Proof of Concept

21 July 2006

Creating something that will sell is as much about understanding the competition and market as getting the product right. Market research helps - and so does deep collaboration with your customers

How much money is your product or service really going to make you? When you're setting up a technology business, it's tempting to focus your efforts on the product or service, working out whether it's feasible and genuinely innovative. But as any MBA graduate will tell you, there are four Ps to the marketing mix ('place', 'price' and 'promotion' being just as important) and implicit in the concept of innovation is the idea that a product is both useful and desired.

Deciding who really wants your product upfront is something that tends to catch out many start-ups. If you haven't assessed the market in depth, it's likely to hurt you sooner or later - either when you seek funding and face a grilling from potential investors, or worse, when you've developed the product and try to sell it. As Paula Knee, senior projects leader at Quo-Tec, one of the partners in the g2i consortium, says: 'Technology rarely sells itself. It's got to be solving a problem that lots of people have got.' Or as marketing folk like to put it - you need to sell a product that doesn't come back, to customers that do.

Without direct experience in a relevant market, market sizing is a difficult and inexact science. In a flurry of self-promotion, start-ups often focus on top-line figures, without drilling down into real-world practicalities. 'Start-ups look at the number of mobile phones out there, or the number of people with a particular disease and the spend of the NHS in treating it, then tell you that if they get 5% of the market they'll have this much turnover,' says Knee. However, a London start-up would probably only be able to cover parts of the UK market, would take some time to establish its distribution channels - and in practice, would only take a cut of that 5% share.

Beyond injecting a dose of reality into these calculations, it's also helpful to balance a top-down approach to market sizing with a bottom-up estimate, based on feedback from customers and prospects. Understanding the purchasing motivation of different types of buyers is a standard sales exercise, but some companies are now going further, immersing customers in their offering from an early stage. A recent DTI report, '60-minute Guide to Innovation: Turning Ideas into Profit', expands on the idea of immersion: 'Customers, or consumers, are seldom able to consciously express their latent needs, although they will usually recognise the solution when shown it. Listening to customers is therefore not sufficient to understand what they might want. Customer and market immersion involves closely observing what they do with current products or services, and creatively identifying what is either missing, not satisfactory or could be improved.'

The more complex the enterprise - and the more customers required to meet sales goals - the greater the need for this kind of market research, because it's the only realistic measure of the impact you'll have. Such information will also have a big appeal to potential investors.

Eyeing up the competition

Market research also helps a start-up get a better grip on who its competitors are, and calculate what their reaction's likely to be to a new entrant. Few technologies are truly disruptive - most either bring incremental improvement or are copy-cat products, taking market share from existing players. So while start-ups might position themselves against the major players in their market, the reality is that they're more likely to take up a niche position against companies they may not even have realised existed.

According to Quo-Tec's Knee, start-ups often make infeasible claims - either that their product or service is so good everyone is going to want to buy it, or that there's no competition. Both these positions tend to blind them to the obstacles they're set to encounter, no matter how innovative their technology. 'You need to look at how the problem was solved before,' says Knee. 'Inertia might be the biggest competitor you encounter as people just continue with the existing solution.'

Getting to know the market better doesn't have to involve costly consultancy - simply attending events and reading the trade press can tell you a lot about what your competitors are doing. The British Library also runs seminars on understanding patents and researching competition. But Knee recommends that research should consist of more than Googling your subject area - getting out and talking to people will be the best gauge of what's really happening in the market. As Susan Preston, founder of US angel investment group Seraph Capital Forum, points out, competition is really in the eye of the buyer or consumer - not the entrepreneur.

Once you understand who your competitors are, you can start to appreciate how they might react to a new entrant. With established brands, it's easier for large companies to adjust their offering to the market to fend off competition - by dropping prices, for example, or increasing promotion.

You'll also need to calculate how long you'll be able to sustain any technological edge. If a technology introduction is truly innovative, competitors could simply decide to copy it. IP rights, registered trademarks, and design patents can go some way to protecting your innovation, but this kind of litigation is notoriously expensive, particularly in Europe. An EU-commissioned report in 2002 assessed all patents owned by small and mid-sized enterprises (SMEs) for its 15 member states over three years, and concluded categorically that 'patenting does not pay SMEs'.

You might want to be creative instead and think of licensing the product. It's little known that Ron Hickman was the man who first developed the Workmate: he licensed the patent to Black & Decker for £1 per unit and the company sold 30 million units worldwide while the patent was in force.

By David Longworth, Webster Buchanan Research

*G2I runs technology assessment workshops as part of its investment readiness process, with technology specialists from the private sector offering 1:1 advice