OK, back to the topic of designing successful business experiments. I promised some more how-to’s.
Let’s start with identifying critical assumptions about your idea. I really love a model suggested by Vijay Govindarajan of Harvard. He suggests drawing yourself a two by two matrix (you know how professors love these). Along the vertical axis, you estimate the level of uncertainty you have about your assumption. Would you bet one year’s salary (your own!) at the bottom of the line, one month’s salary, or none of your salary? The top data point is no salary. Then, along the horizontal axis, estimate how important the assumption is to the success of your idea. On the left is you would need to tweak your strategy if you were wrong, and then moving outward, you would have to re-think your entire strategy, or at the far end “game over.”
Those assumptions that fall in the upper right quadrant -- you’d bet none of your own salary, and the game would be over if you were wrong – those are the critical assumptions.
(I would draw it for you but I’m no good at graphics.)
In any event, test those assumptions first.
When you’re thinking about the kinds of assumptions you might make, they could fall into several categories.
Market factors:
· What do you assume are the customer problems and pain points?
· How do you assume they are solving that problem today?
· What insights do you think you have gathered that make your solution a good one?
· Who will sell and distribute your solution? Why?
· How many times do customers need to purchase your solution in order for your solution to work?
· How fast will the market grow?
Competition factors:
· What do you believe is your competitive advantage?
· Is it sustainable/defensible? How?
· What existing competitors/potential new competitors will you face?
· How will those competitors respond to your offer?
· What substitutes exist for what you will offer? How will you address them?
Profitability factors:
· How much do you need to make in order for the business to succeed?
· What price level will the market sustain? Do those two data points add up?
· How quickly can you gain scale?
· How will you earn revenue?
· How will you manage your expenses as you grow?
· How will you measure success and by when?
· Does the opportunity have substantial upside?
Technology and Operations:
· Can you leverage existing processes, systems, or technology?
· Does this require the core capability of complex administration skills?
· Do you need regulatory approval? How will you get it?
· Will your clients or distribution channel accept the standards we are proposing?
· Are you sufficiently agile to keep ahead of the technology curve in the offer you are proposing?
So, you get the idea. Remember to put the customer first. Will they want it? Can we do it? Can we make money at it? In that order. Identify the most critical assumptions and then design an experiment to test them. We’ll talk about that later. Have a great week!