A market problem worth solving has three components; it is urgent, it is pervasive and there is a willingness to pay. Unfortunately, many companies start with the statement, "There is a problem in the market, we're not making enough money!" From there they come up with an idea, possibly based on their technology, and then try to capitalize on this idea to solve their problem. This scenario plays out time and time again in corporations and this sort of inside-out thinking is what leads to 40% of new products to fail.
To work outside-in, from the customer problem to a new solution, product managers and founders need to employ the Customer Discovery method developed by Steve Blank at Stanford. He has been a proponent of developing the customer before the idea to quickly identify a valid business model and to find product-market fit faster. While it's natural to start with the idea for a new product and begin working on the details of the solution, it is even more important to identify the customers who will want to buy this solution, what their problems are and how they react to potential solutions. To identify the correct customer segments, product managers need to employ specific research about the market.
Market research generally falls into three tiers:
General Market Research: This research includes third-party research reports, financial data, Crunchbase, government reports, etc. It is the easiest to gather, but is also the most unreliable for identifying paying customers and judging the success of a product.
Targeted Segment Research: This includes online surveys, internal customer data, phone surveys and other information, generally gathered by the product development team. This information is more specific to the solution, but still deals with large customer segments. This information takes more work to gather than general market research and is generally more reliable for predicting product success.
Customer Interviews: This is the most detailed type of market research, it includes win/loss call interviews, NIHITO visits and other personal interactions with potential customers. This information is time consuming, but revealing in its depth and can be used to generate specific information for the product development and market potential.
When identifying a customer segment with a problem, it's easiest to start with general research, but this will create a bias towards potential revenue potential that may be difficult to overcome. This bias becomes apparent with statements such as, "It's a $10 billion-dollar market, if we just capture 1% we'll make $100 million dollars!" A market is made up of an infinite number of customer segments defined by their characteristics and their behaviors. There is no guarantee of capturing any percentage based on the size of the market. Only by understanding specific users and then researching segments that have similar profiles can an accurate market size be estimated.
To begin identifying the customers, product managers need to begin with the most detailed market research, customer interviews. These interviews are still part of the market research to understand the customer segments whom have a problem and quantify their willingness to pay. This means these interviews should not be about the product idea, but about the symptoms of the problem (so no demos). There is a great list of sites with possible product discovery questions below. Essentially these interviews should be to determine the following four items:
Customer Characteristics: What are the attributes and behaviors of this customer that can be used to identify future customers. In particular, their level of risk and whether they are actively attempting to solve the problem can be used to identify early adopters.
Problem Discovery- Pervasiveness: Do many people have this problem or do a small number of people have this problem often?
Problem Discovery- Urgent: Is it happening now or soon? Are people actively trying to solve it?
Problem Discovery- Willingness to pay: Payment could be in terms of money, time, or social sharing, etc. Willingness means they are currently spending on alternatives or are losing value because of the problem.
This process is time consuming and requires active listening on the part of the product manager. The process should not involve validation of an idea or a demonstration of a solution, but rather a series of queries about problems and causes. The goal is understanding the value of a solution by identifying what is important to the customer, this will directly lead to the value proposition for the solution. Product managers should be continually interviewing customers in this manner to continue to uncover new problems in the market, for new product discovery it is recommended to interview at least a few dozen customers and in particular continue refining the customer selection to the point where the cohort has a preponderance of early adopter candidates that can be used for product validation with a Minimum Viable Product (MVP) later.
As the interviews are being completed and analyzed, product managers can also begin looking at targeted segment research to begin expanding the market knowledge to understand the total size of the available market and potential customers beyond the early adopters that would be targeted with a post-MVP product. By utilizing the customer interview research, targeted surveys can be utilized to identify other demographic information and further refinement of the problem and possible solutions. Surveys are risky as the sole support for a market research because it is too easy to gain poor knowledge with leading questions or survey a biased group of customers that does not represent the entirety of the market. In addition to surveys, most companies have access to internal data which is more specific than general research, this might include sales call information, current customer lists or customer support issues. This can be utilized to support the customer interview information to develop market information.
Finally, the customer characteristics from customer interviews and targeted segment research can be utilized along with general market research to identify both a total available market and a serviceable available market for both the MVP and for subsequent product releases. This information can be used for both investment decisions as well as for marketing and sales to develop go-to-market plans.
By building market research from the bottom up, from detailed customer interviews to general market research, product managers can identify the solution customers are willing to pay for, identify the total market potential and develop go to market plans all before any investment in development has occurred. This not only allows the development team to work with a specific vision in mind, but reduces the waste of developing something no one wants and forcing a pivot that demoralizes the team.
Market Research Resources