In Part 1, we talked about Technical and Product Risks—the challenge of building a product that’s feasible, functional, and able to deliver on its promise. These risks are often the most immediate, as they focus on making sure your product is both technically achievable and aligned with user expectations.
In this second part of our series, we’ll explore key strategies to manage Market and Competitive risks, giving you practical ways to confirm your product’s relevance and unique value.
Market and Competitive Risks – Building for Demand and Standing Out
With a technically feasible and user-centred product concept in hand, the next big questions for any founder are: Does the market genuinely want it? and What makes it stand out? In other words, you need to address both Market Risk and Competitive Risk.
For non-technical founders, these risks may feel daunting without experience in market analysis or brand positioning. But they’re essential to ensure that your product isn’t just functional, but meaningful in a crowded landscape. At Thought&Function, we believe that validating demand early and defining what sets you apart are core steps in building momentum and setting the foundation for sustainable growth.
Market Risk: Is There Real Demand for Your Product?
Market risk revolves around validating demand—determining if the target audience truly has the problem your product aims to solve and is willing to pay for a solution. Without understanding demand, even a well-built product can fail to find its place in the market.
At Thought&Function, we guide founders through a series of lean, low-cost steps to test market interest, ensuring that products are aligned with real needs before significant investment. Here are a few practical strategies to assess market demand effectively.
Key Strategies for Market Risk
Validate Demand with Minimal Testing
Rather than investing heavily upfront, use quick, low-cost methods to gauge early interest. A simple landing page that describes the product’s value and features can reveal a lot. If potential users sign up or express curiosity, that’s a good sign the idea resonates.
Example: Suppose you’re creating a service to connect freelance designers with startups. You could start with a landing page outlining the service’s benefits and inviting visitors to join a waitlist. The response—whether high or low—can give you a preliminary sense of market demand, and you can use this feedback to refine the idea if necessary.
Why This Matters: Lightweight testing is a cost-effective way to validate demand, allowing you to test the waters before diving in.
Conduct User Interviews to Understand Core Needs
Sometimes, the market’s needs aren’t fully captured by a waitlist or signup metrics alone. Direct feedback from potential users can uncover specific pain points, expectations, and potential objections, giving you a nuanced understanding of how well your concept aligns with user needs.
At Thought&Function, we emphasise user interviews as a vital part of the early product development process. “Conducting user interviews to validate that your product solves the problem is one of the most valuable things you can do early on.” Interviews bring out nuances in user expectations that help refine your product vision and highlight areas for improvement.
Why This Matters: User interviews provide qualitative insights that surveys alone often miss, giving you a more well-rounded understanding of market needs.
Competitive Risk: What Makes Your Product Truly Stand Out?
Even with a validated market need, your product won’t go far without a clear differentiator. Competitive risk focuses on ensuring your product stands out in a crowded market. Without a unique value proposition, it’s difficult to capture attention and retain users over time.
Differentiating your product is about more than just features. It’s about understanding what makes your product special and communicating that uniqueness in a way that resonates with your audience. Thought&Function helps founders craft their brand narrative and define their product’s unique value proposition, both of which are essential for reducing competitive risk.
Key Strategies for Competitive Risk
Identify a Unique Value Proposition (UVP)
A UVP is what makes your product distinct and valuable to your target audience. It answers the question: why should users choose your product over other options? Defining this value proposition requires a deep understanding of your users’ needs and a focus on the benefits your product delivers that competitors don’t.
Example: Imagine you’re launching a wellness app aimed at professionals dealing with workplace burnout. Instead of positioning it as another generic wellness app, your UVP could focus on its integration with workplace productivity tools, helping users manage stress within the context of their professional lives.
Why This Matters: A strong UVP is the foundation of your product’s identity. It sets the product apart in users’ minds and makes it easier to attract and retain users in a competitive landscape.
Develop a Compelling Brand Story
A brand story is more than just your product’s features—it’s the emotional connection you create with your users. A strong brand story explains not only what your product does but why it matters and how it came to be.
Example: Take a fintech app designed for young investors who feel underserved by traditional financial institutions. A compelling brand story could highlight the founder’s journey and frustration with the traditional financial industry, positioning the product as a modern solution that empowers users to make informed financial decisions.
Why This Matters: A compelling brand story appeals to users on a personal level, creating a connection that goes beyond product functionality and fosters loyalty.
Building a Product That Resonates in the Market
Addressing market and competitive risks helps ensure that your product isn’t just functional but relevant and differentiated.
By validating demand through lightweight testing and user interviews, you can confirm that there’s genuine interest in your product. And by defining your unique value proposition and crafting a brand story, you set your product up to stand out in a crowded market.
These strategies are essential for building a product that uses not only want but are drawn to. In our third and final part of this series, we’ll dive into Financial Risk and outline a roadmap for sustainable growth, ensuring that your startup is positioned to thrive as it scales. See you next week!
1 - Prioritise new features / Address User Drop-Off
When you're running a SaaS company, deciding which features to roll out next can make or break your product's appeal. Additionally, understanding why users leave your SaaS platform can be as important as attracting them in the first place. By keeping an eye on KPIs like Churn Rate and Engagement Rate, you gain invaluable insights into what keeps users satisfied and what might be pushing them away. Let's look into some crucial KPIs which can guide you in making well-informed decisions about your next big feature update:
1. Feature Conversion Funnel:
This KPI measures how effectively users move from initial engagement to full use of a feature. It helps SaaS companies identify where users drop off, guiding improvements to enhance feature adoption and prioritising development efforts.
