Customer Discovery: Achieving Problem-Solution Fit

As we saw in the previous article, “Why Startups Shouldn’t Act Like Big Companies: Lessons from Steve Blank”, we explored how customer discovery is the first stage in the customer development process. This stage focuses on identifying market opportunities, conducting research, calculating market value, understanding market types, propose a business model, and validating the problem.

In this article I will cover The problem-Solution Fit, highlighting all the elements you need to know about that step

Like always, if you find my articles interesting, don’t forget to like and follow ????, these articles take times and effort to do!

Understanding the Market Opportunity

1 — Market Research: Translating Vision into Hypotheses

During the customer discovery phase, startups must translate the founder’s vision into business model hypotheses. This requires determining if the market opportunity is substantial enough to be profitable.

Unlike big corporations that can outsource this task, startups must conduct their own “primary research” and utilize available data, known as “secondary research”

2 — Understanding the types of market research

2.1. Primary research : This involves collecting first-hand data using various methods, including:

• Focus groups: Using a small group from a specific demographic to give reviews and feedback on particular products and services
• Surveys: Asking customers a set list of questions one or offline to record their opinions.
• Interviews: Asking customers conversational, open-ended questions in a one-on-one virtual or in-person setting to gather opinions and preferences, this approach generates mostly qualitative data
• Observations: Watching how customers interact with specific products for mannerisms and ease-of-use.
• Market segmentation: Dividing your consumers into demographics and analyzing data through that lens to better meet their respective needs

2.2. Secondary research : Secondary research represents any research from data that already exists (free and paid) from credible newspapers, government statistics, and industry reports.

Note : Both include quantitative and qualitative research. Here is examples of sources that you can use :

3 — Estimating Market Value

3.1. Understanding TAM, SAM, and SOM :

To estimate the size of your market opportunity, the first value you will need to calculate is the total addressable market (TAM), representing the maximum potential sales for a product or service, assuming there are no competitors and every potential customer makes a purchase

Next, you will narrow the TAM down to arrive at an estimate of your served addressable market (SAM), representing the portion of the TAM targeted by your product that is feasibly within reach of your company’s sales channels

Finally, you will estimate the size of your serviceable obtainable market (SOM) which is also a portion of the SAM that a business can realistically capture, considering its current resources, reach, and competitive position.

3.2. Methods to Calculate Market Size : There are multiple method to calculate market size :

• Top-Down Approach : Start with the total market size (TAM) and narrow it down by applying filters like geography, demographics, or market share to estimate the portion of the market your business can target and capture
• Bottom-Up Approach : Start with specific data from your business, such as the average selling price and the number of potential customers, and build up to estimate the total addressable market by scaling those components to a broader market level
• Value Theory Approach : Estimates the Total Addressable Market (TAM) based on the value that a product or service provides to its customers, rather than the total number of potential customers or the overall market size

Note : Bottom-Up Approach uses real market data such as the actual price of a unit, the number of units sold, or the number of potential customers and Value Theory Approach focuses on the perceived value of the product or service to the customer. It uses estimations of how much customers are willing to pay based on the value or benefits they perceive, often derived from surveys, customer feedback, or cost savings

Example of Top-Down Approach for Estimating TAM for a Prediabetes Product :

Total Addressable Market (TAM)

1. Start with the Total Market Size: Use data sources like the IDF Diabetes Atlas and the Centers for Disease Control and Prevention (CDC) to estimate the total number of people with prediabetes in the United States. For instance, there are 115.9 million people with prediabetes.
2. Narrow Down to the Target Segment: Focus on the segment of people with prediabetes who are potential customers for your product (For Instance, those interested in treatment or prevention).
3. Estimate Product Usage: Determine the average number of product units required per patient (since it’s a treatment requiring multiple units).
4. Calculate TAM: Multiply the total number of potential customers (115.9 million) by the price of your product and the number of units per patient. (TAM = Number of Prediabetes Patients × Product Price × Units Required per Patient)

Serviceable Addressable Market (SAM)

1. Narrow Down to a Reachable Market: Identify the subset of the total prediabetes population that your product can actually serve. (could be based on geographical availability, regulatory approval, purchasing power, or specific product requirements ; For example, if your product is only available in certain states or is targeted at adults aged 40–70, you will only consider those patients)
2. Determine the Size of the Serviceable Market: Let’s assume that 60% of the 115.9 million people with prediabetes in the U.S. fit within your serviceable criteria (age, location, other factors). The SAM would be equal to : 115.9 million × 60% = 69.54 million potential customers.
3. Calculate SAM Value: Multiply this refined number by the product price and the average number of units required per patient. SAM Value = 69.54 million patients × Product Price × Units Required per Patient

