In my last post I talked about market validation as the tried and true process for figuring out if there's a market for your new product. It's the "Ready, Aim, Fire" approach to getting products out the door; versus the "Ready, Fire, Fire, Fire, Go Out of Business" process, which most companies use. I also covered the first step in that process, figuring out if the market is big enough to enable you to hit the revenue target you need in order to be successful.
If you passed that part of the market-validation process, it's time to take a hard-core look at your competitors. This is one of the most under-looked ways of validating your market: If someone is in the market with a successful product, that's a good sign that a market for your product exists. But don't get too cocky.
My experience in working with companies is that they typically put down their competitors as mindless automatons that accidentally got into the market; they denigrate the management team, the quality of the product, and claim the company just plain can't execute. It's time once again for me to give you a good hard dope slap. The truth is that most competitors are clearly doing A LOT better than you; they're in the market, they already have a product, and someone is buying what they have.
For you, then, the goal is to be objective and to learn as much about the competition as you can. Scour their websites. Talk to their salespeople. Contact their distributors. Talk to their customers. Get aggressive and do everything you can to analyze their offering, their target market, their features, and how they position themselves.
A few important points: When sizing up the competition, you must include substitutes for your product or service under the umbrella of "competitors." If it competes for the same budget dollars you're going after, it's clearly a rival. No. 2, you must also consider the biggest and most consistent competitor around, a guy who affects all companies of all sizes in all markets—his name is "I just want to keep my money," and he does particularly well in a tough economy. You want to know how much of a competitor he is before you enter a new market.
As you begin to assess the competition and compare your product against theirs, make sure you understand how your customers define success. In my experience, entrepreneurs radically underestimate the return on investment most customers expect from making a new product or service; CEOs typically expect that a 30 percent ROI will get a customer excited. Not so. The reality I've experienced is that it usually takes between 200 and 300 percent (meaning a 2-3 X return on the cost of a product) just to get the customer to pay attention to what you're saying. You need to figure this out before you go to market.
So where are we here? First, you've got to know who all of your competitors and substitutes are. Then, learn everything about them that you can learn. Remember that "I just want to keep my money" is the biggest competitor you face. Finally, understand the economics needed, from the customer's point of view, to consider your product worthwhile. You'll be amazed what you learn from conducting this kind of rigorous competitive analysis.
ROB ADAMS is on the faculty of the MBA program at The University of Texas at Austin, and is the Director of Texas Venture Labs. He’s a former software executive, entrepreneur and fund manager, and has founded or financed more than 40 companies that have launched more than 100 products with transactions exceeding one billion dollars of capital.