too soon or risk getting ripped-off. They want to stay “stealth”. Although I understand these concerns, it is important that you find at least one important potential customer that you can trust; one that actually would buy your stuff, and use them as a sounding board for your idea.
Two formal ways of collecting customer data and feedback are focus groups and surveys. A Focus Group is a form of qualitative research in which a group of potential customers are asked about their perceptions, opinions, beliefs, and attitudes towards a product, service, concept, advertisement, idea, or packaging. It can be a way to gather important customer feedback, especially if your product is used in a collaborative way. A Customer Survey is a method for collecting quantitative information about items in a population. Designing surveys is an art and a science. If you want to get useful information from surveys, I suggest you work with a qualified and capable market research firm. But, if you want to do something on the cheap, you can look at the Community Tool Box: Conducting Surveys. For business to consumer opportunities, you can also use online tools like Survey Monkey. Proper survey design and analysis are critical, especially if you are seeking to get systematic or statistically significant results. However, you can sometimes get some good qualitative data even from polling a small group of customers or potential customers.
Benefits and Types of Secondary Market Research for Startups
Secondary market research is getting data from people that did some work with customers, or they talked to your competitors or potential competitors to collect data about a market. In my experience, this type of research is of questionable real value, especially in an emerging market situation. Thus, many startups are reluctant to get secondary research since they think it is irrelevant or too expensive. Relevance is dependent upon how you can extrapolate the secondary research into your market opportunity.
Let’s look at one of my former companies, Entropic Communications, as an example. We had a home networking solution that was capable of streaming high quality of service, carrier class video throughout the home. There wasn’t a market for this when we were developing the product. However, there was a market for DVRs and people liked and wanted that capability so much that they were buying second and third DVRs for their homes. That was the potential market.
Historically, I have thought that a lot of secondary research has been way too expensive for a startup. However, these days, there is a lot of very valuable and high quality research that’s available for free on the web.
Industry trade groups, business magazines, academic institutions and other third parties gather and analyze research data about business trends can also be sources of secondary research. I frequently use the Internet and database searches to find information related to my location and industry. I also use social media to ask questions and source data. My favorites are Quora, Twitter, and LinkedIn. In particular, you can get a lot of great info from joining targeted LinkedIn groups. I think Google search is the best tool ever invented in the history of the world for conducting secondary market research.
For more personal contact, you can also walk trade show floors and talk to businesses that sell into your target market. They are potential competitors, so it’s important that you learn to ask questions in the right way to get the information that you want, without giving too much away. Think of playing poker.
Today’s economy is global, so it’s important to understand the international factors that influence your business, assuming your product could have global appeal. There are a number of resources that will help you to research potential international markets for your products or services. A lot of this deals with what niches or segments of the market you will attack first, and then over time.
So, Is Market Research Important for a Startup?
I’d say that market research is ESSENTIAL for a startup. If you don’t have an intimate understanding of your customers needs, then you don’t know if you’re addressing a real problem or if your solution really solves the problem in a desired way. If you don’t try to size your market opportunity and the potential growth, then you don’t know if you have a real business opportunity. If you don’t define your target customer and test what it takes to reach them, then you won’t understand your customer acquisition costs. If you don’t have a dialog with customers using demos and a minimum viable product, then you lose the opportunity to refine the product. This stepwise refinement, based on customer feedback, can be the difference between winning and losing, or the difference between having an awesome product and one that is mediocre. I’d say the value in for market research to a startup, especially based on interactive and frequent customer engagement, is invaluable to a startup.