How to Validate Your Online Business Idea (Before Sinking All Your Savings Into It)
Make sure your new online store can reach the right market with the right marketing strategy before you commit all your savings to it.
Steven Ford, Brendon Liebel and Bruno Aschidamini were hanging out on a beach in San Diego one day when a rather inconsequential remark about the terrible quality of the beach towels around them led them all to quit their jobs and jump head first into an entrepreneurship journey that would change their lives forever.
They left the beach on a mission. After setting up a website, opening an Instagram account and finding manufactures to help them make their first products, Sand Cloud, an online store for beautifully designed quality beach towels, was born. Today they are one of the leading sellers of beach towels in the world.
Stories like this make me want to jump out of my chair and start a business today. None of them knew a thing about the clothing or accessory business when they started. They knew nothing about beach towels other than how poorly made the majority of the towels on their favorite beach looked. They learned everything from friends and YouTube videos. Lots of YouTube videos.
And yet, they built a very successful business from scratch.
Perhaps the most discouraging phase for anybody starting a business is not the ‘having a good idea’ part. Or finding manufacturers or wholesalers to source the products (they’re all online). It’s the step after that: How do you know if people will even want to buy what you’re trying to sell? And how do you market it?
An online store idea is only a good one if it can answer these three questions:
- Is there a market for my products? The Product/Market Fit question.
- What is the best channel to promote my products? The Product/Channel Fit question.
- What’s unique about my approach that makes me stand out from the crowd? The Unique Marketing Advantage question.
1. The Product/Market Fit Question
To answer the Product/Market Fit question is to figure out — preferably before you quit your job — if people would even be interested in your products.
That’s what Steven, Brendon, and Bruno did as soon as they picked up their first beach towels from the manufacturer. They headed to the beach to sell them one by one.
When you’re ramping up and growing sales, you want to automate as many processes of the business as possible, since you’re dealing with high volumes. But in this starting phase of the business your goal is to learn about your customers and the industry as quickly, cheaply, and directly as possible. Being hands-on is the best way to accelerate learning.
Walking up and down the beach selling towels is not how you build a scalable business, but it’s how you validate your idea directly with the consumer. Even though most people didn’t have enough cash at the beach to buy the towels, the three co-founders sold quite a few of them, heard some valuable feedback, and managed to get their first Instagram followers. An integral part of their plan and a promising answer to the Product/Channel Fit question.
2. The Product/Channel Fit question
If there was one step in their entrepreneurship journey that Steven, Brendon, and Bruno could say they were savvy about, it was Instagram. As early users of the up-and-coming photo-sharing platform (this was in 2014), they observed its popularity growing among their friends and seized the opportunity to use it as a sales channel.
To answer the Product/Channel Fit question is to figure out your first main promotion channel. As you grow, you often need to diversify your marketing, but young companies are better off focusing on one marketing channel first. Steven had no doubts that channel was Instagram.
Finding the best marketing channel for your store requires some thinking and consideration of the pros and cons of each channel in relation to your products and target market. But as you’ll find out when you start researching and planning, there aren’t that many realistic options available for each type of store:
If you’re selling to other companies, for example, you probably need a sales team and a lead-generation strategy, most likely via inbound marketing.
Are your customers actively looking for your product or category? Then you’ll increase your chances by investing in Search Engine Optimization (SEO) and/or Search Engine Marketing (SEM).
If your customers are passionate about the space you’re getting into, then build an audience and become (or sponsor) a thought-leader in the community.
If your customers are not looking for your solution, then social advertising — sometimes combined with a content strategy — may show that you can solve a problem they didn’t even know they had.
Or maybe your product is social, as is the case for Sand Cloud’s towels. Social networks will likely be the best place for you to engage with your audience. Especially if, like Sand Cloud’s beach towels, people can be seen using your products in social situations.
** These guidelines are based on the research we did with thousands of online stores using Compass. They won’t necessarily fit your store. You might even be better off breaking these “rules.”. This is just what we found in the majority of cases through our research.
Instagram, as a visual media, was perfect for promoting one of the main aspects of their beach towels: their beautiful design. In addition, the most active Instagram users are young people, their main target market.
Instagram was such an important piece of their business plan that when I asked Steven what made him realize their store was going to be big, his answer was: “It was when we got to the ten thousandth follower on Instagram.”
