The fact is it’s tough to be successful with new products, even for mature software companies. The bulk of new product initiatives fail or sputter along with mediocre results.

Over the years of working with software startups as either an early employee or advisor, I’ve learned that getting products out the door is not typically the primary challenge. There are usually great development processes in place (Scrum for example) to build high quality products.

The real challenge: product teams and executives rarely have a process for evaluating the right things to build in the first place. Product teams need a process to evaluate market opportunities, reduce new product risk, and put the right things on the product roadmap.

Truly great product teams blend entrepreneurial instinct with evidence they’ve gathered from the market to make intelligent product decisions. They have first built a culture to ask the right questions and validate opportunities objectively. Here are a few characteristics I’ve seen that set the stage for building the right products:

• A small, multi-disciplined team evaluates opportunities. The ideal team is eager to engage early with prospects, is problem-focused, and has an experimentation attitude. Teams include design and engineering specialists and occasionally have a member with a sales or marketing background.
• They focus on problems first, product second. Great product teams deeply understand what the customer problem is before outlining the product and features. I’ve seen many companies launch the right technical product, but miss the mark because they haven’t understood the customer’s core problem.
• They validate critical products and features. Ideally the product team is working three or more months ahead of engineering to validate new product initiatives including major features and partner integrations. Just as they would for a new business, they create a hypothesis and methodically test the minimum feature set, price, and acquisition model. Although back-of-the-envelope financials may be a part of the early discussions, there is greater emphasis on validating how well the product solves customer pain.
• There is a focus on quality customer interactions rather than quantity. The best early insight comes from deep customer interviews. For example when I conducted the market validation for GoToMeeting (acquired by Citrix), our small team held in-depth interviews with 30 prospects to guide major decisions about the initial market, value proposition, product features, and pricing. Surveys, split-tests and other quantitative data supplement the deep customer insight.
• They sell it early. These teams learn early whether they can presell customers using prototypes before investing in expensive engineering. They keep iterating and revising the pitch until they can consistently get positive signals that customers are willing to buy.

Product teams often have opportunities coming at them from many different directions, making it challenging to choose the right path. But companies can put in place processes at the “fuzzy front end” of product design that improve the odds of getting the right product on the roadmap and in the development pipeline.

How can product teams and startups quickly validate new product ideas without spending a dime?

That concept got put to the test earlier this month at Startup Weekend Santa Barbara. If you’re not familiar with Startup Weekend, participants have 54 hours to develop a business model, get customer validation and start building a product.

On the first night of the event I spoke about how to find and talk with prospective customers. My talk, “Guerrilla Validation: How to Test Your Idea with Real Customers in 54 Hours” gave the teams tips and inspiration for testing their product ideas.

The core message was simple: Product teams and startups don’t need deep pockets, costly market research and weeks of time to get early evidence whether customers are likely to buy. The goal is to quickly document the problem and solution, and then get out of the building to test those assumptions to determine whether anyone cares about your product.

Even mature companies and product managers who are considering new product innovations can benefit from Guerrilla Validation. I talk regularly with product teams about techniques that require little more than the courage to pick up the phone, send an email, or speak to a few people at the coffee shop.

Over the weekend it was fun to watch the teams hustle to get validation any way they could: interviewing people at Home Depot, sending questions in email, or calling business contacts provided by mentors at the event. Several teams quickly gathered enough evidence to move ahead with an improved version of their product.

Whether you’re launching a startup or adding a new product to your business, a few low-cost validation techniques can give your team the confidence you need to get your product on the path to success.

How can startups and product organizations take a kernel of an idea and evolve it into a fleshed out business concept?

In this video I describe one of the processes I use to help teams think through the different elements of a successful business model. The goal is to get your business concept documented with just enough detail to validate with real customers and prospects.

While I like to use the business model canvas for brainstorming a new business, you can achieve much of the same result with Word, sticky notes, or even a large whiteboard. Here are the basic business elements to document:

• The problem you are solving
• The customer who has the problem (the more specific you are with the customer segment, the better)
• The product’s primary features (a minimum product that solves the problem)
• Why your product is better than others (and why the customer would care)
• How you’ll reach your customer and sell to them
• Price and or Revenue model

If you have the opportunity to work with a co-founder, team, or advisors during this process, the collaboration is invaluable. Plan at least four hours for the brainstorming. Give everyone an opportunity to write down and present their thoughts about each element of the business model. Then find common areas for discussion.

