Creating software is an expensive business. Whichever way you go about it. Whether you hire an agency, a freelancer, or employ software developers. It costs a lot of money to build any software of value. Especially if that software is to be the backbone of a new technology startup business.
So it’s quite a risk to invest in a brand new software product, before you know you have customers that will pay for it.
The point of an MVP (a ‘Minimum Viable Product’) is to build the smallest, cheapest piece of software possible to test the market, as an experiment to see if you have an idea that can turn into a real business.
Eric Ries, author of ‘The Lean Startup’, defines an MVP as:
“The minimum viable product is that version of a new product a team uses to collect the maximum amount of validated learning about customers with the least effort.“
We, at Reason Factory, go further than that:
“The minimum viable product is an experiment to test the hypothesis: if we were to build this product, there would be a market for this product, and this business would be able to efficiently access that market.“
As you can see the hypothesis has two parts: let’s examine these parts:
“…there would be a market for this product…”
This is the simpler part. One thing you want to test with your experiment is that if you create your product, people exist who will be prepared to pay for it. Hopefully having gone through a validation process, you’ll have some good evidence for this, so why bother building an MVP at all? The problem is there is a wide chasm between what people say they will do, and what they actually do. If you had anything less than signed contracts with your potential customers in the validation stage, then there is every chance those customers will change their mind when faced with parting with their hard-earned cash.
It may also be the case that your product needs to go through several iterations before it works sufficiently well for your customers to want it enough to start paying for it; It is very common when creating software to find out crucial issues only when enough of the software exists that real users start using it.
This is another major reason to get working software into your customers’ hands as early as possible so you can find and incorporate this early feedback.
If you build your MVP, and you cannot get any real user to care enough about it to pay for it, even after iterating it based on their feedback, then your MVP has failed the hypothesis, and you shouldn’t invest further in the software product.
“…this business would be able to efficiently access that market.“
This is the less obvious part of our hypothesis. It may be that you identify there are customers for your product, you may even have customers who love your product. But can you acquire enough of them to have a viable business? What this means very much depends on the nature of the software you are creating. If you sell enterprise software that costs £1000s, then it may be that you only need to acquire a small number of clients to put yourself on a successful trajectory. If you sell a more mass-market SAAS, or (God forbid!) a B2C product, then you’ll need to start thinking about the following metrics:
- CAC – customer acquisition cost
- Churn rate – how long a customer stays a customer
- LTV – lifetime value of a customer
As an early stage business with an MVP, you will only be able to make assumptions about churn and lifetime value, but you should be able to get a handle on your customer acquisition cost fairly quickly.
Whether you market through Adwords, Facebook Ads, telesales, door to door or a megaphone in the street, you should be able to come up with a metric of how many customers you get based on your marketing and advertising spend. This of course is something that can be optimised over time, but if you are clearly spending a lot more to acquire a customer than their projected LTV, then it is unlikely that you have proved you can ‘efficiently access the market’.
Many founders believe they product will be ‘viral’, be ‘so good it’ll market itself’. These are also assumptions you can test under the same hypothesis. Whichever way you choose to access the market, you will either get people signing up or not signing up to your MVP, and you’ll have a CAC to know how much it costs.
Have an idea for a new app or business? Book a free consultation with us to discuss your project.
Our clients love the software we’ve created, allowing us to establish ourselves as a key player in our market. There is no doubt this wouldn’t have been possible without Dan from Reason Factory and his team.