CHAPTER 4

CUSTOMER AND MARKET VALIDATION

4.1 Know Who
4.1.1 One-day validation: Finding and interviewing potential customers and
understanding customer problems (see 2.4)
4.1.2 User stories
4.1.3 Customer Return on Investment (ROI)
4.2 Market Analysis
4.2.1 Types of market
4.2.2 Market evaluation

After this chapter, the students will be able to:

1. Identify customers and target market for an innovation
2. Explain how to do customer validation and market evaluation
3. Build and develop value proposition
4.1.1 One-day validation

One-day validation is conducted to verify the problem by gathering feedback on the

minimum viable product (MVP, see below) or technology and understanding customer needs
including severity and urgency (Figure 4.1A & B below). One guiding principle is the bigger
the pain you are solving for the potential customer, the easier it is to sell a solution. The
urgency is another important factor when evaluating customer pains. Obviously,
organizations find it more urgent to solve vision and active problems than passive and latent
problems. In an active problem, potential customers recognize a problem or passion and are
searching for a solution but haven't done any serious work to solve the problem. In a passive
problem, potential customers know of the problem but aren't motivated or aware of the
opportunity to change. Vision means potential customers have an idea for solving the
problem and even have cobbled together a home-grown solution, but are prepared to pay for a
better one. In a latent problem, potential customers have a problem but don't know it.
Moreover, since customer feedback is important in the development of the technology, be
able to gather willingness or commitment for follow-up sessions.

Figure 4.1. Mapping the frequency vs severity (A) and awareness vs urgency of customer problems.

1
The one-day validation activity sheet below could be used.
Name/Company/Role
Verify the problem
What’s the hardest part about the
problem?
Can you tell us about the last time it
happened? How often does it happen?
What, if anything, have you done to
solve the problem? Problem awareness
(Latent, Passive, Active, Vision)
What are your issues with the solutions
you’ve tried?
What role would you play in
choosing/implementing the solution?
Customer type
What do you think of our proposed
solution?
What do you think of the MVP (if
available from a previous venture)?
What resources/support would you be
able to provide to advance the tech
development?

Minimum viable product (MVP) is a product with enough features to attract early-adopter
customers and validate a product idea early in the product development cycle. In industries
such as software, the MVP can help the product team receive user feedback as quickly as
possible to iterate and improve the product. Below is a checklist for low-fidelity MVP to
verify value proposition after a preliminary one-day validation and during technology
development.
Physical products Software/service
• User story • User story (can be built and validated
by demo day)
• Specs of proposed product • User interface and/or process flow of
proposed software/services
• Method for verifying the specs • Customer ROI
• Comparison of proposed product • Key resources and funding
specs to competing product specs
• Optional: product mockup • Total cost of ownership
• Customer ROI
• Key components and sourcing
• Total cost of ownership
4.1.2 User stories
User stories describe the day in the life of the customer before using your product or
service or using existing solutions and after using your “innovative solution”. This gives
an idea of the product design or features. Note that there are varying roles of the
customers and hence varying customer stories. In addition, several user stories may be
2
needed to completely describe the product. The sequence of user stories may be
important and needs to be specified. Accompanying illustrations, photos, and diagrams
are often helpful.

A typical customer story defines the WHO, WHAT and WHY components and a
format is given: As a <type of user (WHO), I can <some goal (WHAT)> so that <some
reason (WHY)> (https://www.mountaingoatsoftware.com/agile/user-stories). Some
examples are the following:

1. Context: Power User permission level gives full use of access methods and
advanced features of a backup software for servers. Depending on the plan, power users
can access files using the web browser, FTP, Desktop App, mobile apps, and can invite
Standard Users.
General: As a user, I can back up my entire hard drive so that I can recover data in
case I lose or damage my laptop.
Specific: As a power user, I can specify files or folders to back up based on file size,
date created, and date modified.
2. For a foot pressure monitoring device for rehab (2 roles: rehabilitation therapist and
patient)
As a rehabilitation therapist, I can monitor the pressure at different parts of the foot of
my patient, so I can advise the patient on corrective actions and track the rehab progress.
As a patient during rehab therapy, I can get immediate audio feedback during each
step on whether I am performing the proper gait or not so I can consciously correct my
actions.
3. three roles (medical expert MedEx, patient, hospital administrative), rehab tool

User story Parameter Design Verification

input method
As a MedEx, I can conduct Range of 0.2 to Resistance
simultaneous rehab sessions that resistance 9 Nm characterization
are each self-adjusting so that I values via torque test
can cater to more patients while
ensuring that each patient
receives effective rehabilitation.

