One of the most gut-wrenching moments for a company is the rollout of a new product. A significant swing and miss can break a company's momentum -- and maybe its bank account. Unfortunately, after months or even years of development, many companies discover that customers aren't willing to buy their new wares. That's why some entrepreneurs are trying another approach to product launches: marketing a product online before spending much on research and development or inventory.
Consider the method used by TPGTEX Label Solutions, a Houston-based software company that specializes in bar codes and labels for manufacturers and chemical companies. Like many companies, TPGTEX rolls out new products several times a year. But instead of spending the time and money to develop products on spec, TPGTEX creates mocked-up webpages that list the features of a potential new product -- such as a system for making radio-frequency identification, or RFID, labels -- along with its price. Then, the company spends no more than a few hundred dollars marketing the product through search engines and to the contacts in its sales database and LinkedIn. It isn't until a customer actually clicks or calls to place an order that TPGTEX's developers will build the software. "We do not develop a product until we get a paying customer," says Orit Pennington, who co-founded the six-employee company with her husband in 2002. Development time is typically no more than two to three weeks, and it generally takes just a few orders to cover development costs.
TPGTEX's approach is an example of a trend in business that has been dubbed minimum viable product or microtesting. The idea is to develop something with the minimum amount of features or information needed to gauge the marketability of a product online. That might mean mocking up a website with potential features and seeing how many visitors click on the item. It might also involve buying pay-per-click ads to see how easy it is to gain potential customers. Or it might mean selling a few products on a site like eBay to see how well they perform before ordering in bulk from a wholesaler.
What sets this approach apart from practices like using focus groups is that companies base product development decisions not just on what customers say they want but on how they vote with their wallets. "The economic downturn has made people hungry for new ideas like this," says Eric Ries, a serial entrepreneur who coined minimum viable product and writes about these ideas and what he calls the "lean startup" on his blog, Startup Lessons Learned. Ries, one of the founders of social network IMVU.com and a former adviser to venture capital firm Kleiner Perkins Caufield & Byers, credits serial entrepreneur Steve Blank as well as Timothy Ferriss, author of The 4-Hour Workweek, for contributing to the evolution of this method of lean product development. Ries says this approach helps companies, especially start-ups, spend their limited resources as efficiently as possible.
Working backward by starting with a paying customer is the opposite of the so-called stealth approach used by many start-ups, which spend millions of VC dollars to develop a product behind closed doors with little or no feedback from potential customers. "You end up shipping this product with a ton of features you think the customer wants, but you really don't know if you've been on the right track or not," says Ries.
That's why companies should incorporate A/B testing, says Ries. A/B testing involves randomly showing half of a set of customers one version of an ad or webpage, while the other half sees a different version that, say, highlights an additional product feature. Then you see which option generates more clicks and use that information to tweak your offerings and pricing. This method is most often used for selling software, but it could work for any number of products. For example, if a company sells lamps, it might run product descriptions variously touting a dimmer and electricity-saving features. If a particular feature -- say, a remote-controlled dimmer -- proves popular in A/B testing, with potential customers willing to pay more for it, the company can invest in new products with remote-controlled dimmers.
Using this approach not only helps you develop new products; it can also help you know when to abandon product ideas. In December, Kent Beck, a programmer living in Medford, Oregon, decided to try Ries's ideas about minimum viable product and test the market demand for JUnit Max, a new software-testing tool he had created. After making a version of the tool that had the bare minimum of features -- enough so that he liked using it himself -- Beck began marketing JUnit Max through his social network on LinkedIn and Twitter, directing interested buyers to a PayPal site. Although he was able to attract a steady trickle of paying customers at a level of $2 a month, he couldn't find a way to tap into a surge of new customers or any willing to pay a higher price. No matter how many new features he added or how many A/B tests he ran, he couldn't find a way to generate enough income to support a business. So he decided to pull the plug. "I found out that most programmers don't like to test their software as intensely as I do," he says. "But I don't consider this a failure. I successfully discovered that this market was too small to support a business, and I gained this information very cheaply."
Though marketing a product that hasn't been fully baked can lead to market insights, there are some potential dangers, says Karl Kronenberger, one of the partners in Kronenberger Burgoyne, an Internet-focused law firm based in San Francisco. If a company doesn't make it clear in its advertising that it might not produce a product unless it receives sufficient market demand, "it could be considered false advertising under federal and state statutes," Kronenberger says. And if a company runs an ad campaign without any intent whatsoever to produce a product, that could be seen as fraud, he cautions.
There is also a risk of irking potential customers with long wait times as products get developed. However, Pennington says that hasn't been an issue for TPGTEX, which tells customers about delays before taking orders. That's why, even when TPGTEX doesn't develop a product because of the lack of paying customers, it doesn't abandon the idea -- the company just stops actively marketing it and leaves the website up and running on the chance that a customer will eventually come calling for it. In fact, Pennington says one of her current bestsellers, a database-driven labelmaker, existed simply as a description on a website for years before customers began to take an interest. "We don't give up on our products, because we never really know when our customers will discover they might need them," she says.
For more on lean product development and other low-cost strategies for bootstrappers, visit www.inc.com/keyword/oct09.