First Startup’s Steps in the Market
Grzegorz Papaj, 27 January 2021
When the product is finally created (but still in the form of its MVP), the longed-for moment of entering the market comes. This is by far the most important moment in the history of each startup's development. The engagement with the market is the final verification of the correctness of the product and business assumptions.
As we focus on tech startups in this article, we need to distinguish the differences between customers and users. Let's assume that the user is the person who is directly using the product, while the customer pays to use the product. In the case of B2C, the customer is also usually a user, while in the case of B2B, the situation may be completely different - someone may use the product but someone else pays for it.
Entering the market with users or even customers is much more comfortable than starting from scratch, but feasibility largely depends on the business model and the product itself. Nevertheless, it is worth considering this significant value of users and customers.
At the stage of MVP, the target group of users should be defined. If you're still having trouble with this, here's a hint: First users can usually be found not far from where the idea first started. Thinking about the idea and value of the product that led to the founding of the startup justified taking the risk.
The first users are often people from the closest environment - family, friends, colleagues. Of course, the product is not always suitable for those people. Often the target group can be industry, companies with a specific profile, corporations, so startups generally have a network of contacts in such an environment. Therefore, it seems natural to start with one’s own network of contacts.
If a startup can’t achieve the first group of users, then it should take an interest in industry events. Various types of fairs and conferences are a great opportunity to talk to representatives of companies. You do not necessarily have to present or speak right away (although if you are prepared and have the appropriate financial background, why not) - sometimes it is enough to go to potential future customers and exchange business cards with representatives. Of course, a sales representative is usually not a target contact, but might be a starting point that facilitates penetrating the company. Anyway, in the case of smaller enterprises, sometimes at conferences you can meet directors or even board members.
Let’s be clear. In the beginning, the number of users doesn’t have to be large. On the contrary, the best situation is a few people/companies with whom the startup will have the best possible contact, to whom the product’s assumptions will be well explained and whose opinions will carefully heeded. The last one is particularly important. Enthusiastic startups often forget to listen to the opinions of their first users, especially if they are critical.
This is not the moment for huge marketing and advertising in the press or television. There will be time for that later. First users are very valuable because they do extremely important work for startups - they help them assess the true potential of the product, and also point out its strengths and weaknesses. That is why it is so significant to research the user's opinion about the solution.
There are two ways to harvest user opinions:
- user declaration - usually an assessment in the form of a survey or opinion (e.g. written in an application store),
- actual user behavior - that is, how intensively and in which ways is the product used.
Both of these approaches may be taken in parallel but also independently of each other. The differences between their results are an extremely valuable source of information and should be carefully analyzed.
Let's consider two extreme scenarios:
- users evaluate the product positively but do not use it or use it very rarely
- users have a negative opinion of the product, but many of them use it intensively.
In spite of appearances, the first scenario is worse and usually shows that users like the product, but do not see any value in it. This may be the case, for example, with a game or application that provides entertainment for a while but quickly becomes boring after some time.
The second scenario usually means that users see some value in the product, but not necessarily where the creators saw it. Moreover, they may have problems defining it. A bad declarative assessment may also result from a parity between the initial expectations and the actual value. In this case, it usually takes some time for users (and the developers!) to figure out what makes the user want to use the product.
Tools for researching the actual user activity play a significant role at the early stage of product development. As the discussion of these techniques is far beyond the scope of this article, we will only mention one method that is available for every technology startup, and is usually the cheapest and least invasive (most user-friendly). This is the sometimes underestimated collection and analysis of activity logs because the analysis of logs usually does not require extremely complicated or expensive tools - a spreadsheet is often great for starting.
As mentioned above, customers mean money. However, this does not mean that the first free users can be discounted. These are people who spend their time verifying the product. Even if they see value in it, they do not need the assurance that the startup will survive, yet they still invest their time in it. Do not hesitate to offer them bonuses, especially those that cost you little or nothing. In particular, do not hesitate to grant them special privileges (e.g. discounts or free premium lifetime packages), because they undoubtedly earned it by testing the product and providing valuable feedback.
Before embarking on a wider marketing campaign, check the monetization options. The situation is different here for B2C and B2B. In the business market, one good customer may be enough to ensure a startup's profitability. Sometimes a common approach is to create the product for one specific customer but with the intention to reach other companies with similar needs, later. Admittedly, this is a very convenient scenario, but the first business customer is in a privileged position and may require functionalities that will not necessarily be used by subsequent customers. But this is usually a small price to pay for being able to test the product with minimal risk and for demonstrating successful live implementations to other potential customers.