Do an activity for this customer story to advance or develop your business idea or
venture.
Before your product
As a <type of user I can <some goal >so that <some reason
(WHO)>, (WHAT)> (WHY)>

After your product

As a <type of user I can <some goal >so that <some reason
(WHO)>, (WHAT)> (WHY)>

3
4.1.3 Customer ROI

Customer ROI is one parameter that can be presented in the value proposition and
thus, may be presented in the customer story. Sample ROI metrics and examples are
presented below:
How will your product increase your customer’s revenues? Describe qualitatively
and estimate quantitatively.
• Fertilizers increase the yield of a farm
• Quantitative: If yield is currently P100K/ha, a 10% yield increase
results in P10K/ha revenue increase

• Online classified ads bring customers to a seller

• Quantitative: If ads bring 2000 new customers per month with average
purchase of P800/customer, then revenue increase is P1.6M/month.

How will your product decrease your customer’s costs? Describe qualitatively
and estimate quantitatively.
• Instrumentation for preventive maintenance reduce losses due to unscheduled
equipment downtime
• Quantitative: If each unscheduled downtime costs the company P80K
and there are 7 unscheduled downtime per year on average that can be
eliminated with the system, then the annual cost savings is P560K.
• Analytics for tracking and improving HR performance reduce losses due to
staff turnover and reduce expenses for raining new staff
• Quantitative: If each staff turnover costs the company P100K in hiring
and training expenses as well as reduced productivity, and the system
can reduce the turnover from 12 to 4 per year, then the customer can
save P800K per year
Perform the customer ROI hypothesis activity as a means of presenting the customer
story using the following activity sheet. You may need to revise your value proposition
and align it with the customer ROI hypothesis.

How will your product increase customer’s revenue?

Qualitative Description Quantitative Estimate

How will your product decrease customer’s cost?

Qualitative Description Quantitative Estimate

Revised value proposition aligned with customer ROI hypothesis

4
4.2 Market Analysis
4.2.1 Types of market

In building and developing the value proposition, competitive analysis for your target
market must be done and illustrated in a competitive diagram such as below. Three types
of markets can be assigned as existing market, resegmented market, and a new market.
In an existing market, competitors are already serving large numbers of customers. A
strategy could be identification of performance metrics for which your job is better. For
instance, Google provided higher quality search results than Yahoo.
In a resegmented market, competitors are already serving large number of customers
but your product is lower cost or has unique features. A low-cost strategy would be to
identify special features not present in your competition that will address unmet needs of
your customers. A new standards strategy entails identification of industry or regulatory
bodies that dictate market standards and how to influence them.
In a new market, there is no established and well-defined market yet and no existing
competitors. This situation is increasingly becoming rare. Ignorance about competing
products may mistakenly lead you to conclude that you are creating a new market. A
strategy could be to identify how to educate the market in unique benefits of your product
and how to use it.

Steps
1. Enumerate your competitors.
2. Identify 2 key metrics for comparison
(preferably other than acquisition cost).
3. Draw the competitive diagram for your market.
4. Determine the type of market you are in.

Figure 4.2. Sample competitive diagram

4.2.2 Market evaluation

TAM stands for totally available market. SAM stands for serviceable available
market and SOM is for serviceable obtainable market. For example, in releasing an
innovation in the Living colors LED market: TAM would focus on total market size
which is the total LED market, SAM should focus on own technology or services hence
on the total Living colors LED market, while SOM should focus on which realistic
market share that can be obtained, considering competition, countries, trends, expected
demand/forecast, sales/distribution channels, and other market influences, thus the
realistic goal.

5
 TOTAL ADDRESSABLE MARKET

US Population
(300 M)
Sick or Dependent
is sick
Internet user
Mother
(2+ kids)
College
Educated
Income
$45-$120k

Do this activity in evaluating your TAM, SAM, and SOM.

• Define in words your TAM and SAM
• SOM: Early adopters, ex. Customers in a given city or region.
• SAM: All other customers in the country that can be served with changes in the
product, or related products.
• TAM: All other customers that can be served with changes in the product, or
related products.
• How would you quantify your TAM and SAM? List possible sources of information.
• If possible, use online sources to estimate your SAM.

Category Description Source of quantitative info Size (quantity)

TAM

SAM

SOM

REFERENCES
1. Sison, L. G. (2018). Tech to Go. University of the Philippines.
2. Pono, M. (2019). Ideal Customer Profile (ICP): How To Create A
Comprehensive Customer Profile. https://www.mykpono.com/ideal-customer-
profile-icp-how-to-create-a-comprehensive-customer-profile/