In general, there are two types of research: quantitative and qualitative.

Quantitative

Quantitative, unsurprisingly, involves large numbers of respondents. It’s typically structured as some kind of survey and analyzed using statistical methods. It can help you learn things like

• “78% of executives who travel rely on their smartphones instead of their laptops for overnight trips”
• “Only 3% of small business owners have heard the term “VoIP” and know what it means”

Quantitative research is often used to find potential market opportunities, gauge demand for a product under consideration, or justify demand for a product already under development.

Qualitative

Qualitative research is typically conducted with small groups (some variation of the focus group model), and with individuals (some kind of one-on-one interview.)

Use Focus Groups for Insight

Focus groups help you to identify customer problems and pain points, and allow you to hear the actual language they use. For example, you may think of your product as a “multi-function mobile broadband communications terminal” while your customers think of it as a “phone.” This type of insight is invaluable when defining or positioning a product.
The rules for successful focus groups are pretty simple: get the right people in the groups, work with a great moderator, and run at least two groups for each audience you want to research. (This helps you eliminate any bias that might exist within one particular session.)
A complete focus group project to one audience can cost as little as $15K, and can be done in as little as 4 weeks. You can of course spend more to get better, more reliable insight, but budget at least this to get some real value from the process.

Use Interviews for Validation

Individual interviews are best for getting a response to a specific proposition, like a product idea or positioning. This helps you validate and refine your messaging, benefit statements, pricing, and the other specifics of your offering.
The rules for successful one-on-one interviews are also simple: make sure you’re talking to the right people, talk to a minimum of 7 or 8 from each audience, and don’t have someone from your company do the interviews. (No one will tell you that your baby is ugly, but if asked correctly, they will tell someone else.)
One-on-one interviews are usually 30 minutes to an hour long, and can be done over the phone at very low cost.

Now is a Good Time to Start

At what phase in the development process should you start your research? Now is probably a good time. In the 20 years we’ve been doing technology marketing, we’ve never heard anyone say “We did the research too early.”

• Technology risk — the risk that you can’t make the product you want
• Adoption risk — the risk that customers don’t want the product you make

In my experience, startups usually overestimate technology risk and underestimate adoption risk. There are two reasons for this.

1. Technology Risk is Declining

As the software market matures, technology risk is actually declining for all but the most ambitious projects. Simply put, there is now a lot of really good infrastructure in place (development languages, open source tools and platforms, hosting infrastructure, turn-key cloud computing platforms, and of course the worldwide web itself). Just as important, there are also a lot of really smart technology people who know how to use these powerful building blocks to make pretty much anything you can dream up. Don’t get me wrong, software development isn’t trivial or a slam-dunk, and many ships have foundered on those shores, but the risk is declining and generally over-emphasized.

2. Disbelievers Don’t Build Products

Passion for an idea is the bedrock requirement of being an entrepreneur. Entrepreneurs work with investors and employees who also believe strongly in the mission. After all, who would hire a marketing director, a developer, or a QA person who said “It’s kind of a dumb idea, but what the heck, I’ll give it a whirl.”?

This makes adoption risk that much more dangerous. It’s typically underestimated by the entire organization.

This organizational blind spot can play out in three different ways:

1. Bad ideas that should never have been funded
2. Good ideas that were flawed in execution (this is often cleverly disguised as technology risk, as the dev team scrambles to revise the product to match actual customer needs)
3. Well executed ideas without a clear path to market (or without a realistic level of funding to get them to market)

Fortunately, a well-run research effort can reduce the risk of all of these types of failures. More on that in a future post.

Nothing's perfect

(Part one of this series was called SaaS: First, the good news)

While there are many inherently good things about the SaaS (Software-as-a-Service) business model, there are also some unique challenges.

Higher cash requirements (Please deposit $24 for the next minute…)

SaaS companies can be very cheap to start, but because they tend to produce recurring (usually monthly) revenues rather than large lump-sum payments, it’s hard to use current cash to finance future growth. VCs often assume that it takes about $50 million to build a profitable SaaS company. Assuming a 4 year path to profitability, you’re burning through $24 a minute. This problem is made worse by…

…Lower price points (including FREE)

Because they’re typically based on a subscription model, SaaS companies try to maximize lifetime customer value through a low entry price and a long subscription duration. This approach, combined with intense competition and strong customer expectations that online content and services should be free or extremely cheap, means in order to reach profitability…

…You gotta have scale

If you’re entry price point is free (or something close to it) and you’re relying on some advertising revenue plus conversion to higher priced offerings (a conversion rate of 1% of your total customer base is considered typical) then you have to be able to attract and retain a very large number of customers before you’re in the black. That means your infrastructure and application need to be engineered accordingly, of course. But more importantly…

…Customer acquisition will be a major expense

While the online nature of SaaS suggests a pure online selling strategy, the reality is that SaaS companies tend to be very omnivorous in their drive to acquire customers. Between PR, search engine optimization, keyword advertising, webinars, email campaigns, reseller compensation, and other direct and indirect sales efforts, you could easily be spending 2/3 of your money on sales and marketing expense. To get a return on this investment, especially in the early days before your market matures, you’ll need to reach and convert a pool of savvy and influential people who prefer your vision of the future to that of your many competitors. In other words…

…You’re competing for the attention of Influencers, not just customers

Early customers are different. They know that others look to them for guidance about which technologies or services to adopt, and that their opinion counts. They will be very hesitant to risk their reputation on a company that doesn’t deliver a good experience and good value to their friends and colleagues. To be successful, you’ll need to build specific programs and efforts for reaching, influencing and recruiting these early adopters. These programs may be very different (and much more expensive, on a cost-per-customer basis) than your “typical” customer acquisition programs.

More on this in a separate post.