Is it Time to Pivot Your Business Model?

Stop! This is the last chance for you, your team and your investors to fully review the evidence gathered through the Customer Development process and decide whether to move to the Customer Validation stage. Stopping at this stage is very difficult for eager entrepreneurs, but you must take the time to review what you have learned before moving to the much more expensive Customer Validation stage.

There are three critical questions to answer before taking the leap.

This is part 8 of our Lean Innovation Series.

Don’t rush the process. Expect this discussion to take an entire board meeting to fully review the evidence gathered.

  1. Have We Found a Product & Market Fit? To answer this question we must answer several sub-questions.
    1. Is the problem you are addressing serious enough to your target market? Did customers have friends or colleagues with a similar problem? Did they rank their pain a 9 or 10 on a 10 point scale? Had customers created their own “home grown” solutions?
    2. Does your product or service solve the problem for your customers? Did your MVP (minimum viable product) generate lots of “buys”? Were customers referring you to their friends?
    3. Are there enough customers (market) to deliver a worthwhile business opportunity? Review your assumptions about your TAM (total addressable market) and SAM (serviceable market). Did your customer interactions verify your assumptions? Is the market growing? What kinds of competitive pressure did you uncover? Will the uncovered market provide founders and investors with the opportunity they are seeking?
  2. Who are Our Customers and How Do We Reach Them? At this stage you should have a verified customer archetype. You should know who your customers are and where you can reach them. What TV shows (if any) they watch, what they read and what gurus they follow. Can you thoroughly complete your channel map showing how your product or services moves from you to the end user? Based on your tests, what is the acquisition cost of each new customer?
  3. Can We Make Good Money and Grow the Company? Now let’s look at the numbers. Using the hard data gathered so far, what is the direct revenue that the company will receive by quarter? Add to that the channel revenue less channel costs. Direct revenues are the sales direct to customers that the company will keep 100% of the revenue. Channel revenue is sold through partners (like Amazon) that take a percentage of the sales prices. There are often multiple levels of channel costs. Deduct the quarterly operating costs and sales acquisition costs. Project this model out for a year. This model will show you the total expenditures you project until you hopefully reach break-even.

To pivot or proceed? Based on your analysis is the return worth the risk? Are there changes you can make to the model to reduce risk or increase return? If there are, it’s time to make a pivot.

If all the evidence is telling you and your team to proceed, it’s time to move to Customer Validation. Customer Validation is where your team turns its hypotheses into facts as you work to justify scaling sales and marketing spending.

Thank you for being a part of our values driven community!

Photo courtesy of https://www.flickr.com/photos/scott-teresi/3425223559/in/photostream/.

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