Acid test for a new product/service/company

We all often stumble upon many a new start-up. Usually they get a proud article in one of the primary technology publications like Gigaom or Techcrunch. I check a lot of them out and often, if they have some trial and it has some merit to me, I’ll sign up as well. I periodically have bouts of ‘great ideas’ about new companies or services that can be created.

In this free form creative thinking process, there has to be some vetting process. What is merely an OK (or even a bad idea) against what could be a truly great business idea. Note I used the word “business ” idea. As a result, I developed a simple set of rules as means of an acid test to put any new business venture up against. They’re simple and obvious, but all too often we don’t like the obvious answer. Here they are:

Do ENOUGH people need the service/product?

The modifier here is ENOUGH. There are some pretty esoteric or niche ideas out there but often the available market is either small or fleeing.  A good example of this is Kajeet. Kajeet developed a mobile telephone for kids. It allowed parents to control what their kids did with the phone, how much money they spent (they created a concept of a phone allowance) and provided reporting capabilities. Sounds great right?

What Kajeet struggled with was that while the idea was great. Kids hated it, no kid wants a kiddie phone. Nor do kids want their parents to be in control. So Kajeet struggled to get customers. Worse, kids have this habit of growing up. So not only did Kajeet have trouble getting customers, the customers they had grew away from them. Kajeet has morph’d their business model a couple of times, but as you know, you never get a 2nd chance to start a company and it struggles along.

Are people looking for it (or alternatively can people find you or can you find them?)

This is the demon that haunts most products, the belief that a product markets itself. A new born start-up gets some attention a techie events, but unless the base grows beyond some set of early adopters, it suffers.  Venture capitalist hate to invest (or rather throw money) into marketing. But unless there is some natural pull, a company is going to have to spend real dollars to get a real customer.

Google AdWords have created the birth of many a company for online sales. The challenge is people have to be looking for you in order for you to be found. This works for a lot of common services and products.

I briefly helped a small company that had invented a form of personal workflow management. The intent was to make your daily life more productive. Their online application consisted of shared folders, calendar, conference calling, tasks list and event management. It was pretty neat … but

They couldn’t figure out how to sell it. The company embarked on a strategy of selling direct and hired a small sales force. But the sales process was long, you had to play with the software a while to get the concept, customers didn’t have a big willingness to pay  and big surprise, direct sales forces are expensive. The ‘net the company consumed all it’s free cash and produced only a handful of customers. Ugh!

Is there a willingness to pay enough?

This last test is often the killer. Are folks willing to fork over money for whatever it is you’re selling?  In the current Internet era where so much is free or freemium, companies often die not because the idea itself wasn’t valid, but that while many people got benefit from it, few were willing to pay.

This is most often the acute problem with freemium services. The hope is enough people like the service to convince some percentage of them to convert to a paid version. Great thinking, but statistics show only about 3% of freemium customers are willing to pay. I know you don’t think these odds apply to your great idea, let me know when you plan your next trip to Vegas. If you costs are low, you might still have a business.  But you need some pretty big numbers for this model to work.

Dropbox is a perfect example. Clearly millions of people can benefit from having a shared folder or just using Dropbox for backup (which is what I do).  Millions more have been introduced to Dropbox from a friend or colleague who ‘invited’ them to share a folder, hence $0 marketing costs. So far, Dropbox easily passed 2 of the tests.

But is there a willingness to pay? Dropbox indicates they have about 50m users, and have about 2m paying customers (Dropbox has confirmed their paid base is 4% of total) and if you figure the paying customer is worth $10 a month. Bang – you’ve got a $240m business (which is what Dropbox indicates they have).

The issue though is perhaps your idea isn’t of Dropbox size. Let’s say you attract only 100,000 users (still a very very large number). This same math would result in annual revenues of $480k. Not a lot of bucks if you have staff, office and development costs.

I hate my own rules but without a doubt most of my ideas fail the test at some point and I’m back to the drawing board.  But great ideas aren’t born every day. Keeping thinking, one will come.