All About the Realities of the Marketplace
Market Research
October / November 2004
Volume 2 Number 5
Many high technology companies fail because they don't sufficiently comprehend market realities. The overestimation of customer demand, especially when paired with its evil twin, the underestimation of barriers to entry, can spell disaster. Although the reasons for this failure are many and diverse, one simple way to categorize them is by dividing them into those that reflect a lack of understanding of the customer environment, and those that reveal a misreading of factors external to the customer. A market research effort can provide the knowledge that can help reduce the chances of market failure.
In some cases, research will uncover conditions that can be mitigated or at least addressed, as long as they are identified early enough. In other cases, the research effort may reveal conditions so adverse that a total change of strategy is indicated. Not a happy event, but better to find out now rather than later.
Misunderstanding the Customer Environment
The overestimation of product demand is often the result of an incomplete understanding of customer concerns. Perhaps the problem you are solving is not the most critical one faced by your customer base; maybe the specific arena in which your product possesses technical superiority is not one in which any improvement is sought; or maybe the additional benefit is so incremental that no one is willing to pay for it. These are all examples of not understanding customer pain. Extensive secondary research into the customer industry, coupled with in-depth interviews with customers and industry thought leaders should help to uncover and make more explicit the areas and dimensions where major solutions are needed.
A startup venture might correctly identify the need in the marketplace, but fail to understand some of the realities that might impede rapid adoption of its improved offering. For example, customers may be locked into long-term contracts with producers of competing—€”albeit inferior—€”solutions. In other cases, when the customer sits down and calculates the total cost of ownership, including line items like ongoing maintenance or the ancillary products needed to optimize the new solution, product adoption becomes a less attractive option, even if the initial purchase price seemed attractive.
There are some customer realities—€”such as a slow decision-making process—€”that probably can't be changed, but if market research at least identifies them, steps can be taken to counteract. Perhaps you need more cash on hand that you anticipated because you may not be able to hang on until the first sales come in. Maybe you need to figure out which of your intended customers have histories of (or a need for) adopting innovative solutions and target that group before moving on to the laggards.
The lack of full understanding about the customer can sometimes take the form of a certain fuzziness about the intended markets. This is hinted at in those business plans where an entrepreneur presents huge, generic market size numbers that don't address the specific segments that will be targeted. This is often coupled with a lack of analysis of the specific customers or customer types who will be approached first. All of this suggests that customers have been seen as a sort of abstract black box, with no attempt to identify, probe or understand exactly who they are. The more visceral understanding you have about your customers, what motivates them to buy, and the best way of reaching them, the more likely you are to succeed. In fact, the most convincing business plans often name specific customers who will be approached and explain exactly why these customers were targeted.
Not understanding the external environment
There are also a host of factors outside the customer sphere that can contribute to market failure, many of which are underestimated by entrepreneurs. The most obvious example is the competitive environment, something that was discussed in detail in an earlier column (TechComm Feb/March 2004), but other formidable barriers may also exist.
The legal and regulatory arena is one in which startups sometimes fail to anticipate problems, but where market research can help uncover potential pitfalls early on. However, certain industries have their own unique barriers that do not fall neatly into these categories. For instance, medical products are usually not adopted by healthcare providers until insurers have made determinations about reimbursement. The process of obtaining a reimbursement decision can be a long and thorny one, but it can be improved by a planning effort that has been bolstered by research.
Entrepreneurs often wait too long to find out how the industry will want product performance validated. If the industry has established, perhaps through an industry association, a standard method for validating the performance of products like yours, you should adhere to this process rather than developing your own way of proving that your technology does what you say it does. Likewise if your product is subject to industry standards or certifications you don't want to find out about these at the last minute, as obtaining them can be both costly and time consuming. You will generally be able to identify these industry validation initiatives and standards fairly easily through a research effort.
Grace Brill is director of market research for Technology Ventures Corporation.
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