You have Customers
So you have cracked the nut on the key challenge faced by many entrepreneurs. You not only have users and usage (the two are different) but you also have the magical paying user also called a customer. At first glance, the customer is not that unique and in theory you should be able to find hundreds if not thousands of such customers. But wait, the customer-product interaction is unique – you either modified it for them in a unique way or they are using it in a manner that cannot be replicated by others. For example, let’s say you built a Segway (yes!) and sold it to a man or a woman who uses it for transportation – a market of millions if not billions of people – except they are a mall cop. So while there are millions of people, you inaccurately inferred that your product is being bought by a 45 year old man – its actually bought by a 45 year old mall cop who works in cold weather in Minnesota. A market of may be 1000s.
You have Pricing
Another element of repeatability is pricing. Can you sell the product at the price point that you think you can? Again, if you select just the right customers, you can prove that your storage can be sold for $100 per GB – especially since you have sold it to dozens of users. Well, you are further along then the ‘halfway to freemium’ (yes nailed the free part) companies but you may be far from discovering your price at scale. Need an example of this – well, you can always find customers who will pay $100 or more for a burger but that will really not help you build a viable, scalable fast food business.
You have Distribution
You have done an excellent job and found a partner in Malaysia who is willing to sell your product and take 30% of the revenue. And he even has sold it to a few customers. Now this can be a very good thing if the Malaysian partner is a typical IT distributor but if he happens to be a power elite whose uncle knows the prime minister and you know him through your wife, its hard to see how this ever scales. This can give you some early revenue and lower your burn rate but does not prove the viability of your business.
When $1000 is better than $1M
The proof point that you as an entrepreneur should be looking for is some evidence that you have a product that is meeting the needs of a customer – and that this is repeatable at scale. Often times, we hear phrases like get to real revenues of millions of dollars but I think that confuses the point.
You are much more likely to succeed if you have a product that has revenues of $1000 per month in a manner that can be scaled up by adding resources like more sales and marketing than you are with a million dollar revenue arrived at by taking one off shortcuts. The latter can lead to finding a repeatable model too – after all millions in sales are nothing to sneeze at – but you are much better off realizing what you are trying to aim for – the repeatable business model – and not get distracted by secondary goals.
In fact, you can take advantage of this bias for repeatability – by purposefully testing your product with few sales & marketing resources and getting to a small revenue and then taking the results of your successful experiment as proof of product market fit and repeatable business model. Most investors will salivate over the ability to then give you the capital you need to scale.
(Cross-posted @ AnshuBlog)