Most technical entrepreneurs focus hard on building an innovative product, but forget that an elegant solution doesn?t automatically translate into a successful business. Businesses require an equally elegant business model, with the right price, messaging?and delivery channel to the right target customers to keep the dream alive and growing.
Defining the right business model requires the same diligence as designing the right product, but the approach and skills required are different. That?s why investors acknowledge that two co-founders are often better than one –?with one focusing on the technical solution, and the other focusing on defining and building the business model. These two jobs need to be done in parallel.
This dual-leadership approach would have avoided the frustration I felt in a startup a few years ago where beta customers loved our software solution as a free prototype, but we couldn?t sell one in the first few months for a price that seemed reasonable for all our work and innovation. The founder had simply not done the work to validate a price and customer segment.
In the investment community, this work is called proving the business model. It starts with validating a business opportunity (a large customer segment willing to pay money to solve a real problem), in much the same way as your proof of concept or prototype validates your technical solution. Here are seven steps I recommend for establishing the right business model:
1. Size the value of your solution in the target segment.
Customers often complain that existing approaches are not intuitive or integrated, but old solutions may be familiar and locked in. Estimate your costs, including a 50 percent gross margin, as a lower bound on a price. Products too expensive for the market won?t succeed, and prices too low will leave you exposed. Match with competitor prices and market demographics.
2. Confirm that your product or service solves the problem.
Once you have a prototype or alpha version, expose it to real customers to see if you get the same excitement and delight that you feel. Look for feedback on how to make it a better fit. If it doesn?t relieve the pain, or doesn?t work, no business model will save you.
3. Test your channel and support strategy.
Now is the time to pitch the entire business model to a group of customers or a specially selected focus group. This is not just a product pitch, but must include all elements of your pricing, marketing, distribution?and maintenance. Here again is your chance to make pivots for almost no cost.
4. Talk to industry experts and investors.
A small advisory board of outside people with?experience in your domain can give you the unbiased feedback you need, as well as connections for setting up distribution and sales channels. It?s also valuable to talk to potential investors for their views, even if you are bootstrapping the effort.
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