Creating Your Start-up – Part 3

In the last post, we took a broad look at how markets and customers are to be evaluated. This is very important to internalize- especially for Indian entrepreneurs who have yet to understand that any product or service has to first meet market and customer expectations and requirements. And then and only then should you the entrepreneur look at defining the product or service.

So in this post, let’s take a look at how products and services can be defined.

Your focus as the entrepreneur should be on superb execution rather than on inventing the perfect product. Superb execution ensures that a company can be built around a less-than-exceptional product for which there exists a market. And superb execution pre-supposes that the right product/service is chosen.

So, what’s it going to be: Products or Services? In a sense, this is a redundant question since a service is also a product. Services can be productized, branded, replicated and marketed much like products and can also represent high-growth, high profit-margin opportunities.

The key is growth. Why? A GE study showed that companies with market shares in excess of 30% were almost always profitable, while companies with shares less than 15% almost always lost money.

Mathematically, no more than 6 companies can have more than 15% share, the startup has to grow to command at least a 15%-30% market share. This could mean that the startup identify segments which it can dominate.

Thus, it is advisable for a startup to choose an unserviced or under-serviced segment and fulfill the market demand. Growth is not only desirable but necessary for a startup to achieve critical mass and economies of scale. A BCG study has indicated that every time sales double, the cost of doing business decrease 20%-30%.

A service business is a perfectly acceptable way to create wealth as long as it is a growth business. As examples, look at the Application Service Provider business, the co-locating/hosting business, the web based email services business. Increasingly, companies like IBM are knowingly sacrificing technology leadership in products to attain leadership in services. Its entire e-business strategy hinges around services.

Assuming you have selected a product upon which to start your business, do not ignore service altogether. Good service is a powerful differentiator. Listen to what William H Davidow has this to say in Marketing High Technology: “The key is to convert great devices into great products. When a device is properly augmented with service so that it can be easily sold and used by a customer, it becomes a product.”

Where do you find “good” product ideas? Studies have indicated that most hi-tech product ideas for new companies come from positions held with previous employers of the start-up’s founders and key employees. Most entrepreneurs get an idea based on their current employment. Customers and customer-sponsored R&D are also great sources of ideas. Trade shows, subscriptions to trade & business magazines and periodicals are also important.

Beware of confusing a cute or nifty single product idea with a business. It is imperative to focus on identifying a family of related products to build a solid business with growth potential. Growth implies that new customers/new markets are served and therefore the entrepreneur must look at a product family. A growing company attracts people, offers better career prospects.

To help define your product/service, you may want to consider the following points: Do you sell technology or benefits?

Customers don’t care about technology. They want to know what benefits they’ll get. There must be a perceived benefit over similar products in terms of price and/or performance.

Remember: perception is reality! Differentiating features can be solely product related and highly visible, for example, adding 3D capabilities to a 2D spreadsheet program. Or differentiating features could be less tangible such as reputation, service, delivery, support etc. Cost leadership is also clearly a method of competing initially but service, product upgrades, quality etc are key as the startup grows.

Does the product have any grades, quality etc are key as the startup grows. Does the product have any technology or proprietary advantage? Any patent protection? Does it take a huge amount of marketing/branding effort to get it into the market? Evaluate your proposed product/service against the competition and objectively assess whether there is any sustainable competitive advantage. Finally, don’t be too attached too much to your technology or product.

How big is the market? If your specialized product has a worldwide market of a few million dollars, you may want to take another look. VCs in the US want to fund businesses that address markets that can become at least $1b in 5 years. How fast is it growing?

Avoid going head-to-head with entrenched players. Launching products/services against a Microsoft or Intel is a bad idea.

Can you identify concrete, real customers for the product? What attracts them the most to the product? A work-flow engine company found that its in-built email capability was what customers really liked; so that’s the core offering of the company today! Many times customers can become sources of funding of products/ideas. Their inputs can be invaluable in defining the product – check out Yantra, an Infosys spin-off which built its initial suite of products based on customer projects.

Can you describe your product in simple and understandable language?

As time to market is crucial, how developable and producible in a timely manner is your product/service? It is a good idea to have a Statement of Requirements, which is essentially a marketing document. This can be extracted from a well researched and well written business plan.

This document talks of the market need, features and uses, benefits, market analysis and competition, sales and marketing strategy and plan, product road-map, functional requirements etc. Following this, a Functional Specifications document should be produced. This is more of an engineering document that details the hardware, software features and details including support, reliability, testing and performance requirements.

VCs love to fund high gross margin businesses like software. Does the product have significant collateral revenue possibilities? For example, look at developing products which bring in increased revenues as usage increases.

How will the product be sold? Will it be distributed through channels, over the Net, or will it be sold direct….Time is money and trying to establish an in-house sales force can cost a startup heavily.

Not an awful lot to go by, huh?! Use the above points as guidelines and you will find that defining your product/service has become that much easier.

Missed our earlier posts? Read it here:

Creating Your Start-up – Part 1

Creating Your Start-up – Part 2

This article was originally published in VentureKatalyst, India’s first e-zine aimed at entrepreneurs, started by Sanjay Anandaram.