• Jeff Waggoner

Strategic Execution Part 3.2: Product / Market Validation

Updated: May 25

Strategic Execution Part 3.2: Product / Market Validation

This blog is part of a series of blog posts on the 6 stages of corporate development with the overview here. In previous blog posts, I explained what strategy is, why it is needed, and how it is developed and executed. In this post, I will outline the second of six stages of strategic corporate development for growth from inception to Exit; mastering the highly differing and even contradictory demands and focuses of each of these independent stages is the key to successfully navigating the entire journey.

In the Product / Market Validation phase, the company must perform a series of experiments and growth exercises to validate the product or service and target market identified in the Company / Product Launch or Customer Development Stage. That validation involves a product and/or service that bears paying, sustainable customers within a defined market micro-niche with an established value proposition including pricing. The real focus of this stage is exploration and deep understanding of the market and the way the product / service developed in the previous stage really creates value. While growth during this stage will be important for financial reasons, the primary purpose of growth will be to fuel a series of evolving experiments to enable that deep understanding.

Product / Market Validation Objectives:

  • Through iterative, narrowing experimentation develop a deep understanding of the primary 3 factors of product / market fit:

o Feature / facet mapping of driver(s) of value within the market space. This is

an exploration of what features drive what kind of value for customers

o Market / Value mapping identifying the dimension(s) of the market as they

relate to the product / service value production, an exploration of how the

drivers of value vary across the market space and in which niches is the value

realizable or not and why

o Operational driver(s) for value capture for the company; the % of value

captured in revenue for the company of value produced for a company, this

should include pricing

  • Achieve a proof of Product / Market Fit through development of a customer base, with controlled churn, and consistent recurring and one-time revenue with industry / business model appropriate gross margin.

  • Develop initial Sales, Development, Delivery, and Operations models and baseline their efficacy and efficiency.

  • Stand up basic management to budget and team structure, if not already developed in Company / Product Launch.

Product / Market Validation Key Metrics:

The metrics of each stage build on previous stages. Runway, through cash and time management of the team remain a key metric as do the traction metrics of revenue as well the metrics associated with the uptake step model shown in Figure 2. Added to this set of metrics are a few additional key metrics:

  • Product Cohort / Complete Customer base churn. This metric is the primary indicator or proof of product / market fit. Appropriate churn rates vary by size, maturity, product price, customer type and a myriad other factors. In the venture world, companies need to target 5-7% annual churn by the time they reach approximately $10M in annual revenue, but rates as high as 40% annual churn could still support a conclusion of product / market fit when the annual revenue is still below $1M. Of course, these figures vary as a function of the free-flow of capital, the specific company / investor, and if it applies to the entire customer base including purposeful market experiment customers.

  • Customer Value versus Pricing. This set of metrics enables an understanding of the value created for the customer through use of the product or service and should include a mapping of key drivers in that value proposition. Not all products / services will support a metric of this nature.

  • Gross Margin and unit economics for the company; this would include Research and Development (R&D), Sales and Marketing (S&M), and General and Administrative (G&A) as a % of revenue. This set of metrics enables an understanding of the value capture as well as the relative expenditure base of the company. Benchmarks for appropriate values vary significantly for different types of companies, but this data does exist and is useful for targeting these expenditure levels. For most companies, Gross Margin of at least 60% is appropriate; recognizing that for many SaaS companies, Gross Margins above 90% are realistic and appropriate.

  • Customer Acquisition Cost (CAC) and Life-Time Value (LTV) should also be tracked at this stage, but primarily to identify a benchmark for Business Model Validation as well as to enable a deeper analysis of process and tools drivers of both.

Product / Market Validation Areas of Consideration:

Performing Product / Market Validation requires coherent orchestration of a series of experiments the company must perform. Synchronicity of effort across the enterprise is critical. These experiments must be designed to reveal a mapping of the market space, the product and associated perceived value of features associated with sub-segments of the market, and the customer sensitivity to pricing. Mapping should not be construed to imply that the entire feature-market space is mapped; the process should be convergent with additional mapping performed in other stages. In most cases, this process will reveal a shallow map of most but not all of the space, with value-feature depth in select areas, but most especially in the target micro-niche. Once this mapping is achieved, the focus should pivot to building the revenue base in an identified attractive sub-segment of the market and baselining and refining the sales, marketing, development, delivery, operation, and support of the product.

