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How to Identify the First Customers for Your Startup

By

Upasana Sharma

Posted

May 11, 2022

at

09:05 PM

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It’s a common story.

A team comes up with an idea for a product. It’s convinced that the product will fill a gaping void and capture at least 1% of the market.

It approaches venture capitalists and raises funds. In the meantime, the team (now a startup) adds and removes features from its Minimum Viable Product (MVP). When the MVP functions smoothly, it ships a mature and stable product.

Next, goaded by VCs, the sales team goes to the market, positioning the product as an innovative alternative to existing products.

So What’s Wrong With This Strategy?

In the beginning, this strategy is good. But with time, this is how events follow.

Flush with VC funds and hungry to “blitz-scale”, the startup offers deep discounts to onboard customers. Profit gets ignored because the founders hope to “make it up later.”

In the short term, revenue and customers flow in quickly. The startup raises more funds, the media declares it next in line to become the next unicorn, and everything seems great.

Suddenly growth stops. The product stops selling because of 3 critical reasons.

  1. The product remains a cheap nice-to-have for most customers. But it doesn’t address a pain point and barely affects user behavior. As a result, the startup rarely gets constructive feedback to improve its product.
  2. The startup doesn’t know how many customers will stick after the discounts run out. That’s why it cannot fix a price or fee for its product. Nor can it raise fees to become profitable.
  3. In spite of not raising prices, customer churn remains high. This forces the startup to spend most of its resources on customer acquisition and little on product improvement. This is another reason why the startup does little to make its product world-class.

When growth stagnates, founders initially make promises to keep investors at bay. Then they avoid investors and eventually, find themselves on the outside looking in. The product stops selling and investors pull the plug.

It’s no surprise that no market need and lack of investment are the largest reasons for most startups to fail.

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How can startups avoid this deathtrap and build a sustainable business model? The answer lies in first identifying the right customers.

From Zero to Enough Customers

“If you’re not embarrassed with your first version, you’re not shipping fast enough.” — Reid Hoffman

Startups often assume that their first MVP should be a feature-laden, best-in-class, market leader-beater. They target the largest audience in order to make a dent in the universe and provide the biggest ROI for their investors.

But that’s not how an MVP works.

An MVP should focus on an unaddressed pain point of a specific customer type that has tried a solution without much success, and has the budget to pay for a better solution.

Such customers don’t just pay for the product; they also help the startup refine and improve the product (and business model) by providing constructive feedback from the perspective of customers. A startup should make such expert customers a part of their advisory panel, welcome their feedback, and work on it.

Updates to MVPs should be “speedboated” out and customer behavior observed. Is the product solving a burning problem or one that customers don’t notice? is the product a nice-to-have or a must-have for users? How much are customers willing to pay? Are they willing to pay at all?

The outcome is a business model where:

  1. Customers place a high value on the startup’s solution
  2. The startup knows what makes its product unique and better than the competition
  3. Customers become the most dominant source of the startup’s revenue.

You Will Go Wrong

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And that’s okay.

A startup cannot function in the same way as a large corporation. Corporations can afford failed products, startups cannot.

That’s why they must go back-and-forth to discover their first customers, work with them and refine their business model before building sales processes and driving end-user growth.

For Content Sutra, I initially identified business leaders who spoke at seminars as our easiest audience because our offering could complement their personal brand. Prospects found our service novel and we enjoyed a 100% conversion rate.

But our offering remained a nice-to-have. Our clients kept getting invited to speak at events, so they didn’t need our service. We rarely got feedback on our work and content marketing kept taking a backseat to daily firefighting for them.

On the other hand, organizations that had “burned their fingers” with other agencies:

  1. Had a pressing need (meaningful content marketing to align with their business goals)
  2. Had tried a solution (handling content in-house), but
  3. Were facing challenges (lack of time and expertise).

Such clients converted quickly, paid better, and helped us improve our services.

We experimented with a series of customer types before identifying one that we can serve best right now. If we had stuck to our original targeted customer segment and offering and hadn’t gone back-and-forth with customer identification, I wonder which ditch we would’ve been in today.

Summing Up

The best pockets to grow your startup are those of your customers. When they readily part with their money, it indicates that they find what you offer valuable. Identifying the right customers helps you build a viable business model and take your startup to the next level.

When you apply such a model consistently, your startup will add value to its customers, investors, and people who are a part of it.

Learn More About Building a Successful Startup for your Canadian Start-up

Investor Quotient Canada is a premier professional services firm offering a suite of business, legal, logistical and related services to foreign innovators and entities looking to establish and/or expand their operations into Canada or invest in Canadian businesses.

IQ works with start-ups at all stages and welcomes an opportunity to speak with you about any of your start-up needs, from helping to develop the concept to raising the necessary funds to move forward. Contact Upasana and book a consultation.

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