How to do Market Validation

You’ve got a great idea for a new business. You’ve figured out how to deliver it, why people want it, and you even have a name for the company. The next step is to figure out who your target market is and go through a Market Validation Process.

Market Validation is the process of checking that there is a market for your product. There are many market validation methods, in this article, we discuss a more simple version. We’ll use product and service interchangeably, the concepts apply to both.

There are some cases where the product is ahead of the market – take the iPhone. For the majority of product concepts, Market Validation is a crucial step to ensure you avoid costly mistakes when you go through developing the product. If you don’t do it early in the product development, you might invest a lot of time, money and energy to create something the market does not want or need.

Even if your friends think it’s great, your Mum adores it, and your family is excited; the truth is – they are not necessarily a representation of your actual customer. It’s important to ensure your end users’ pain points are solved and they get just as excited about your product or service before you start.

On the other hand, your friends and family might think your startup idea is stupid. Yes, we see often see in movies how success can start with an underdog. That does not mean every idea rejected by your friends and family will succeed. They may not have a problem that your product solves.

The bottom line is there is no need to be too optimistic or too pessimistic. What you need is Market Validation. The results of your market validation will give you unbiased feedback and raw numbers to say whether the product idea is worth pursuing.

There are many different ways to approach Market Validation. In this article, I’m going to discuss what I believe works for any new product or service.

Whether you already have a company and want to expand your service/product offering.

Or if you are new to business and want to explore your new product idea. The market validation process I suggest will take almost no money and you will find out with a fair amount of confidence if your idea is worth taking to the product development stage. You can think of it as lean market validation.

Step 1: Understand who your target market is

We’ve done a number of articles about this on our whoiswhere business database blog, which you can check out for a more in-depth guide. In short, you first want to understand who will be buying your product/service by creating a user persona.

It’s very difficult to segment businesses using traditional socio-economic demographics. While businesses do have people in them, their demographics have little to do with the wants and needs of a business.

You can’t say you want to target businesses that are 24-35 years old, operate in Wellington CBD and have a revenue of 1.5 million dollars. You will get a smorgasbord of companies using this approach that have little in common. It could be a Mcdonald’s, a book store, a lingerie store, and an assortment of service providers that correspond to this criteria! So, when it comes to B2B, you have to use simpler criteria to target your market.

In B2B we usually suggest going by industry, location, size of the business (use number of staff as a gauge), and the decision maker. For any company with less than 10 staff, the key decision maker is almost definitely going to be the owner of the company.

In some cases, it may also be beneficial to think about other considerations.

For example, does the business want to change and grow?

What is their appetite for embracing new technology?

Does the business have a website already?

Step 2: Get a grip on the size of your target market

You can find some information using the Stats NZ website. These figures are a few years old however this is the only official source of information about the numbers of businesses in New Zealand. There are also industry organisations which you can go to. These tend to be limited because they will only have a list of the members. Often this list will be missing a big chunk of the total.

The final and necessary option to get a count is to enquire with one of the business data providers in New Zealand. There are a number to choose from and you can read about them all in a report we produced a few years ago. We of course would recommend you come to us and we’ll get you a count of your target audience.

Step 3: Crunch the numbers

Once you know how many businesses are in your target audience, it’s time to crunch some numbers.

A super simple way to do this is to use the following formula:

# of businesses in your target x expected market share in Y1 x average cost of your product/service = revenue

You can go one step further and look at the profit margin and see what kind of profit you will be looking at in order to achieve this.

This final step is really where you will find out if you have a business idea that is worth pursuing.

For example, what if you discover that there are only 100 potential companies who could buy your product. If it’s a big-ticket item then maybe that’s more than enough. But if it’s a smaller ticket item it might be too few companies and you need to consider other options.

Here are a couple of options you might discover from this exercise:

Option 1: Your market is huge

This could either mean you haven’t narrowed it down very well, or you genuinely have something with broad appeal. Our recommendation is to narrow down your targeting to only include your very best potential customers. This could be the ones who buy most, who are easiest to sell to, or something else.

If you really are going to target broad-appeal, then you need to consider the implications of this. Primarily the fact that it will be an expensive exercise to roll it out and promote it to your audience. If there are incumbents, they’ve most likely already divvied up the market. Breaking through this is likely to be quite a challenge.

Option 2: Your market is reasonable sized

From our experience for the vast majority of businesses, the target audience ends up being 1000-3,000 businesses. This is a pretty good sweet spot and probably shows that you have targeted well. The next step here is to continue with your business development.

When you’re ready to start marketing, an excellent place to start is by investing in a list of these companies. That will allow you to see if there is product-market fit by talking to them. We are here to help you with this step – our database whoiswhere has over 200,000 business contact details. It’s updated regularly so you will always have fresh data for your marketing.

Option 3: Your market seems small

If you end up with market size of 1,000 or less, this might be an indication that something is wrong.

Potentially you didn’t identify enough industries that could use your product/service. The best thing to do is discuss this with our team. As we’re in the data industry we’ve honed our skills in identifying good targets.

Sometimes a small number of businesses is OK – for example when you have a high ticket item and only a few companies can afford it. Boeing and Airbus are prime examples – there are only a few hundred airlines that could buy their products worldwide.

A small market in NZ could also be OK, as long as you are able to deliver your product/service internationally. You could set yourself up initially to be focused on exporting. In this case, NZTE would be a great place to start a conversation. We are able to support you with international data through our partners.

The final option is that your idea simply doesn’t have a market. At the end of the day not every business idea is meant to become reality. You should consider yourself lucky that you found out sooner rather than later.

What next?

You can consider this simple Market Validation as a quantitative approach.

The next step is to test that market and get some qualitative feedback from your target user by conducting customer interviews. It’s all well and good to see that there are X,000 companies who can become your client. What you really want is some opinions from them on your idea. This also helps you assess market conditions before you come to market with a new product.

The best way to do this is to purchase a list of them and then call them up and have a chat with as many people as you can. You can use these conversations as input when creating your minimum viable product (mvp) and maybe even give you some ideas for a new feature. This will also start to build you a list of prospects who could become your very first customers.

If you’re short on time then there are companies out there who can do the calling for you.

We are one of those companies that have a team of callers that are well equipped to have these conversations on your behalf.

Here is how we do it.

The best part is you’re not selling anything so more people are likely to respond and give you quality feedback. Because we also hold the largest database in NZ, you can save money by not having to purchase this separately.

Running a market validation like this will help you understand your potential market really well. When you analyse the data is how you’ll unlock the real value of market validation. Your understanding of market will be much better, and you’ll be able to create a product that your potential users really love.

In conclusion

Conducting market validation is a crucial step when you’re introducing something new to the market. It’s sometimes overlooked or not done very thoroughly. It’s important that you have a market validation plan before you jump the gun and begin your startup.

Beware of skipping market validation research, it’s what will ring the early warning bells if there is a problem with your product and could save you thousands.

Artem Axenov
Operations Manager
E-ideas Limited