The SaaS Validation Process

SECTION IN PROCESS...

What is Validation

Do you gamble?

Without validation, you are walking into a smoky casino, putting your money on the table, and spinning the roulette wheel. Most business owners don’t want to take big gambles with their money though. After all, even if you win this round, you’re going to go bust eventually. Instead of what comes down to guessing, this chapter is going to show you how to guarantee you’re going to make money before making a big investment.

Validation is not just important, it’s critical if you’re going to be successful. When people are critical of this process, I like to remind them that they can either go through this process at the start, before they have invested tons of money and time, or go through it after they have invested time and money and that money has gone to waste. One way or another, you’re going to face the validation process. Choosing to do it upfront and ensuring you have the right offering for the right group at the right price at is delivered in the right way before you start will rocket you ahead, rather than rebuilding, reworking, and wasting money later.

Skipping this single step is the thing that drives most SaaS businesses out of business, and usually after a big investment of time and money. As you read through this chapter, if you realize you already skipped this step and your business isn’t growing, I would strongly recommend taking a step back, reading this chapter, and doing all the exercises. At the very least, it will help you organize your thoughts and validate that what you’re doing is correct. But if your foundation isn’t solid, this chapter will shine a light on the flaws and could potentially save you a huge amount of time and money.

Validating a SaaS

Validating a SaaS is very similar to validating other kinds of businesses, except with a SaaS you automatically know some specific information about how the business will work, how it will be delivered, how you will probably be pricing your services, what methods you will probably be using to market your services, and how your customer will find you (it’s probably going to be on the internet).

Knowing that your business is internet-based is a great start, but you still have to go through ensuring that whatever you create or buy is still going to sell at a price where you make money and can grow towards your goals. So in these ways, it’s a hair more straightforward that some other businesses. But the process is essentially the same. There are many books that have been written on validating a business, one of my favorites being “The Lean Startup” by Eric Reis. I highly recommend you read this book before starting this or any other business.

Validation is Research

Sometimes it’s called ‘market research’ or ‘market fit research’ or a variety of other things, but at the end of the day, it is a lot of phone calls, list-making, emails, meetings, surveys, asking questions, changing plans, and sometimes frustration.

As an entrepreneur or product owner working on a new system, you probably want to move and move fast. This is the downfall of so many SaaS businesses. Without doing your validation step, you’re going to end up with a lot of waste. So as you progress through this step, consider this the first step in your business or business unit growth.

These questions and their answers are critical to the success of a new business or a new offering. By the time you finish this section, you will have a good idea of what you're doing and why, who you're selling to, who's already selling to that group and how they're doing it, how much money you're going to make and what it's going to take to get this to market, and most importantly if you still want to do this.

We will cover the following aspects of SaaS validation:

  • Why & What

  • The problem, Need, Solution

  • Buyers

  • Competitors

  • Distribution

  • Revenue & Costs

  • Time & Investment

  • The secret sauce

  • Going to Market

Key aspects of validation

As you delve into your validation process, keep in mind a few critical items:

The Unique Selling Proposition

The Unique Selling Proposition or USP is the thing that that your system has that no one else has. This is also one of the primary reasons that your buyers will use your system instead of your competitors system. Sometimes you don't necessarily need a USP.

If you are entering a market that is fairly untapped and there are a small number of competitors for a large audience, your target market does not have access to or is willing to research your competition, or your competition can't handle the full load of the market, then this may be a little less important. But most of the time, especially in SaaS, you have a ton of competitors so you'd better have a great USP!

Is it worth it?

As you start digging into your competitors systems you're going to find a lot of features that you didn't initially realize existed. You may realize that some of your competitors have been in this industry for a long time and have very robust tools.

You may also realize that in order to catch up with them, you are going to need to spend a ton of money. For each new feature you realize is necessary, that is another month or two of work, tens of thousands of dollars, more knowledge base articles to write, more support that has to be done, etc. The 'is it worth it' question needs to stay on your mind throughout. Don't be afraid to admit that it may not be worth it, that's what validation is for.

