The Painful Cost Of Neglecting Market Research: Lessons From Failure

One of the most frequent questions I get from clients is about raising money. Before I’m willing to discuss the many ways to raise risk capital for a new venture, I have the client share the validation process they went through. Often I discover they never invested much time doing market research and are looking at ways to fund their business before determining if there is a need for their solution or if it can even be produced economically. I recently found an article written by a former SCORE colleague, Tuck Aikin, about the value of doing market research several decades ago. The message remains as true today as it was when Tuck penned them. I hope you enjoy it as much as I did.

Here’s an interesting website: “https://www.whytheyfailed.com/.” It’s a listing of just some of the Internet websites, both here and abroad, that have gone out of business. A few of the types of these wannabe e-businesses are baby clothing retailers, mobile ringtones, fantasy football, games downloads, recipe website, online music promotion platforms, women’s portal, online toy retailers (several), a community site for teenage girls, etc. And the reasons given for failure? The overwhelming majority stated “Ran out of money”, “Filed for bankruptcy”, “Failed to secure further funding”, and “Not generating sufficient revenues”. Hardly! These apparent reasons are really the results of the most likely true cause of extinction: a pre-startup failure to determine through research and market testing whether or not there is a need for the products or services to be offered, and most importantly, whether there is a viable market that will satisfy the perceived need.

The documentary film, “Startup.Com” chronicles the rise and demise of one of these dot bombs, gOVWORKS.com. The founders’ perception was that there is a need for a convenient method for offenders to pay parking tickets, such as online via the web. Once established then, this e-business presumably could be expanded to provide all sorts of citizen/government interaction via the web such as registering to vote, renewing drivers’ licenses, obtaining various licenses and permits, and registering trade names and incorporations. Sounds good, doesn’t it? The only trouble is that it took $60 million of investors’ money and 19 months to find out that:

The thousands of government jurisdictions whose cooperation was needed, wouldn’t (turf battles and statutory constraints probably)
To make the e-business work financially, a huge number of citizens would have to pay their parking tickets online versus the in-person or snail-mail way, a considerable “buyer” behavior change.

So, just why did the gOVWORKS.com business fail? It crashed because the founders neglected to conduct proper research before starting their venture, research that probably would have told them that government cooperation was unlikely and that it was too premature in the evolution of consumer commercial transactions via the web for citizens to be willing to use this needed convenience.

Unfortunately, this neglect occurs with most new small startups, and the oversight costs them dearly – most are out of business in the first 5 years. So, first start with the ‘concept’, what service or product you think you will offer, then test to see if there is a viable market, one that can support your business. There are many good “how to” books that can help with the research stage of this endeavor, and one of the best is Voices into Choices, by Gary Burchill, Christina Hepner Brodie, and Oriel Corporation.

The disciplined approach detailed in this book should produce valuable insights into potential customer preferences, perceptions, and buying behaviors. How many prospects will buy? At what price? How frequently? What features are essential to stimulate buying? What do competitors do that has to be overcome? How is your prospective offering perceived? These answers and many others then can be incorporated into a test product or service, which should be offered into as realistic a marketplace as is possible, before launching the business. As they say, the proof of the pudding…

There clearly was/is a market for buying postage stamps conveniently it is thought. Online provider stamps.com folded. Everyone knows that raising children is one of life’s most difficult jobs and that parental education is paramount. Learnfree.com shut down on September 30, 2000.

So, there might be a need, but is there a buying market that can be reached, one that will support a business? Research first, then find out for sure.

Tuck Aikin was a former SCORE colleague of mine for many years until his retirement. Tuck is a prolific writer and wrote small business-themed articles for the Colorado Springs Gazette for many years. As a co-mentor, Tuck was my inspiration for me starting this blog. The preceding post is reproduced with permission from the author.