A. How do I validate my digital concept?
When it comes to idea validation, companies generally start by researching their target market. First, you find out whether your product addresses a real customer need. The days when ‘cool app’ ideas were popular are officially gone. People are tired of ‘noise’ and only want solutions to existing problems. A good way of identifying such problems is Google Trends, a tool that enables you to see the popularity of search terms over a period of time. Second, you find out whether you can sustainably monetize your idea by researching the size and wealth of your target market. Research bureaus, such as the Centraal Bureau voor de Statistiek, provide a lot of information on this topic, often free of charge. Third, you check your competition. A good way of identifying your competitors is Google Keyword Planner, a tool that enables you to see the monthly search results for specific search terms. The tool also works as proof of concept as the presence of competitors usually signals demand.
After researching their target market behind the scenes, best in class companies continue the validation process and run their ideas by potential customers. One way to do so is to outsource this part of the process to companies such as Proved. that generate questionnaires, spread them among the target market, interpret results and produce a report in just 24 hours. Another way to get in touch with potential customers is to create a landing page with a pitch. Top notch landing pages include a clear description of the product and its unique selling points as well as a direct call to action ranging from subscribing to a newsletter and submitting an email address to signing a letter of commitment and making advance payments. Also, they have the right technical underpinning – software that analyses the behaviour of visitors. The validation process ends with an evaluation of the landing page according to pre-established success criteria such as ‘x signups in x months’.
B. How do I build my digital product?
Now that you have validated your concept, you want to turn your idea into reality. In order to design and deliver a digital product, you need the right people and the right processes in place. You’ll want to leverage your core assets by involving 1). high performers from your current business and leverage your market by involving 2). customers and creating a dedicated customer group. Also, you’ll need 3). user experience (UX) designers. Their role is to bridge the gap between the business goals of your high performers and the user needs of your dedicated customer group and to design mock-ups and prototypes that will subsequently be built by 4). developers and maintained by 5). IT operators. Lastly, you’ll probably want to involve partners in the development process, such as start-ups with complementary offerings.
A big plus of working together with start-ups is becoming familiar with agile development processes. In contrast to traditional waterfall processes, agile processes are both incremental (deliver completed chunks) and iterative (continuously improve completed chunks). As developers don’t have to wait for a chunk to be perfect before starting another, agile processes lead to quicker development.
Scrum, the most widely used process framework for agile development, identifies three roles: the product owner, the development team and the scrum master. Product owners prioritize the work of the development team and create a product backlog. The team then pulls a chunk of work from the top of the backlog and starts the sprint – the timeframe for completing the work, usually between two to four weeks. At the end of the sprint, they deliver a ready-to-use piece of the product to the customer, review the sprint and start a new one. The scrum master coaches everyone and helps optimize the process. Perhaps the best part of scrum is that there aren’t any project managers – the self-steering scrum teams pull work off the backlog and commit to complete it within the timeframe of the sprint.
While agile processes, and particularly scrum, have significantly improved development, they have left out operations. In the last couple of years, a new practice, called devops, has been gaining traction in the tech community. Devops teams increase agility as both development and operations engineers work together during the lifecycle of the product.
In the end, development is about delivering a minimum viable product in the shortest amount of time and with the least amount of resources. And having a team comprised of high-performing employees, customers, UX designers, developers and operators that employ agile processes goes a long way toward achieving this goal.
C. How do I fund my new offering?
Funding is usually the first thing that comes to mind when entrepreneurs want to develop new products. However, before thinking about funding, you should think about how you want to launch your product as this has implications for your funding options. Do you want to develop the new product within your current business or do you want to create a new business entity or a start-up? Both options have pros and cons – generally we see that the more innovative the product, the more entrepreneurs opt for a separate entity in order to insulate the current business from any liabilities. A big plus of creating a start-up is that you can join an incubator. In doing so, you have access to a large business network that enables you to generate leads, to market your product through its channels, to receive help and advice from successful entrepreneurs and venture capitalists and to be on top of the latest developments in your field as you interact with other start-ups.