The Product Twist & The Market Hole

Not the dance, and not the 'pivot'; the twist is when you look at all your competitors and realize that there is a way to do exactly what they're already doing and beat them at their own game. There may be a way to do what they're already doing better or in a new way. The trick is, you have to really, really look at how they're all doing everything before you can figure out the twist and if it's worth it. Because as soon as you twist the product, they're going to follow suit, and if they've been doing this for a long time they may still crush you. So make sure you're sure it's worth it!

The hole is the hole in the market. Once you know all your competitors and all their tools and all their target markets, then you can much more easily find the hole in the market. You can see where there is a market segment that isn't being served. If it's a market segment that is never going to be served then you're in great shape.

Storytime: The Market That Google Doesn't Want

One of my companies, Map-Dynamics.com builds web-based mapping solutions for trade shows. The groups that run trade shows are associations, and people love associations. Well, maybe not your home owners association, but for any craft, profession, sport, or just about anything else, there is an association for it.

What do people who do a thing like to do at least once a year? Get together and talk about the thing that they do. It turns out, there are somewhere between 50,000 and 90,000 associations just in America! Each of these trade associations has an annual trade show at a convention center somewhere, and each of these shows needs a floor plan map.

In 2007 Jeremy and I realized that this was a market that Google was never going to touch because these maps would change minutes before the show started and even sometimes during the show. It wouldn't be worth the time for Google or any other large mapping company to edit the floor plan map multiple times per week leading up to a show and several times just before or during the show. Additionally, after some competitor analysis, we realized that almost every floor plan company was targeting the top 20% of trade shows, and there was no one serving the bottom 80%. So we choose a lower price and implemented a solution for the smaller shows.

I wouldn't say it was a smooth ride or that we exploded. But after twelve years, we're still here and just about all of our competition is gone. We did it by finding a niche that wasn't being served, that had the problem and the need, and we're fairly stubborn and just didn't give up.

