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.

Whoopee!

There are a lot of great things about the Software as a Service business model. Here are 7 of them…

Cheap to start

SaaS companies can be very cheap to start because you can leverage existing infrastructure (Amazon’s EC3, Google, etc.) and great open source tools and languages to deploy powerful applications fairly quickly. This means you can keep your team small and agile while you figure out your offering and business model. This is closely related to…

…Faster development cycles

You can add functionality incrementally, see how customers respond, and react accordingly. It’s also fairly easy to run “beta” features side-by-side with production code, allowing the adventurous ones to get the new stuff early and give you feedback, without having to worry about upsetting the “just keep it working and leave me alone” segment of your customer base. You can also create a…

…Rapid “Find it, try it, buy it” sales cycle

This not only helps reduce your cost of sales, it’s a great way to understand what customers are responding to. You can test new messages and benefit statements, target new types of customers, even quickly roll out new offerings. This direct sales cycle, coupled with your faster development cycles, makes it much easier to…

…Stay close to your customers

Through methods both active (blogs, online surveys, email) and passive (measuring ROI on AdWords, reviewing log files to see what features are used most) you can get lots of information about what your customers like and want, and what they don’t care for. This not only helps you use your engineering resources efficiently, it means you can do a better job than the next company of meeting their needs and keeping them happy, so you can benefit from…

…WOM economics

Simply put, word of mouth is the least expensive and most desirable customer acquisition strategy. There are some very smart people who specialize in WOM marketing (for example, Seth Godin), but the key idea is simple: recommendations from existing customers are more influential than your own marketing messages, and cost a lot less money.

While we’re on the subject of money, SaaS companies are very well suited to…

…Recurring revenue models

It would be hard to convince someone to send you money every month for a piece of software they installed on a desktop computer, but customers are comfortable with the idea of paying a recurring fee for a recurring service. Part of the reason is simply psychology (customers don’t feel like they own the application), but another aspect is the understanding that you’ll continue to develop and enhance the system over time.

Recurring revenue is good not only because it’s predictable, but also because it compounds your growth tremendously. With the exception of churn, your year 2 revenue starts at your ending revenue for year 1. With traditional software, your year 2 revenue starts at zero. It’s also good for the customer because your interests and theirs are closely aligned. You have to keep them happy every day, not just when a new version comes out, or you’ll lose them.

This recurring revenue stream also helps you to…

Build partnerships quickly and cheaply

Recurring revenue is a powerful inducement to potential partners. You can both share in the wins, and no one has to pony up a bunch of money up front for something that may not produce a lot of results. It’s not only much easier to put together meaningful marketing, distribution or customer acquisition partnerships, but the technical advantages of web-based integration (usually much faster and cheaper than for installed software) mean you can deliver a wide range of functionality to your customers without having to build it all yourself.

So much for the good news. Next, let’s look at some of the inherent challenges of the SaaS business model.

(Part two of this series is called And now the Bad News… )