Once you have figured out how to launch your product, you move to funding options. Luckily, there are many ways nowadays to fund your business. Digital crowdfunding platforms have been gaining popularity for some years now as they enable individuals to invest in promising projects. So have platforms that enable companies to apply for innovation subsidies. Another successful option is to approach potential launching customers and ask them to contribute to the development of your product in exchange for discounts and other perks. There is however one thing all these parties have in common. They usually don’t invest in an idea or in a slide deck. Most investors expect at least a working prototype and preferably a minimum viable product that is being used by a number of customers before investing.
So how does it usually work? You use your own savings and/or revenue from your current business as well as money from the ‘family, friends and fools’ pool to develop a prototype and test it with a dedicated customer group. After a few months, you need to make another round of investments. This time around you can opt for angel investors or accelerators. They both invest in start-ups in exchange for equity. Venture capitalists only invest in scale-ups, meaning that you have to have built the first version of your product and to already have a steady customer base in order for them to invest. What happens next? You start thinking about things such as dilution, vesting and option pools.
Dilution is often seen as a necessary evil: you need to invest in order to seize momentum and grow your company. Also, with each investment your company is worth more. You do however lose control of your company. A good way to disincentive the wrong people from getting involved in your start-up is vesting. A common vesting arrangement is to have four years of vesting with a one year cliff – this means that people who get fired or decide to quit within the first year don’t receive any shares. After the first year everyone receives 25% of their shares and 1/48th every month after that. Also, don’t forget to reserve shares for future high performers, the so-called option pool, as the prospect of option pool shares attracts top talent.
D. How do I monetize my offering?
Now that you’ve built a minimum viable product and several launching customers are experimenting with it, you can start thinking about an appropriate revenue model. There are several revenue models that are gaining traction in the digital economy.
First, there’s the subscription-based model in which customers pay a fee for using products or services for a specific amount of time. Subscriptions add value for both parties. For customers, subscriptions mean flexibility: they are not locked into expensive purchases and are able to scale up or down according to their needs. For producers, subscriptions mean recurring revenue and a way to predict demand. If you think this model is only suitable for digital services such as software or apps, think again. This model is becoming so popular that many providers of tangibles are turning to subscriptions in order to develop whole new business models. You can now subscribe to customized boxes for groceries (de Krat, Hello Fresh), flower bouquets (Bloomon) or cosmetics (Beautybox). You can even have a surprise box full of items that match your interests (Quarterly; Goodie Goodness) delivered to your doorstep every month.
Second, there’s the freemium model, a combination of ‘free’ and ‘premium’, in which customers use products with limited functionalities for free and pay in order to upgrade to a premium version. If done properly, freemium works really well. Just think of Linkedin and Dropbox. There are however several challenges such as finding the right balance between the free and the premium functionalities and ensuring customers understand what they would gain by upgrading. Some combine freemium with in-app advertising as user data enables them to place targeted ads in the free products. As with the freemium model, there are challenges such as ensuring that advertising enhances the user experience and doesn’t interrupt it.
Finally, there’s the platform-based model in which companies not only facilitate interactions between customers and their products but also between customers and complementary products. Most of the time, they don’t even have products of their own, such is the case with Ali Baba. There are many types of platforms: product marketplaces such as Amazon, service marketplaces such as Uber, development platforms such as the Apple Store, content platforms such as Instagram, payment platforms such as Paypal and social networking platforms such as Tinder to name a few. Although platforms are among the fastest growing companies in the world, they are among the most difficult models to sustain and platform owners are often confronted with membership issues. Sometimes they must subsidize either consumers or producers in order to get both groups on board. Other times, they must open up the governance of the platform in order to get producers on board. And finally, they must continuously control access to the platform in order to ensure that only members who create value are allowed on the platform.