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The Importance of Business Model Validation

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We come across many new companies that have products that have been developed, without speaking to the target market at all. There may be many reasons for the lack of validation including fear or uncertainty, the investment of time or finance required. Companies that ignore speaking to the customers can only assume what the market desires. This article is designed to communicate the vital importance of business model validation and provide key reasons to support the importance:

 

Companies must know their target market before the product is designed

Before a software is created, the scope must be known before it is planned and created. Many times, companies launching startups skip this initial step before entering the market. A prototype is developed based on the interpretation of the management team, which may be entirely different than what the market wants. If companies have the scope defined by the target market, they have the ability to design and develop the product around the market needs.

 

Companies must know the price the customer is willing to pay

Some business model may be intrinsically invalid if the deprecation of initial assets and marginal cost of implementing the value is less than the price a target customer is willing to pay. Companies must fully consider the price that a customer is willing to pay through surveys, polls, or focus groups. Variations of each service may also be created that enable companies to maximize value at multiple price points from the ground-up. Developing a software or implementing a service may be more effective if variation requirements are known from the beginning.

 

A small sample population may be inadequate

Some companies only pool a small focus group or worse yet, limit data points to friends and family. A company that wishes to acquire reliable information, must acquire a sizable population so that data is normalized and a clear distribution arises. You may find that the first initial 10-15 data points are actually outliers and only when you survey 1,000 or more people will a median emerge that enables your company to benefit from the data.

 

It can gain initial coverage and customers

You may find that the initial people that you interview may be customers that will immediately drive new customers during an initial trial or Beta period. This will enable the company to generate revenue directly after the release. An immediate dry period without no revenue may dry already thin cash flow levels.

The points in this article are only a few of the most important points covering the validation of a business model. Your company may benefit from any degree of research, but the more in-depth, the more advantageous it will be and benefits that your company may yield. If you have any additional questions regarding the validation of the business model, we can support you with a free review advisory.

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