Gaze upon the elephant: the difference between product and market risk

Product-market fit
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Rob Fitzpatrick
Partner
Founder Centric
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Sometimes we comfort ourselves by asking questions which don’t actually de-risk the business we're building or resolve those critical, big, scary, lurking questions. We ignore the elephant in the room.

This article is serialised from Rob Fitzpatrick's The Mom Test: how to talk to customers and learn if your business is a good idea when everyone is lying to you. Read the fist excerpt here

Let’s say we suspect that teachers from the poorest schools are completely overloaded and that our tools would save them time so they could better educate their students. We go talk to them and confirm that yes, they are completely overloaded. We then spend weeks with them, figuring out exactly what their dream tool would do. Unfortunately, we've missed the elephant, which is that the poorest schools may not have the budgets available to pay us what we need to sustain and grow a business. We're liable to spend a huge amount of time exploring a real and urgent problem, only to hop into the deadpool due to our customer’s budgeting issues.

Startups tend to have multiple failure points (e.g. the problems of the teachers and the ability of the schools to pay us). If any of these conditions doesn't exist, we must overhaul our idea. It’s tempting to obsess over the most interesting of several failure points and ignore the others. And then we miss important questions.

Beyond the risks of our customers and market, we also have challenges with our own product. Overlooking product risks is just as deadly as overlooking the goals and constraints of our customers. Take the following conversation with a professional public speaker. Is it full of good data or bad data?

An ambiguous conversation:

Them: “…I get paid 2 or 3 grand per talk. Sometimes more if it’s corporate work.” Some good pricing and value signals.

You: “Where do you get your gigs? Do you have an agent?”

Trying to understand  the alternatives.

Them: “Yeah. He kind of sucks though. Most of my work comes through people who just know me from my blog or have seen my other talks.” Hardly  a must-solve problem since he has a reliable workaround, but at least it’s high value.

You: “What’s wrong with the agent? And why do you still work with him?” Dig.

Them: “I’m one of the lowest-paid people they work with, so I get ignored a lot. But sometimes he brings in deals, so whatever. It’s free money.” Good information on his motivations and goals.

Even though you’ve found a pain, your success is dependent on a bunch of other factors.

At this point, let’s say I’m confident that getting gigs is important to him. I also know what it’s worth and how he’s currently accomplishing it. So I zoom in to introduce the problem I’m solving and the way I want to approach it.

You: “I’m building a marketplace to cut out the agents and connect event organisers directly with speakers. It should help you get more gigs and keep the agent fees. How would that fit into your speaking life?”

Them: “Man, that’s awesome. If you could get me more gigs — or betterbetter-paid— I’d happily drop my agent and pay you 20% of the boost. I know a bunch of other people who would love to as well.” This is the important bit — is it good?

So what’s the result? Beyond being excited, we got some concrete data about how valuable this could be to him. Plus, he gave a verbal commitment to be one of our early users. It sure seems good.

But what did he actually tell us? He said that if we can get him more gigs, then he’ll pay a cut. Well, obviously. Who doesn’t want free money? His needs are clear: he wants to make more money by speaking. If we can send him work, he’ll share some of it with us. This was never really in doubt.

The phrase “if you could get me more gigs” is basically shifting the burden from the customer to your product. Even though you’ve found a pain, your success is dependent on a bunch of other factors, such as your ability to grow a healthy supply of paying gigs which are a good fit for him. Will you be able to do that? It remains to be seen.

This situation is easier to spot in the online advertising industry. Imagine running customer conversations with an advertiser to try to understand their pains so you can convince them to advertise on your site. They’d sort of look at you blankly and say, “Listen, if you can get enough page views, we’ll pay you for them.” In fact, it’s such a well-established, would pay to solve problem that you don’t even need to talk to them to set it up. You just plug in an ad network and you’re done.

Same deal with affiliate commissions. If you sell a company’s products, you get a cut. That’s just how it works. You don’t need to explore or validate or understand their problems. The risk resides in your ability to get lots of traffic and sell lots of products. If you can, they’ll pay you.

In all of these examples, the risk is in your product, not in the customer.

They’ll pay if your product gets big enough.

  • Product risk — Can I build it? Can I grow it?
  • Customer/market risk — Do they want it? Will they pay me? Are there lots of them?

You can’t overlook either one. I remember talking to a founder who had wasted three months on worthless customer conversations. He wanted to start a company building gadgets that tracked the fertility of farm animals, ultimately boosting birthrates and thus farm revenue. When he talked to farmers, he asked questions like: “Would you switch trackers if something cheaper and more effective was available?” That’s the same as asking someone whether they would like more money. The farmers responded along the lines of: “If you can build what you say you can build, I’ll equip my whole herd.” The problem is, he couldn’t build it. The risk was in the product.

I’ve also seen this strike several of the recent companies who want to use mobile/realtime deals to drive foot traffic to bars and clubs. They run customer conversations with bar owners who confirm that: yes, they would like more customers on the slow nights; and yes, they would pay you if you could send customers on demand. The founders take this as strong validation (“They have the problem and committed to pay!”) without recognising that the vast majority of the risk is in the product, not the market. Bars will pay, but only if you can amass a huge audience of consumers. Then the founders talk to consumers and ask if they would use an app which always pointed them to booming parties with cheap booze. Again, obviously yes. But that doesn’t tell us whether we can actually achieve that critical mass of users.

Video games are pure product risk. What sort of question could you ask to validate your game idea? “Do you like having fun? Would you like to have even more fun?” Practically 100% of the risk is in the product and almost none is in the customer. You know people buy games. If yours is good and you can find a way to make them notice it, they’ll buy it. You don’t need to rediscover people’s desire to play video games.

This isn’t to say that you shouldn’t talk to anyone if you’re building something with product risk. In the case of the farm fertility monitor, it’s good to know that the farmer isn’t opposed to switching tech, for example. For the nightclubs, it’s good to know that they’re at least theoretically willing to pay for promotion. It would be tragic to succeed at the hard work of creating the product or community only to learn nobody will pay for it.

What all this does mean is that if you’ve got heavy product risk (as opposed to pure market risk), then you’re not going to be able to prove as much of your business through conversations alone. The conversations give you a starting point, but you’ll have to start building product earlier and with less certainty than if you had pure market risk.

This article is serialised from Rob Fitzpatrick's The Mom Test: how to talk to customers and learn if your business is a good idea when everyone is lying to you. Read the fist excerpt here

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09th Jul 2016 15:41

Nice one,

Relly like it I really like

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