You can use the following formula to calculate this KPI:
2. User Engagement Rate:
For SaaS companies, engagement rate measures how actively users are interacting with the application. High engagement rates are often indicative of a valuable and sticky product, reducing the likelihood of user drop-off.
The calculation for this KPI can be done using this formula:
3. Customer Satisfaction:
This KPI measures how satisfied customers are with a product or feature, typically through surveys. High satisfaction rates correlate with lower churn and higher loyalty, making it essential for evaluating user experience and identifying areas for improvement in SaaS offerings.
The calculation for this KPI can be done using this formula:
2 - Accelerate User Growth
Growing a user base is one of the most exciting challenges in the SaaS world. It's not just about bringing in new sign-ups but ensuring they stick around and find real value in your product. We'll delve into effective SaaS KPIs like Monthly Active Users and the Growth Rate of New Signups that can help you craft strategies to not only attract more users but also engage them deeply:
1. Customer Acquisition Cost (CAC)
The CAC is a crucial KPI for SaaS companies, as it quantifies the cost involved in acquiring new customers. Understanding this metric is essential for evaluating the effectiveness of your marketing strategies and ensuring sustainable growth by maintaining a balance between expenditure and incoming revenue.
To find this KPI, use this formula:
2. Growth Rate of New Signups
This KPI tracks the percentage increase in user signups over a given period. It's particularly useful for SaaS businesses to monitor momentum in market penetration and user interest, helping to direct marketing efforts and product development.
This formula is used to calculate the KPI:
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3. Monthly Active Users (MAU)
In the SaaS world, the MAU KPI measures the number of unique users who interact with your software within a month. This metric is vital as it indicates the active reach of your product and helps gauge the overall stickiness and appeal of your platform.
The following formula can be used to calculate this KPI:
3 - Provide Product Metrics to Investors
Communicating effectively with investors is crucial for any SaaS business. Clear and precise metrics like Monthly Recurring Revenue (MRR) and Churn Rate not only showcase the financial health of your company but also reassure investors about the scalability and stability of your business model. Let's walk through the vital KPIs that paint a transparent picture of your SaaS company's performance for its stakeholders:
1. Monthly Recurring Revenue (MRR)
MRR is a key financial metric for any SaaS business, reflecting the total predictable revenue generated from customers every month. It's essential for investors as it provides a clear picture of the company’s financial health and growth potential.
Here’s the formula to calculate this KPI:
2. Churn Rate
Churn rate is an indispensable KPI for SaaS companies, indicating the percentage of customers who discontinue their subscriptions within a specific period. A lower churn rate suggests a higher customer satisfaction and product-market fit, which is critical for long-term success.
This is the formula for calculating the KPI:
3. Lifetime Value (LTV)
LTV measures the total revenue a SaaS company can expect from a single customer throughout their relationship. This KPI is crucial for understanding how much a company should invest in acquiring customers and for determining the profitability of long-term business strategies.
Use this formula to find the KPI:
4 - Optimise Revenue Generation / Monetisation
Turning your SaaS platform into a robust revenue-generating machine requires more than just great software; it needs a smart monetisation strategy. By focusing on KPIs like Average Revenue Per User (ARPU) and Conversion Rates from Free to Paid, you can really dial in on what makes your users upgrade and how to boost your overall profitability. Let’s break down these KPIs and explore how you can use them to fine-tune your monetisation efforts for maximum impact:
1. Average Revenue Per User (ARPU)
ARPU is a critical financial KPI for SaaS businesses, measuring the revenue generated per user. It helps in assessing the revenue impact of different operational strategies and in fine-tuning pricing models.
Here's the formula you need to calculate this KPI:
2. Conversion Rate from Free to Paid
This metric tracks the percentage of users converting from free trial versions to paid subscriptions. For SaaS companies, a higher conversion rate indicates effective monetisation strategies and a compelling value proposition.
The following formula can be used to calculate this KPI:
3. Revenue Growth Rate
The revenue growth rate is an essential KPI for SaaS businesses, showcasing the rate at which the company's revenue is expanding. This KPI is vital for investors and stakeholders to assess the overall business growth and scaling capacity.
You can find this KPI using this formula:
5 - Improve Business Resource Allocation and Strategy
Ensuring sustainable business growth and operational efficiency is paramount for any SaaS business. Key performance indicators (KPIs), such as the LTV:CAC ratio, provide a clear picture into the returns generated and optimal resource distribution. Let's dive into the KPIs that will help you strategically allocate resources, adjust marketing strategies, and effectively balance customer acquisition with retention:
1. Customer Lifetime Value to Customer Acquisition Cost Ratio (LTV:CAC)
The LTV:CAC ratio is a vital KPI in the SaaS industry, providing insight into the relationship between the lifetime value of a customer and the cost to acquire them. A healthy ratio indicates that a company is spending efficiently on customer acquisition while maximising revenue from each customer. The bigger the multiple, the more budget you can put into growing a team and customer growth.
To find the KPI, apply the following formula:
2. Customer Acquisition Cost Payback Period
The Customer Acquisition Cost (CAC) Payback Period is a critical metric for SaaS businesses. It measures how long it takes to recover the costs of acquiring new customers, helping companies evaluate the efficiency of their marketing and sales efforts. A shorter payback period means a quicker return on investment, guiding better financial and strategic decisions.
This formula will help you calculate the KPI:
3. Market Penetration Rate
The Market Penetration Rate is essential for understanding a SaaS company's market impact. It measures the percentage of the total addressable market that the company has captured. This metric helps assess competitive position and growth opportunities, indicating how well the product is adopted in the market.
Use this method to calculate the KPI:
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