It wasn’t number of sales, revenue, or winning an award. It was the number of Instagram followers that gave him the feeling that they had made it. That’s how much faith they put into that channel. Their bet paid off. Here’s why:
3. The Unique Marketing Advantage Question
Marketing online products comes down to two things: (1) Making sure that the chosen marketing channel brings a high volume of interested shoppers to your store and (2) Managing the store’s Customer Acquisition Cost (CAC)/Customer Lifetime Value (CLV) ratio.
Customer Lifetime Value is the measure of how much gross profit (before marketing) a single customer brings in during the entire time they remain a customer. For example, if your average customer shops with you 10 times, their average order value is $100 and your average gross profit is 20%, then your CLV = 10 x (100 x 0.2) = $200.
Having a CLV of $200 means your Customer Acquisition Cost needs to be $199 or lower to turn a profit. The goal then is to manage your marketing to have the lowest CAC possible, combined with the highest possible CLV.
There are many “knobs” you can turn up or down to make this equation work in your favor. A store that has high conversion rates and uses a very cheap (or free) marketing channel will have a low CAC. A store that has high margins, high repurchase rates, and/or high average order value will have a high CLV.
Steven, Brendon and Bruno’s plan was having a free marketing channel: social media. That means having a CAC of zero, producing an excellent CAC/CLV ratio. But opening a social media account and posting product photos on there isn’t enough. There are many companies promoting their brands on the most popular social media sites, so they had to do something different to stand out: find a Unique Marketing Advantage.
Sand Cloud’s unique advantage was to take their chances on an upcoming social network that wasn’t as competitive as the others at the time. In 2009, most companies were focusing on Facebook and Twitter. Instagram was still quite knew and unexplored, but growing at a remarklable rate. It was also the best social network for mobile devices at the time, something that fit with the lifestyle of their customers and showed the potential to provide qualified traffic at high volumes in the long term.
When it comes to social media marketing, you’re not only competing with other online stores. You’re competing for customers’ attention with Coca-Cola, Unilever, Cristiano Ronaldo, Times Magazine, the latest rom com, friends, family, boyfriends, girlfriends, crushes, etc.
The three co-founders spent most of their days coming up with different strategies to grow their follower count. They hosted giveaways and quizzes, asked followers to tag friends, and created an Ambassador Program to reward people who were sharing their products.
In addition, their beach towels are beautiful and the beach is a very social place. Every time people used their product, they were getting free advertising.
Their strategy wasn’t an overnight success. It took Sand Cloud two years to gather a large enough following to bring in significant results. But they were seeing progress every step of the way, learning from every mistake, and working hard to get things right.
A Unique Marketing Advantage doesn’t need to be anything out-of-this-world creative. Sometimes just being at the right place at the right time, being smart enough to seize an opportunity, or working diligently is already a big advantage.
In time, Sand Cloud developed a social program to help preserve marine life, something that the founders were passionate about. Customers could see that these social cause efforts were authentic, which helped them build up their brand on their site and on Instagram even more.
Sand Cloud also diversified their product range, offering accessories that are in line with their marine conservation cause, such as glass water bottles and metal straws, which helped increase retention and CLV. Later, a subscription program was also an important step in making the company more profitable because it helped increase repurchase rates.
The step after the “I have a great idea for an online store” is often overlooked, but it’s fundamental to a company’s success. There are three main questions in your ecommerce strategy that need to be answered, ideally before you take the plunge: the Product/Market Fit question, the Product/Channel Fit question, and the Unique Marketing Advantage question.
Product/Market Fit validates that there’s going to be a market for your store. Product/Channel Fit is all about finding what is the best promotion channel for your initial marketing efforts. The Unique Marketing Advantage is how to make sure that your marketing will stand out among the competition in that channel.
The three Sand Cloud co-founders took their time to validate their idea personally by going to the beach and selling their products one person at a time to learn about their customers, validate their products, and develop their marketing strategy–all at the same time.
There’s a lot to learn from Steven, Brendon, and Bruno’s experience. When you’re starting out you have a lot of energy and enthusiasm. Use that eagerness during the early days and months to speak to your customers directly. Gather unique insights that will help refine your business strategy going forward.