May 11, 2020
Why Startups Fail – Superficial Market/Customer Research
Many startups do very little market research. It is expensive, time consuming, and may indicate major issues that would keep your startup from becoming successful. Hiring a consulting firm to execute this step may be a viable option for you. However, this may also prove disastrous. At Lycos, I was responsible for tripod.com’s traffic and promotion. My KPI was to increase the number of page views per day from 12 million to 16 million in one year. When I joined I was handed a market research report that was around 250 pages long and indicated that the majority of visitors were white low to middle class women over 40. When I reviewed the pages that were the highest trafficked pages on the site, they were devoted to Backstreet Boys, Britney Spears, Nsync, J-Pop, and K-Pop – not the subject matter that that would be attracting what the marketing firm stated were our target market. Lack of product/market fit is typically fatal.
Lack of Product/Market Fit
Very often startups develop products for themselves instead of for a large market. They keep their development too close to their chest instead of involving test customers very early on – even before they create their first prototype. The result is often too far off from what the market needs. There may be multiple targets. For example, I built an overnight sourcing platform which guaranteed customers 12 matching resumes to their job order by 9 AM the next morning. I was targeting small businesses and was surprised that the majority of our customers were staffing firms and they were giving us just their junk – for example, a groundskeeper who was also a veterinarian, or a sales person for a company that sold $50,000 plastic trees to airports and other public buildings (none of which was spelled out in the job order). We were charging $59.00 for the service and would barely break even on each order. Completing do-overs for poorly submitted job orders cost us money, and the staffing firms felt the price should be much lower – around the $29.00 range. They wanted to know if they could get a discount. We failed to attract the small business owners who also felt the price was too high, so after a year, the project was scrapped.
We didn’t show our product to existing staffing firm clients because we didn’t want to cannibalize our current business. Perhaps we could have approached past clients to help plan the prototype and get feedback on the price. Perhaps we could have approached a few small business associations across the country to see if their members would be willing to BETA test the system for free.
Finding BETA testers is the hardest part. Identifying who to approach and getting on the phone with them takes time. You only need seven testers for each target market to get 98% of your issues. The good thing is that many of these testers typically will become paying customers when you open the system to the public because they helped you build it and feel a bit of ownership in your project.
Doing market research doesn’t have to cost a lot of money, but it does take time. If you want quality and you want to keep costs down, you’ll need time. If you don’t have time, you may need to pay for volunteers to BETA test your project and they won’t necessarily come back after you stop paying them.
Ultimately, it’s up to you to ensure you have a market and a product or service that your market can afford with a margin of four times the cost to company (4 x CtC) in order for your company to grow and become a sustainable business.