How do you validate an idea for a software startup before the product is built? Last week, a founder of a SaaS business and I were wrestling with this problem. It's a question without a universal answer. After a while, we came up with quick and dirty rule of thumb for his business. Can he hit his quota?
Suppose this founder wasn't the founder, but the first inside sales hire for the startup. His annual quota would be around $300k or about $25k per month. He would likely commit to a four month quota ramp, needing to reach of 25% of quota ($6k) in the first month, 50% in the second ($12k) and so on.
With his mockups/demo in hand and given 30 days, could he sell $6k worth of vaporware and become confident of achieving his second month's quota? Would customers agree to buy the product at the target price, if it were built?
This quota test is a harsh one. Most inside sales reps arrive with a sales script, warm leads, a known sales path and a working product. For founders, none of this exists. Founders start from scratch.
Despite its severity, I think there are five benefits to this approach:
- The quota test demands the team understand and identify potential customers, contact them and establish initial pricing - aka getting out of the office and validating the idea.
- The quota test prepares the team for eventually building inside saless, because the founders will know from experience what it takes to sell the product.
- The wireframes sales process unearths missing features that block product adoption (eg, integrations with other software, compliance, stability, SaaS vs. on-prem) and surfaces other customer objections (eg long term contracts with competitors, politics, etc.)
- Should the team succeed in the quota test, the startup will have established that an inside sales model is a viable growth strategy for the company.
- The sales funnel data is a tremendous asset during fund-raising because it establishes customers’ willingness to pay, reference customers and some basic sales funnel metrics.
This test isn't for every software business. The quota test doesn't work for freemium businesses who acquire individual users to gin up leads with the aim of converting a department or company later; nor for network effect businesses whose value can only be experienced after critical mass is established; nor for businesses who will never build inside sales teams.
But it is a tactic worth adding to the product/market fit toolkit for software ideas.
What other tactics have you found to validate product/market fit? Tweet me.