Crowdfunding and Market Validation

In my last post I talked a lot about the concept of crowdfunding and why it is such a powerful tool to raise money and get your business going.  But, I actually believe there is an even greater advantage to crowdfunding that isn’t thought about or discussed nearly as much.  Market Validation.

True Market Validation

Previously, if you had a good idea, there weren’t really any good avenues for getting true “is the customer going to buy my product?” kind of market validation before you stepped off that cliff and took the leap of faith to finalize your design, make prototypes, make

If you say, "hey I've got this great product and I've sold $25k online and have a list of 500 customers without even starting my marketing push" their ears will perk up and they'll start talking details with you.
tooling, and finish your first production run.  There were some tools like focus groups, surveys, interviews…and they are still good tools and I still highly recommend them for a variety of reasons, but none of them actually gave you real proof that the idea would sell.

It’s a far cry from your friends telling you, “hey, that’s a great idea, I would buy 10 of them”, to people you have never met that have no interest in the personal “you” spending actual cash money on your product because they really want one.  The goal each of these tools is trying to reach in their ultimate forms is to try to answer the question, “will people buy this product?”.  No matter how well diversified your focus group, how detailed your survey, how insightful your interview, they won’t ever to be able to answer this question better than putting it out there and seeing if people actually buy it or not.

The Power of Market Validation

The reason these tools have been focused on this question and companies spend tens and hundreds of thousands of dollars doing this research is because there is tremendous power in market validation.  As a small business, the value is not simply in knowing that your product will indeed sell, but the fact that you can leverage that knowledge in all of your business activities. Think of some of the key things you need to do:

Funding.  If you go into a bank and say, “hey, I need $50k to make my business work, I’ve got a great idea”, you won’t have much luck. If you go in and say, “hey, I need $50k to make my business work, and I know it will because I just sold $50k worth of products without even making it yet”, they are going to be a lot more interested in loaning you money. Same will be true with investors.

Sales: If you go into a meeting with a buyer from Target and say “hey, I’ve got this great product, check it out” they’ll put your product on the pile with all the others to get cleaned out next month.  If you say, “hey I’ve got this great product and I’ve sold $25k online and have a list of 500 customers without even starting my marketing push” their ears will perk up and they’ll start talking details with you.  Buyers are much more prone to proven products, they want the sure thing.

Manufacturing: As a small business, a lot of manufacturers won’t want to work with you because they think you don’t know what you’re doing, you won’t be able to communicate what you want to make, and the chances of your product taking off are small. Referencing a successful Indiegogo campaign will go a long way to giving them the confidence that you do in fact know some things at least, that you have already been somewhat successful, and if they can make it well, there could be a good future for your product.

Don’t underestimate the power of market validation.  It can be leveraged to do all kinds of things.  The beauty of these new crowdfunding tools is that they give 3rd party, easily verifiable proof that your product has a viable market.

Demographics

An important aspect of getting market validation in this way is that you need to understand the demographics of the crowdfunding site.  Generally, as with many new technologies, the users are younger and more tech savvy, so products attracting that crowd will tend to show much better on Kickstarter or Indiegogo than they might with the general public.  If you are selling hearing aids, you might need to get your market validation elsewhere.

For more info on the demographics of Kickstarter you can check this out.

 

 

 

Photo credit: FreeDigitalPhotos.net

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