WHAT IS STEP 23, SHOW THAT “THE DOGS WILL EAT THE DOG FOOD”?

Offer your Minimum Viable Business Product (MVBP) to your target customer and obtain quantitative metrics regarding the adoption rate of the product, the value the customer is getting from the product, and that someone is paying for the product.

WHY DO WE DO THIS STEP, AND WHY DO WE DO IT NOW?

Numbers don’t lie. Entrepreneurs have an ability to create great passion for a vision, but now is the time for reality, to show concrete evidence that your product, and specific features of it, are succeeding. Qualitative information and conceptual logic are not sufficient. You do this step now because you finally have the MVBP and you need to validate it before moving forward.

PROCESS GUIDE

Entrepreneurial ventures usually fall into one of two varieties. The most common state is that they are blindly optimistic that everything is going great and getting even better. The other state is one of paranoia where the team is overly pessimistic about the launch of their first product. In either case, the entrepreneurs suffer from some of the same biases I spoke about in the primary market research chapter, and as such they don’t collect sufficient appropriate quantitative postlaunch data to override the confirmation bias that kicks in to validate their original point of view. As a result, they overreact or underreact to how the market responds.

Don’t fall into this trap. Be vigilant as a team to maintain the level of objectivity, specificity, and rigor you learned in your primary market research work and that you have kept throughout the 24 Steps. If you do, you will much better understand whether the level of adoption is in line with what you should be seeing.

Just like you did in Steps 20 and 21, where you first identified your key assumptions and then tested them, in this step you will test the integrated MVBP you defined in Step 22. The ultimate test now is whether the end user is using the product and getting value, the economic buyer is willing to pay, and the champion is pleased enough with the results to keep championing your product and company.

There are many different ways to quantitatively measure your adoption rate.¹ In this workbook, I recommend that for consistency, you use the framework from Step 18, Map the Sales Process to Acquire a Customer, as your initial foundational framework because it covers the full sales cycle from customer awareness all the way to repeat customers and word of mouth. The worksheet for this step presents the seven stages in the sales funnel and asks you to provide the conversion rates for each stage in the funnel, compare it to the industry average, and define other metrics useful to your startup.

Your instinctual qualitative observations can help guide you on how your product and go-to-market plan are working, but you need to combine them with quantitative data or you will be in the blindly optimistic or pessimistic world I described in the beginning of this step. Lord Kelvin expressed it memorably in saying: “When you can measure what you are speaking about and express it in numbers, you know something about it. When you cannot, your knowledge is of a meager and unsatisfactory kind.”²

So what numbers should you look at?

1. Initial interest: Once your target customers are exposed to your value proposition, what percentage of them actively seek to learn more? On a website, you can measure the click-through rate from a page that details the benefits of the product to a subsequent page.
2. Conversion rates: Once the target customer is in the sales funnel, the yield rates going from section to section of the funnel are extremely important numbers to understand, both the absolute numbers but also the trends.
3. Purchase and pay: The ultimate conversion. Whether the customer pays for your product is one very important indication of whether the customer is getting value. How long it takes the customer to pay, and what percentage of customers end up not paying after making an initial commitment (the “default rate”), are also interesting numbers to watch.
4. Retention rates: It is always telling to monitor retention rates, often referred to in the negative modality of “churn rate,” especially in subscription businesses. One way to measure retention rates is through support or maintenance contracts for postpurchase support. If the customer buys the product but doesn’t sign up for a maintenance contract at the end of the warranty period, in some industries that is a bad sign and you should take note immediately.
5. Customer advocacy: There is a huge difference between a satisfied customer and a very happy, evangelizing one. The latter is at least one order of magnitude if not more valuable to you. The simplest and most commonly used way to measure customer advocacy is the Net Promoter Score (NPS), developed by Bain & Company, Satmetrix Systems, and Fred Reichheld. You gather the necessary data by asking customers a single question: On a scale of 1 to 10, with 10 being the highest, how likely is it that they would recommend your product to a friend or colleague? By tallying the percentage of responses that are nines and 10s (“promoters”) and subtracting the percentage of responses that are sixes and below (“detractors”), you get your score, which can be as low as -100 (all detractors) and as high as 100 (all promoters).
6. Cost of Customer Acquisition (COCA) and Lifetime Value (LTV): Estimate these numbers again now that you have some sales. They are much easier to estimate the second time around! They are valuable, albeit imperfect, indicators of your success. If there are surprises in these numbers, then quickly dive into them and understand why.
7. Gross margin: Your gross margin, the difference between what it costs to make one unit of product and what you sell that unit of product at, should go up over time, indicating that you are getting strong word of mouth for your product. If it goes down, then you are possibly providing too many discounts on your product, so the number of customers may be going up because the price is artificially low. The gross margin trend is an imperfect indicator on its own (much like the other indicators here), but make sure you monitor it.

Don’t feel constrained by this list. There are plenty of other metrics that will be equally or more valuable for your situation.

While it is hard to capture all of these metrics, especially at the beginning, they will be highly useful to you, especially within the framework of the sales process from Step 18.

Before you release your product, make sure you clearly define what metrics you will be observing, how you will observe them, and what constitutes success against those metrics. In the worksheet for this step, I suggest coming up with percentages for conversion between each step of the sales funnel, as well as monitoring gross margin, LTV, and COCA. You’ll also want to roughly define the time period(s) over which you’ll make your initial observations, since you’ll need to give customers some time to hear about and evaluate your product, but not too much time or you might expend too many resources on a product nobody wants. If you release your product without carefully defining what constitutes success, it is all too easy to pretend that whatever results you get are indicators that you have a good product. Don’t fall into that trap!

GENERAL EXERCISE TO UNDERSTAND CONCEPT

• Viral video and then what? A new product comes to market via a highly entertaining video that goes “viral,” meaning millions of people view it over a short time period. However, very few people go to the product’s website (less than 0.1 percent), and very few of those people convert to paying customers for the product, which is a subscription business (0.2 percent conversion rate of those who visited the website). How would you assess the situation? What has this company done well? What has it not done well? What should its next steps be?
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WORKSHEET

What time period(s) will you measure metrics for (give duration and units—e.g., two weeks, two months, )? _____________________________________