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Last weekend I had a rare opportunity to relax and unwind. I needed some supplies before settling down on my couch, so I grabbed my Amazon Fire phone and headed to the local stores. I didn’t need to carry cash – my Amazon Wallet had me covered. When I got home, I nearly choked on my Amazon Dash ordered box of laundry detergent. I remembered that I had booked my trip to New York City on Amazon Destinations, and as soon as I confirmed my hotel, the doorbell rang, announcing the arrival of my order from Amazon Restaurants. I grabbed my food, settled into my comfy couch, and spent the rest of the day playing Amazon’s online game, The Crucible.
Of course none of this happened. Because all these Amazon products and services are real, but they no longer exist. Those were experiments that failed to reach major milestones, and Amazon stopped them.
One of the things that made Jeff Bezos a great founder was his experimentation and embracing failure. They continuously invested in the development of new products. But he didn’t fall in love with one product or strategy to make his dream come true. Instead, if an experiment failed to meet minimum performance expectations, regardless of the time and effort invested, he quickly pulled the plug to make room for future experiments.
Innovation and experimentation are essential to a startup’s journey. You are looking for measurable product-market fit. Many of your assumptions will be wrong. Many of your experiments and tests will fail. As long as you follow one essential rule, it’s fine.
Believe in your vision, but be ruthless in shutting down initiatives that don’t live up to expectations. If you don’t finish unsuccessful projects quickly, your team will get bogged down in work that isn’t scalable, wasting time and money on promising ideas. Here are three questions to ask when evaluating the potential of a new product or service:
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1. Will your early adopters drive organic growth?
When you first launch a product, you should be able to find a core group of early adopters. Your target early adopters have problems to solve. You launch a product that solves these problems. If you impress on features and price and can easily convey your value proposition, they should be willing to try your product with very little incentive or marketing effort. If they like it, they can quickly become an evangelist within their community, creating your first flywheel of organic growth.
If you can’t find a group of early adopters who can drive organic growth, you have an important decision to make. Repeat and test again, or stop the product and move on to your next idea. Unfortunately, the biggest mistake most startups make at this critical juncture is spending on marketing above sustainable levels in the mistaken belief that they have a marketing problem rather than a product problem. This path only leads to faster cash burn and missed opportunities.
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2. Do your customers come back for more?
Once you find the message that draws customers to your product, you need to meet their expectations. Do they continue to use your product after the first few tries? Do they keep coming back to buy more from you? Or do you suffer from high return percentages, cancellations or abandoned products? You need to have clear KPIs for customer behavior that you need to measure on an ongoing basis to ensure you’re creating an offering that’s compelling enough to grow your business.
Successful startups are built around customer lifetime value (LTV) that can support profitable, scalable growth. High LTV is driven by strong customer loyalty and consistent repeat buyer behaviour. If most of your clients are single people, it is unlikely that you will be able to grow your business profitably.
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3. Do you have enough pricing power to be profitable?
Sales volume and customer retention only matter if each sale generates a substantial profit. The path to profitability and positive cash flow is a healthy contribution margin. Contribution margin is calculated by subtracting the variable costs required to produce and sell your product from your net selling price.
It’s easy enough for customers to order a free trial or accept delivery of a Try Before You Buy subscription box. But can you attract enough customers who are willing to pay a price that yields an acceptable contribution margin? Too many startups fall into the trap of focusing on vanity metrics to measure the performance of their products – downloads, gross sales and free trial downloads. Ultimately, your product and your startup will only be successful if you can consistently charge a price that generates the profits you need to support sales and marketing, new product development, and your day-to-day operations.
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The Amazon Fire Phone may have failed, but the technology developed for the phone spurred the development of two highly successful products: the Echo and Alexa. Building a culture of innovation is not easy. It requires an acceptance of failure supported by a culture of measurement and accountability. But it’s a powerful force for finding product-market fit, growing your startup and profitability for creating business value. It’s also a more fun and satisfying way to build your business.