Market mapping begins with the first question of what drives the market dimensionality. There can be multiple dimensions to a market; these typically are demographic based measures but can mix multiple types such as size, revenue, industry focus, growth stage, supply chain stage, etc. for B2B companies. For B2C companies, these dimensions might be age, income, educational status, homeowner status, hobby interests, professional interests, or many others. For most companies, their market is truly segment-able with only one or two dimensions. There can be layers to the segmentation as well; the first layer might be filters that exclude obvious non-customers; the intent here is to identify dimensions that support mapping of a broad market population.

Once market dimensionality is identified, the value proposition should be vetted across the dimension by attempted sales and customer relationship building, interviews, surveys, and analysis. This should reveal a deeper understanding of how the MVP, as it evolves, is viewed by potential and actual customers at various points along the primary market dimensions. As this understanding is gained, two things will happen. First, the market mapping will become clearer, and second the capabilities and features appropriate to augment the MVP will become clearer and that clarity should drive continued product development. The market mapping is a primary objective. This map will drive continued coherent product development, sales expansion, investment, and many other facets of the growth of the company.

It is imperative that these exercises yield more than a binary good / bad mapping of value perception across the market. The real value here is in the why. Why customers and prospects perceive things differently needs to be understood in order to drive continued product development, separate the perceived product value from the process of measuring, and identify potential roadblocks to future sales and growth. The key skill here is business development; a pure sales approach will miss the mark and waste a lot of resources especially time, market good will, and cash. The difference is the focus on understanding vs. making the sale.

The market mapping exercise can drive a pivot back to early-stage Customer Development. If the initial work appears to be invalidated by the mapping, where the market does not perceive value broadly and there is not a clear path to repairing that situation, or where the resultant mapped market appears too small and/or not growing, then a major pivot may be in order. Smaller pivots are more common, in fact expected, where the exercise has to alter the fundamentals of the MVP to complete the mapping.

Once the market mapping is performed, a target micro-niche is identified, and a deep understanding of the value proposition and how it needs to evolve is developed for that identified micro-niche; then the focus now shifts to proving product / market fit. To do this, the company needs to focus the continued experimentation on the target micro-niche. Here the focus shifts to understanding the perceived value of the product within that micro-niche and performing experiments with pricing. Performance guarantees, to the extent that they are required will play into this and can extend the proof cycle often driving the time to equal 1-2 performance guarantee cycles. Pricing analysis and sensitivity analysis should be performed to gain an understanding of the impact of pricing on initial sales as well as churn. With pricing understood it is time to benchmark the company’s internal value chain with gross margin, R&D/revenue, S&M/revenue, G&A/revenue, as well as the more targeted metrics of Customer Acquisition Cost (CAC) and Life-Time Value (LTV). Along with these metrics, should come an analysis of the internal processes that have organically developed within the company for all of these functions and opportunities to alter and improve the cost and speed of those processes.

The criteria for having achieved product / market fit are a function of industry, capital sources and associated perspectives, and market conditions. The point of the milestone is to objectively state that the company has a product that a market is repeatedly buying and not returning (or is recurrently buying), that the product is commanding sufficient value and associated pricing to be able to support the company with reasonable outside capital to offset growth and process inefficiency, and that the company has benchmarked and assessed the next phase. For many high growth companies, this milestone will be marked with the first institutional outside investment and that will help define the objectivity of the milestone. For those not raising capital, this milestone requires an objective assessment of the stability of the growing customer base, the revenue stream’s ability to support growth in expenditures associated with streamlining the company, and a confidence that it’s time to invest in that streamlining along with what is usually a steeper proof point; sufficient free cash flow to invest in growth.

In the next blog post, Business Model Validation.

What stage of corporate development are you currently in and what challenges are you facing?

For most companies, the usage of external parties to facilitate the strategic planning and execution process produces superior results. The process typically involves a great deal of information processing that isn’t core to running the business on a daily basis and a facilitator in planning sessions frees up the team to focus on the critical questions rather than the process and can inject highly productive objectivity into the discussion and decisions. If you would like to discuss where your company is in the evolution of strategic planning and execution or would like some assistance in setting up or performing this critical process or just have a question please contact us.


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