If you’re like me, ideas for new businesses or products cross my mind or come up in client conversations nearly every day. A handful are worthy of exploring further, and the video shows one way to get the concepts in a format that you can discuss with real customers.

You can learn more about developing business models in my online course at Udemy.com

Last week I conducted a webinar for a software company in Portland, Oregon. My talk, “Innovation through Customer Development,” discussed the benefits of combining agile software development (Scrum) with customer development.

The webinar was pretty uneventful, with one exception: In addition to the development team, the company asked several customers to attend the talk.

I think that’s awesome, and I applaud my client for wanting to give his customers insight into these processes. Too often, when discussing customer development and agile development, we tend to talk about the internal benefits such as getting faster to market, reducing waste, self-organizing teams, and so on.

But customers are the ones who get the most significant value out of these processes. I believe that combining agile and customer development as part of the product development process can create products that truly delight customers.

Through agile and customer development customers get:

• Products they care about
• Features that solve real problems
• Features that are in line with expectations and priorities
• Faster updates
• Higher quality and easier to use software with less feature bloat
• Quick action when mistakes are made

In addition, if your customers have have been co-creating or collaborating in your product development process they have more skin in the game. They will feel a closer connection to your product and company.

Perhaps it’s time to extoll the virtues of agile and customer development to customers as well. In the end, delighted customers and promoters of your product are what it’s all about, right?

If you’re part of a lean startup and you’re getting your early MVP out to customers, you should test price with equal fervor as you test the UI.

I’ve seen startups get to launch before figuring out the pricing model (or worse, launching only to learn that customers weren’t willing to pay enough to support the business model).

Some of my thoughts are controversial. For example, I advise startups and new businesses to start charging customers as soon as possible, even if it’s during a Beta. Yet the standard is to give it away for free before launch. But by giving it away for free, you’re giving up an extremely valuable learning opportunity. If you decide to not charge customers during this period, at least do some trial closes (for example, if you have a business product, put a letter of intent in front of beta customers).

Here are a few more pricing mistakes I see companies make:

• Pricing based on your costs rather than on customer value.
• Pricing using the same structure as the competition.
• Creating an overly complicated pricing scheme.
• Believing that a lower price is always better.
• Pricing so that lifetime value is lower than acquisition costs.

This is a lesson from my recent course Business Models and Pricing Strategies that outlines more of my pricing philosophies.

Much of the course is centered on a few core themes:

• A solid business model is more than having a great product. It includes thorough validation of the right customer segment, acquisition method, sales channel, price, and other components.
• Each component of your business model is interdependent. If you have a great product and sales channel, the model is weakened if you haven’t figured out how to cost-effectively identify and acquire the customers.
• Validating the price of a product is more art than science, and it’s a critical part of your business model that can’t wait until right before launch. It relies on a combination of interviews to understand customer behavior as well as quantitative price testing.
• Many of your assumptions about the business model may not be right. It’s only by engaging customers early that you can know whether you have a winner.

These core principles have worked well for me as I’ve helped companies develop business models that lead to successful products.

For the month of June, I’m offering my readers 50% off the course by using this coupon code.

The course covers these topics and more:

• Successful business model examples
• How to define and pivot your business and revenue model
• Innovative revenue models for software and other products
• Pricing mistakes and how to avoid them
• How to test pricing with customers
• Test selling business-to-business (B2B) products
• Interviewing techniques that get the truth out of customers
• Why customer lifetime value (LTV) is so critical

My hope is that a video course is more fun than a book and a whole lot less expensive that a consultant. I packed 10 years of experience into 14 separate lessons, so I think there is a lot value there that will save founders time and frustration. I’d love to hear your thoughts.

Background: I was asked to create an online course for the Founder’s track at Udemy.com around business models. The course has 14 video lessons, and I’ll do another post when it’s ready!

Update: The course is now available at www.udemy.com

Do you know what each additional new customer is worth to your business? A customer’s lifetime value is one of the most essential metrics for startups because it influences what you can afford to spend to acquire customers.

Startups with successful business models get this formula correct: Customer lifetime value (LTV) is greater than the cost to acquire that customer (CAC).

It sounds so simple, right? Yet startups still burn through cash on acquisition and sales costs that aren’t sustainable. Even at scale, many are unlikely to recoup enough revenue from customers to make the business model work.

