Starting a business isn’t easy, and without the right support in place, you can’t expect to break even, much less recover any profits.
According to a study by Startup Genome, only 10% of startups succeed. What’s even more staggering is the data from the Bureau of Labor, suggesting that 20% of businesses fail within the first year.
Many people will give up hope after learning about numbers like these. But starting a business doesn’t have to be a scary journey. All it takes is a little effort to connect with the right people. Luckily there are plenty of tools out there, like the resources at Ramen Club—a founder community that helps entrepreneurs reach the next level of business performance through different kinds of remote collaboration.
In this article, we’ll talk about something simple yet fundamental: market validation. It’s single-handedly the most important thing to consider as a new entrepreneur. Without market validation, you go into the market blind, with no sort of valid expectations or plan.
But what the heck is market validation?!
Market validation is a crucial component of the product development process. Without it, you’re pretty much going into the market blind. Harvard Business School describes market validation as:
The process of determining if there’s a need for your product in your target market. Validating your business idea can enable you to reasonably predict whether people will buy your product or service, and whether your business will be profitable.
Basically, you want to be able to reasonably predict if your business will be profitable—i.e., will people buy your products and/or services. Ideally, you first need to validate the need for what you’re building before allocating a significant amount of time and resources to the project.
There’s no point in spending money to create something that isn’t going to generate profit. When you are the founder of a startup, you have to constantly be thinking of longevity and your place in the market. This is the main goal of market validation.
There are three different ways to look at this:
1. Total available market (TAM): the total overall demand for your product or service.
2. Serviceable available market (SAM): your customer segment within a reasonable geographical range.
3. Serviceable obtainable market (SOM): your customer segment within a geographical range that might become customers
If you aren’t entirely clear on where you belong, you can get involved with entrepreneurial communities, and to learn different tactics about market and customer validation. The best thing about being a startup founder is that it throws you into an industry full of people who have been where you’re at. Mentorship and collaboration are invaluable tools for any budding entrepreneur. If you’re interested in joining the #1 founder community that will support you to ramen profitable and beyond, Ramen Club is for you.
Why is market validation important?
So, you’re starting to understand what market validation is, but maybe you’re not totally sold on how important it is yet. Well, you should know that most of the time when businesses fail, it’s because they introduced a product or service into the market that didn’t fulfill any sort of need. Even if something seems like a great idea, if there’s no market for it, you’re pretty much doomed. When you validate your business ideas, you are more likely to:
1. Avoid any large product failures
When you invest a lot of resources to create and launch a product that ultimately doesn’t do well, you will incur what is called a sunk cost. When you put your business ideas through the market validation process you are far more likely to avoid any negative results.
Market validation allows you to understand your customers in a deeper way and build an awareness of what customers need most. As you become more familiar with the process, it will start to feel easier to identify these elements in the product development process.
2. Justify funding for your projects
As a startup founder, you’re probably familiar with the reality of new product development. It can be a huge financial undertaking for bootstrappers who must go ahead with their ideas without any external funding. When you conduct market validation on your products and services:
- You can justify the cost of your product to potential investors.
- If you work within an organization—gain approval from management to go ahead with your project.
- Bootstrappers can move forward with their ideas without being too worried about failure. When you depend on yourself for funding, the risk is much higher. However, market validation will help you feel more secure when you invest in yourself.
Speaking of bootstrappers, Ramen Club’s community has over 90 founders that created their business from scratch all on their own. If you find yourself coming up with excuses as to why you can’t start, you’ll be given plenty of reasons why you’re already late!
When you see proof that someone in a similar position to you reached a level of success you can only dream of, suddenly it becomes real. The possibility becomes tangible and suddenly the pieces start to come together.
The market validation process
Now that you understand the importance of market validation, it’s time to learn how to put it into practice. To make things simple, the process can be broken down into five steps:
Know your goals and assumptions
This first step is the most important because it allows you to create a vision of what you want to accomplish. You will also be able to notice where you’re making assumptions versus what is true.
Some questions to consider:
- Who is your target audience? What are some of the things you assume to be true about them?
- What value does your product provide? What purpose does it serve?
- Have you articulated any type of hypothesis about your product? If you launch this product into the market, what response are you hoping to achieve?
- What makes your product different from anything similar on the market?
As you go through these questions, write down your answers and anything else that comes to mind. Make sure you hold onto this for reference as you continue the product development process.
2. Identify your market size
After you take some time to become familiar with your goals and assumptions, you can focus more on your target market. The goal here is to estimate the share of the market you might be able to reach with your product.
To estimate your market share you can do the following:
- Find products like yours and look up sales data.
- Find out the number and share of current manufacturers for the product.
- Determine the percentage of the market held by your segment.
3. Search volume research
Effective market validation wouldn’t exist without keyword research. Search engines are the quickest way to find out if people are looking with what you have to offer. When you’re trying to gauge the validity of your idea, you’ll want to conduct monthly search volume research. Creating a product people search for is your best bet should you want to quickly scale a business through digital marketing. Just take a look at VEED, one of our members which scaled their annual recurring revenue to $7M through SEO.
There are plenty of tools you can use online for keyword research, with Ahrefs being the most popular. What’s most important is what you do with the results. If you find that terms related to your product are attracting thousands of searches each month, you might be onto something that the market needs.
On the other hand, if your terms aren’t showing many results, try to adjust your wording to reflect customer intent.
4. Customer validation
Once you have a clear target market segment, you can reach out for feedback from customers to gain insight into the potential of your idea. The most common methods are:
- Online surveys
- One-on-one interviews
If you are pleased with the feedback, you can continue to move along the process. If not, you might want to go back and evaluate your product.
5. Test your idea
After you confirm there is a need in the market for your product, you can conduct testing:
- Alpha testing: test your product in a staged setting to work out any issues before bringing it to other users.
- Beta testing: Your product is tested by a real group of users to help identify operational issues and other problems.
The only thing you’re missing now is people. If you want to conduct alpha testing with a group of individuals that are familiar with what you’re trying to accomplish, check out The Ramen Club.
Validate your market!
In today’s digital world, opportunities are endless, and connecting with one another is easier than ever. Gone are the days of struggling to find the right people to collaborate with because of where you may be located.
Remote work has changed the way people do business and as a startup founder, it’s your responsibility to take advantage of that. When you work for yourself, you set the limits. If you want to work on scaling your business as soon as possible, you must start with a knockout product.
Market validation is an essential process for any entrepreneur looking to bring something new to the market. Without it, you stand to waste time and resources instead of capitalizing on your creativity. Your first step in building a business that will be resilient, even in tough economic times, is by learning as much as you can about the industry.
What are you waiting for? Join Ramen Club for some of the most valuable advice and mentorship in the world. Nothing beats real connections with people who understand exactly where you’re at and want to watch you succeed.