SECTION OUTLINE

  1. Start with the ‘why’. Why are you building this tool?

    1. I need it for me

      1. Have you checked to see if it is available on the web already?

      2. If so, why are you doing this?

    2. It’s a good idea and people need it.

      1. How long are you willing to spend building this tool and how much money do you have available?

    3. I have knowledge that others do not and I can make money selling it

    4. I already have a system built and think people will buy it.

    5. There is a similar system on the market and I think I can do it cheaper or better.

    6. I have a market already that needs this tool and can sell it as soon as it is done.

    7. I was hired to build it.

  2. Do you know this market very, very well?

    1. If no, why are you doing this?

    2. Do you realize what you’re getting into?

  3. I know this market very well because:

    1. I am the target market for this system

    2. I work with people who are the target market for this product

    3. I have done a substantial amount of research into this industry.

    4. I am not in the target market and don’t know the industry.

  4. What is the problem, solution, & need?

  5. We solve ____ for ____ - come back again after validation

  6. What is the unique selling proposition (USP)? - come back again after validation

  7. What is your unfair advantage? - come back again after validation

  8. Competition

    1. Do you have competition?

      1. Yes - List your competitors

        1. Company

        2. List major features

        3. List prices/pricing

        4. What are the groups of people that your competitors are selling to?

        5. Screenshot their pricing pages

        6. Take a trial for each competitor

      2. No

        1. How did your search?

        2. Did you call companies or people with the problem and ask how they solve it now?

        3. Why is there no competition?

          1. Not a viable market

          2. Maybe you just stumbled onto a good idea that no one has come up with yet? Probably not though.

          3. They already went out of business

          4. There is a monopoly

          5. There is already a solution that does not require a SaaS

      3. What are your indirect competitors?

        1. Competition

        2. What makes it indirect

        3. What percent of the market do they own?

  9. Who are your buyers?

    1. Did you ask people with the problem you are solving?

      1. What did they say?

    2. What is the current market size?

    3. Is it worth selling to them?

    4. If you can’t create a list at the beginning of the project, how will you do it later?

    5. Ask current distributors

      1. Distributors

        1. Influencers

        2. Competitors

        3. Podcasts

        4. Youtube channels

        5. Facebook groups

        6. Consultants

      2. How to ask - example Chris Cooper

    6. Creating a list:

      1. Ask the distributors

      2. Li, Tw, Fb groups, Ads, Socal Ads, Forums, Podcasts, tradeshows

    7. Survey your buyers - get a list of 10 - 1000 people from either your distributors or your lists

      1. Who are they?

        1. Role

        2. How long in business

        3. Do they have the problem?

      2. Do they have the need?

      3. Do they know they have a need?

      4. If not, why?

      5. Do they want the product?

      6. How much are they willing to pay?

  10. Cost vs Revenue

    1. Looking for hidden costs

      1. Example MedRev HIPAA costs

      2. Example The Lead Button

    2. Getting real about costs

      1. People

      2. Insurance

      3. Certifications

      4. Software

    3. How most companies grow

      1. slow to start

      2. then start making money in a couple of years

      3. then, sometimes, have a hockey stick growth

  11. Distribution channels

    1. SEO

    2. Direct

    3. List the rest here.

  12. Key partners

  13. We solve ____ for ____ - come back again after validation

  14. What is the unique selling proposition (USP)? - come back again after validation

  15. What is your unfair advantage? - come back again after validation

Example Case -

David had gone through several of the aspects of the validation process, but he didn't reach out to his target market and talk to them first. It's that simple. If David had asked a few questions he would have realized that this wasn't going to work the way he expected.

There are several ways this could have been accomplished.

1. Go to the tradeshow as an attendee and just ask people if they would buy the system.

So many people I have spoken to when I recommend something like this say "I can't afford to spend 2k on a tradeshow where I'm not going to make any money!"

My answer is simple. Would you rather spend 2k figuring out if this will work or 100k building something you'll never make a dollar from?

2. Send a survey

If you don't know your audience, you probably shouldn't be doing this in the first place. So, get started with taking a list of people in the industry and asking them all to take a quick survey. You'll want to have some aspects of what you're building ready to view before you do this, but even if you don't you can still ask questions.

Even if you are entering a new market that you don't know that much about, you could take the following methods to find the people to ask:

  1. Join an association and get their members list

  2. Do market research and hire a VA (virtual assistant) to find email addresses

  3. Run some ads on Facebook targeted towards your users and ask them to fill out your survey. You can also offer to compensate them. Just make sure to set up only a limit to the number of people you're going to pay.

Here are some of the questions that David may have used for his target audience:

  1. How do you currently collect local wage and benefits information from the largest local employers?

    1. We don't collect or distribute this data

    2. We have a consultant do this for us

    3. We use state-wide data

    4. We have an in-house person do this for us

  2. How often do you collect this data?

    1. More than once a year

    2. Once a year

    3. Every other year

    4. Every three years

    5. Whenever we have time, but more than every 3 years

  3. What is the cost of collecting this data?

    1. Free

    2. 1k - 5k

    3. 5k - 10k

    4. 10k - 20k

    5. 20k - 30k

    6. 30k+

  4. What are your top frustrations with collecting this information?

    1. Text answer

  5. For groups using consultants or in-house staff, what is your process for getting this data?

  6. If there was a software system that just required you to send out a pre-built survey and make some followup calls to your industries, would you use it?

  7. How much would you pay for this system?

    1. I wouldn't pay for it

    2. Less than 1k per year

    3. 1k - 2.5k per year

    4. 2.5k - 5k per year

    5. 5k - 10k per year

    6. 10k+ per year

  8. What system features would you find most valuable? (put in order of importance)

    1. The form would auto-fill last years' answers for industries (link to video showing how this would work)

    2. The system would anonymously collect all data and auto-compile it for you.

    3. Integrate with HRI systems to import industry compensation data automatically.

    4. Advanced web-based dashboard specifically built to help industries understand this data.

  9. Would you buy this software if I built it?

    1. Yes

    2. No

    3. Maybe (if maybe, why?)

  10. If yes: if I were to give you 50% off for the first year, knowing the system would be done a year from now, would you be willing to pay for the system now?

    1. Yes

    2. No

  11. If yes, would you be willing to do a phone call with me to talk more about this?

    1. Yes - links to calendar scheduling system

    2. No