Thankfully, sometimes it just works out – the startup pivots and they hit on a formula that’s in balance.  But more often than not, these are potentially fatal mistakes, because once you’re selling your product to real customers, there will be surprises. Your churn rate might be higher than you expect. Or each sale might take longer to close than you thought. Or your lead conversion rate turns out to be half of your projections.

In defense of startups, understanding LTV is one of the trickiest concepts to validate early. Startups simply don’t have the benefit of data gained by selling in volume to customers over several years. And often your acquisition cost per customer may be higher in the early years until there is traction in the market. So it’s challenging to make educated decisions.

But even though many of the factors that go into calculating LTV and CAC are assumptions, the successful startups experiment, learn, and iterate to get their numbers in their favor.

And the more the numbers are in your favor, the more you can be flexible as you adjust your business model. For many web startups, expecting LTV that is at least three times CAC is in the right comfort zone.

There are lots of ways to calculate LTV, but for startups, this is an art, not a science. I recommend keeping it a simple back-of-the-envelope calculation at the beginning using these factors:

A. Revenue per period

B. Less the cost of delivering the service to the customer each period

(this gives you your rough gross margin)

C. Multiplied by how long you expect to retain an average customer

(A-B)*C

If you are selling software at $25 per month, spend $5 a month delivering and supporting the service, and keep an average customer for 18 months, your rough LTV is: (25-5)*18 = $360. So if the cost to acquire that customer is less than $100, you are in good shape.

At some point you’ll want your calculation to be more sophisticated by adding retention rate, Net Present Value of the revenue, and other factors. But too many complications will keep you from thinking about the big picture.

Once you have your calculations, set out to validate your assumptions.

If you haven’t already done so, start by writing down your revenue model hypothesis. Use the Business Model Canvas to document your assumptions. If your LTV calculations simply won’t get the value high enough, you can adjust your model to include items that will bring LTV up. For example, adding additional services, changing monthly plans to annual plans, or adjusting pricing.

Look at industry standards and competitors for retention and churn rates to make sure you are in the ballpark. For example,  if you are selling software to small businesses it’s reasonable to have an expected retention of three or four years. What you are looking to avoid is missing the mark by a huge margin.

You can also benchmark that against public companies and others in your market. For example, mature SaaS companies with a recurring revenue stream like Salesforce.com have LTV multiples that are 3-5 times CAC.

As soon as you can, begin talking with prospects and customers. Call customers using competitive products to determine what the sales process looked like, when they switched from their prior solution, how long they had the prior solution, and how often they switch.

Stepping on the gas before nailing your business model can burn through cash and potentially lead to failure. But by making a few educated calculations about LTV and CAC, you can get closer to finding the the right business model – before any heavy investment of capital.

1. The sales model is repeatable.

2. Customer Lifetime Value is greater than Customer Acquisition Cost.

3. Your team has climbed the Sales Learning Curve.

4. Revenue per sales employee makes sense.

5. You’ve nailed your core market.

You can read the whole article at the SecureDocs blog.

Why do startups fail? I’ve been reading through the Startup Genome Project to understand the patterns of why some startups succeed while others crash and burn.

The project is based on data from over 3,200 high tech startups and describes the similarities of successful startups. It also describes common factors in startup failure or mediocrity.

The biggest cause of failure is moving too fast and scaling prematurely.

I’ve seen first-hand how companies fail by moving too fast through the first two early stages of the lifecycle: Discovery and Validation.

Startups on the path to failure move prematurely through the Discovery stage by starting to build a product without having validated the problem/solution fit. They start building a product that nobody wants.

In the Discovery phase, startups should be discovering real problems worth solving, not jumping ahead to validating and developing the solution. According to the Startup Genome Project, startups destined for failure typically will be writing more code and adding “nice to have” features.

Startups on the way to failure then move too fast through the next stage of Validation. They are more likely to be streamlining their overbuilt product and prematurely making their acquisition process more efficient. In a nutshell, they start executing on the irrelevant.

In the Validation phase, startups should be testing demand for a product. Can they actually sell what they are building in a repeatable way?

Through my years of doing Customer Development and product management for software products I’ve learned what the Startup Genome Project confirms: Startups need 2-3 times longer to validate their market than most founders expect.

But there’s often pressure from investors and others to move fast and scale. The best founders and executives moving in a disciplined way through the stages of the startup lifecycle. And that brings great dividends: According to the report, startups that scale properly grow about 20 times faster than startups that scale prematurely.

You can benchmark your startup against more than 10,000 Internet startups using the Startup Genome Compass.