Serviceable Obtainable Market (SOM)

1. Determine the portion of the SAM that your company can realistically serve based on its current capabilities, marketing strategy, competition, and distribution network (Yes, you can’t have everything :) ). Let’s suppose you estimate that your company can capture 10% of the SAM
2. SOM = 69.54 million × 10% = 6.954 million potential customers.
3. Now the value by multiplying the results by the product price and the number of units required per patient. SOM Value = 6.954 million patients × Product Price × Units Required per Patient.

I will not do the same example for the other method you get the idea, this is an illustration from Quantic where you can get it more

3 — Identifying the Market Type and Strategy

In mature markets with many competitors, it’s often easier to enter and outperform others. However, markets dominated by a few players can be challenging to penetrate. These markets may be ripe for disruption through innovation or new technology (example below :) ). Instead of competing directly, consider re-segmenting the market or creating a new niche

4 — Proposing a Business Model

Now that you have an idea about the Market opportunities, you will start building a proposition of your business model for your hypothesis that you will refine later, you can find my article regarding business model canvas in the resources section.

Note : Consider using the “Lean Canvas” created by Ash Maurya, a version of the Business Model Canvas tailored for startups, focusing on the customer rather than logistic.

• The lean canvas replaces Key Partners, Key Activities, Key Resources, and Customer Relationships with Problem, Solution, Key Metrics, and Unfair Advantage, respectively.

5 — Validating the Problem

5.1. Why Problem Validation Matters : Just because you like a product doesn’t mean others will. Making significant investments before confirming customer interest is risky

Before moving forward, test your Business Model Canvas hypotheses by engaging with real customers. You need to determine:

• If customers genuinely experience the problem
• How urgently they need a solution
• Whether your solution is preferable to current alternatives

As you interact with customer, you will use a series of pass/fail tests to validate (or update) the hypothesis on your Business Model Canvas.

If your hypothesis passes the test, you continue on. If fails the test, you discard the hypothesis and propose a new one based on the data you have.

5.2. Conducting Customer Interviews (Scripts and Strategies) : Pass/fail tests are only part of the customer discovery equation. To succeed, you will need as much customer feedback as possible (Both quantitative and qualitative). Therefore, you should communicate with customers both in person and online. During those presentation, you should not :

• Try to sell your product
• Get detailed feature requests from customers for your product

The trickiest part of in person customer discovery is to find enough to talk to, according to Steve Blank talking to 50 people in your target market is enough (Aim for at least 10 calls/day). You can use this script to book a meeting with them :

“Hi! My name is [NAME]. Our mutual friend [NAME] gave me your number. She said that you’re an expert in [FIELD], and you might be willing to give me some advice. Do you have 15 minutes some time next week when I could come by your office and get your thoughts on my new business?”

Once you find people who are willing to talk to you and since you have a limited time with them, you can follow these elements :

• Understand Customer problems : How much they bother the customer
• Discuss about the current solution if any from customer perspective : How do you currently deal with this problem ? how satisfactory are these options
• Proposed Solution : What’s your reaction to these solution ? does it meet your needs better than your current solution ?

When the conversation is near the end throw some open-ended questions (these often lead to the most valuable information)

• Is there anything else I should have asked you ?
• Who else should I talk to ?
• Is there anything I should be reading or following ?

5.3. Customer Discovery Scorecard : While these conversation will be qualitative, you will also need a quantitative method for tracking what you learn like using a customer discovery scorecard, like the one below, where you score customers responses on a variety of criteria (consider what might best measure customer enthusiasm for your business)

Combining Online and Offline Feedback Methods : Online search can complement in-person conversations like :

• Asking question in discussion groups (Facebook, Reddit, Quora…)
• Online survey via forms
• Review on existing solutions or review on proposed solution in books or other source of information

If there’s a specific subject you’d like us to cover, please don’t hesitate to let me know! Your input will help shape the direction of my content and ensure it remains relevant and engaging??

Resources

If you found this helpful, consider Sharing ?? and follow me Dr. Oualid Soula for more content like this.

Join the journey of discovery and stay ahead in the world of data science and AI! Don't miss out on the latest insights and updates - subscribe to the newsletter for free ????Strategic Synergies , and become part of our growing community!