Validating the various kinds of startups

By Editor April 4, 2016

If you have been following the articles here on StartupBeat, you may have, by now, realized the importance of validating a business idea before executing the plan. In a nutshell, validation is the process of spending minimal resources to test your business idea to see if there is a market for it and if your target customers are ready to pay you for your product or service. By doing this, you can avoid expensive mistakes that can derail your startup dream.

So how does one go about validating their business? Before we can answer that question, one needs to understand the essential difference between the various kinds of business. This is because your business model and distribution channels have a direct impact on the kind of validation that will provide you with the best feedback about your business prospects. In this article, we will take a look at the most common business models and distribution channels and how you can tweak your validation accordingly.

Ecommerce business: If you are seeking to create a business based on online distribution channels, then validation is quite straight-forward. Firstly, you create a website that advertises your product. Many times, product manufacturers have a minimum order quantity that you may not afford. Other times, you may want to manufacture your own product in which case you will require high capital investment. In each case, it is a good idea to launch a ‘finished’ website to sell your product even before you have procured or manufactured your product. By marketing this website to your targeted audience (over Adwords or Facebook), you can evaluate the conversion rates and see if customers are willing to pay for your product. If you do see successful conversions, then it validates the demand for the product. You may always procure the product and distribute to your customers, or refund the payment.

SaaS business: Subscription-based cloud services are among the most attractive business models today because of their relatively lower capital investment and monetization strategy. This is also an easy business to validate because of the recurring nature of payments and in effect higher average revenues per customer. This allows businesses to spend more on advertising. The way you validate this business is very similar to ecommerce businesses except that you cannot market your website in the absence of a product. This is because SaaS customers often seek demo or trial before making a purchase. So the way out is to build a ‘minimum viable product’ (MVP); a no-frills software product that achieves the same objectives of a full-fledged product. By evaluating the customer adoption of the MVP, businesses may assess the prospects of their product and can thereby ‘pivot’ their product strategy.

Consulting business: A number of self-employed professionals start off as consultants in their respective areas of expertise. While such businesses inevitably grow through word-of-mouth marketing, the validation may be done simply via name dropping and cold emails. To do this, find a target customer base that may be interested in your service and connect with them over LinkedIn or email and request a meeting to discuss possible areas to work together. By studying the conversion rates, one may not only validate their business but may also measure the success of cold-emailing as a marketing strategy. Also, if you have already dealt with possible clients in your previous job, it is a good idea to seek opportunities from these clients. Not only does this help you kickstart your business, you may also evaluate the business value of your existing network.

Physical product: This is by far the most common, yet the most tricky, model of doing business. This is because there are multiple variables that can influence your business and hence need to be evaluated. For instance, if you are an innovator and are launching a product that doesn’t exist in the market today, a good place to validate your business would be crowdfunding websites like Kickstarter. The interest shown by funders on this platform is a good indicator of how your audience views your product. This strategy may not work for a business that sells white-labeled products that already exist. In a number of cases, such products do not need validation since a market already exists for your products. However, if you operate in a geography where the product does not exist as yet, there are a couple of ways to validate. One way would be to talk to retailers in your geography to stock your products in their shop. The reception among retail owners is often a good way to estimate potential demand. Another way to do it is to advertise your products via flyers. New business owners typically measure the demand for their product through the number of phone enquiries they receive through flyer distribution.

Each of the strategies mentioned above require a minimal investment to execute. However, they are an extremely cost-effective way to ensure the demand for your product before you invest into your business. Have you validated your business in recent times? Share your experience in the comments below.