It's more difficult in the consumer market - startups generally need hundreds (if not thousands) of customers to be profitable, and the process of building a customer base can be tedious and lengthy. But every paying user is living proof of the validity of an idea. And if the startup already built a repeatable process for reaching potential customers, it can start thinking about scaling.
Scaling a Startup - Acquiring New Clients
In the case of some technology startups, especially those based on software, market entry barriers are relatively low. In practice, products that begin to be successful are relatively easy to copy and in a short time, their novelty ceases to be a competitive advantage. For this reason, it becomes necessary to efficiently scale to expand the number of customers and gain new markets, thus strengthening the strong position of the startup.
What is scaling?
In professional terminology, there is a difference between growth and scaling. Growth is understood as increasing the company's resources but scaling is about increasing revenues without increasing resources. Although in this approach the difference of meanings is significant, for the purposes of this study, let's assume that scaling simply means increasing revenues without an impact on resources
The increasing number of customers
Startups in the fourth stage of development focus primarily on expanding their user base. For this purpose, they use an appropriate marketing strategy and promotion. A large number of customers increases sales and, as a result, leads to higher profits.
Bear in mind that a startup will not be successful if no one knows about its existence and the offered product. For this reason, a key factor in the success of a business is the right marketing strategy that will help a startup to promote a product. This is a way to get significant information for the product promotion process. Only then a startup can consider specific promotion channels that will reach specific customer groups.
When is the right time for scaling?
It is best to start scaling when the following three conditions are satisfied:
- Startups must know the parameter called Customer Lifetime Value (CLV), i.e. how much revenue does the startup expect to receive from each new customer. Moreover, this value must be stable (relatively constant and predictable for each subsequent customer).
- The cost of acquiring a new customer (CAC, Customer Acquisition Cost) should be sufficiently low in relation to CLV - it should not exceed 30% of this value.
- The market must be large enough for a startup to expand your business significantly.
Additionally, the other structures of the company (mainly production, but also HR or administration) should be prepared for the increasing sales and the related burdens.
How to scale?
The most important scaling ingredients include the number of clients and territorial scope. Each of them can be developed in several different ways. Often the scaling process involves entering into other segments or new markets.
Simply, searching for new customers on the domestic market can be done in one of two ways: by finding new ways to reach them or by finding new target groups. The first way is definitely easier as it is basically limited to changing or extending marketing activities. The second method requires, besides marketing, also the adaptation of the business model or even the product itself, because new target groups may have different needs and requirements than the original model client.
Mostly, companies who start scaling focus on their initial, well-known target group and look for new ways to reach them. However, sooner or later, this model begins to run out and it becomes necessary to adapt the strategy and the product to other groups. The process of deploying a customized product for new clients is often more expensive and resource-intensive.
Entering foreign markets is quite often a very natural element of growth. Startups expanding their businesses to new regions and countries must pay attention to the two most important elements, which are legal formalities and clients. Before entering a new foreign market, make sure that the product meets the required local norms and standards, respecting also the cultural differences. Customers from different countries may have different purchasing behaviors, so it is worth adjusting the marketing strategy to their expectations. Be aware of the additional costs of translation activity. Before entering a new market, it is worth conducting an analysis of local competition. In many cases, foreign operation is not possible without having a local office or representative office.
The European Union offers great opportunities for some startups, but it is not necessarily the optimal market for each product or business model. Although the EU is relatively unified in law, it is culturally and linguistically very diverse, which can be a very big problem with some products. For these reasons, many startupers start their overseas expansion in the American market, which not only has a high purchasing power, but also a broadly known language and is generally friendly to new technologies. However, there are also entrepreneurs who successfully expand into the Eastern European markets or to the extremely wealthy countries of the Middle East.
Value every client
Do not forget about old clients, while acquiring the new ones. In sales it is said (undeniably) that acquiring a new client is several times more expensive than maintaining an old one, therefore the most spectacular scaling strategies focus on increasing revenues from previously acquired clients. A number of techniques can be used, from simply increasing the fees to offering additional services.
Bear in mind that the long-term regular customers are the best to testify to the quality of the startup's product. With an appropriate scale, they can provide invaluable support for marketing and sales thanks to networking and referrals.