Maximising investment impact during recessions - the importance of product-market fit

To avoid spending money on unprofitable ideas, companies should validate product ideas before investing. Focusing on product/market fit can lead to greater ROI.

When recessions loom, belt tightening becomes the default corporate response. And for good reason. The risk reward hurdle rates for investing in future revenue generation initiatives become even tighter and executive teams are tasked with ensuring that only the most promising opportunities for delivering revenue growth survive the ensuing cull.

In this light, it is worth stepping back and considering some of the common pitfalls organisations make when it comes to developing new products and services. Organisations are typically very good at launching ideas that will logically solve their customers’ problems – after all the senior leaders typically get promoted on their ability to solve problems and get things done. As good problem solvers, they leverage their collective expertise to design a solution and then build solid, rational arguments and business cases for why their solution will solve the customer problem and get chosen over the competing alternatives. Their business cases are based on a set of highly plausible assumptions that garner support for the solution and get the organisation focused on ‘how can we build this new widget’. But as Eric Ries of Lean Startup fame calls out, the question is not ‘can this product be built’ but instead the question is ‘should this product be built’.

Answering this question goes to the heart of product/market fit. Will the new product or service actually create the expected customer value, will customers choose it, and will they be prepared to pay for it? Investing in this activity will often generate far greater ROIs than trying to find ways of reducing build costs.

A good case in point was a piece of work we recently carried out for an organisation that had come up with an enterprising idea and was working hard to figure out how to build it whilst cranking up the revenue assumptions in the business case to justify the growing investment requirement. We went out to market to answer three key questions:

  • Do customers have unmet needs that this new solution will potentially solve?
  • Are these customers actively trying to solve this problem?
  • Are the likely benefits of the new solution significant enough to overcome the inertia and anxieties that could block customers switching from old to new?

The conclusion from this piece of work was that the ‘real’ opportunity was probably far smaller than the numbers assumed in the business case. This triggered a rethink of the viability of the proposed product saving the organisation significant expense on an idea that was likely to generate smaller than expected market returns.

If you’ve got ideas that you’re working on within your business but you haven’t yet validated that there is a strong product-market fit, then our recommendation is to focus your immediate efforts on addressing this issue. Most new products and services fail, not because they don’t work, but because customers don’t choose to buy them over the competing alternatives. So before you go too much further and invest more precious resources in an unvalidated idea, take the time to test and validate the critical underlying assumptions in your highly plausible business case.

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