5 Criteria for MVPs
Original article written by Brent Freeman for Entrepreneur.com
As entrepreneurs, we’re constantly coming up with new “brilliant” ideas that will change the world and make millions. Sound familiar? Yeah, so at Stealth, to protect ourselves against… ourselves… we literally run every idea we come up with through these 5 criteria as a checklist to see if it’s truly as brilliant as it first seemed. Remember, no matter how good of an architect, designer or inventor you may be, if you build a house on sand, it’s destined to collapse.
Launching an online business without running the idea through these Criteria is the entrepreneurial equivalent of building a house on sand. Do not do it.
In this post, I will walk you through all 5 Criteria one-by-one to explain what they are, why they matter, and how to apply them to your concept. In a nutshell, these 5 Criteria will help you figure out if your idea sucks before you launch your business or — if you’ve already launched — they will help you identify where exactly you need to pivot to increase your sales and profitability.
Then at the end, we’ll do a recap to tie it all together so you know how to use everything as your guiding light moving forward.
Without further ado, here are Stealth Venture Labs’ 5 Criteria for MVP’s:
Criteria #1: Passionate Audience
A passionate audience is a group of people who can be clearly defined based on their heartfelt interest in a topic, subject or activity. Members of a passionate audience define their identity by being a part of this group as it deeply connects with their interests, culture, and lifestyle.
Passionate audiences are easy to identify because they have their own Facebook fan pages, their own TV show, or a bunch of magazines dedicated solely to them. Great examples include; Yoga, Golf, Surfing, Nascar, Cooking, Football, and Gardening. Poor examples include generic or broad audiences like fashion, animals, jewelry, sports, music or food in general. All of these latter examples seem like passionate audiences — and they are — BUT they are so general that there are many specific passionate interest groups underneath them that look, feel and act very differently than one another. If you target a passionate audience that’s too broad you’ll end up creating a product that caters to everybody, which means you’ll be unique to nobody.
When you’re just starting out, you want to be the absolute best at one thing that a clearly defined passionate group of people want or need. In other words, be a mile deep and an inch wide — not the other way around. Amazon started with books online. Apple with a desktop computer. Patagonia with rock climbing gear. Google with a single search bar. The list goes on.
But let’s explore an example of why targeting a general audience like sports would be a mistake. While it’s true that there are millions of people who love and are passionate about sports, the reality is that somebody who loves football generally is motivated by different things than somebody who loves surfing. Both are athletic sports with their own leagues, professional athletes and fan base — but the messaging, value proposition and marketing channels you use to connect with each audience will be VERY different. This is why it is fundamental to select a passionate audience that is clearly defined, specific and easily identifiable. Going too broad is a sure fire way to fall flat out of the gates.
INSIDER TIP: For fashion related brands, find a passionate audience that has both men and women inside of it and start by focusing on only one. Then, as that product grows and takes off, you have a natural line extension opportunity to offer the same product to the other gender without having to enter into a completely new market.
Questions to Ask Yourself:
Is my target audience extremely passionate about the industry I’m in?
Do these passionate people have a tangible activity they could all do, watch or share together?
Is the audience clearly defined or is it too general? Be honest with yourself here, if it’s not crystal clear
who your tribe is, refine your targeting until it is.
Criteria #2: Scale Potential
Now that you’ve nailed down a passionate audience that’s clearly defined, let’s use a system of checks and balances with Criteria #2 to make sure you didn’t drill down too far into a tiny niche of 15 underwater basket weavers. Having Scale Potential means that the passionate audience must also have a critical mass of people that call themselves members. If it’s too narrow, shallow or niche then the scale of your success will be greatly limited. Even if you got all 15 of those underwater basket weavers, you probably don’t have a business that’s worth your time and effort. Time is your most valuable commodity in life — and it takes the same amount of time to build a profitable business that has customers banging down your door as it does to build one that struggles constantly to find enough demand. Don’t waste your time on passionate audiences that are too small, it’s just not worth it.
So how do I know if an audience is too small you ask? Good question and one we will address further in the Customer Acquisition course, but the short answer is: Facebook. On Facebook, the minimum interest group size we recommend you target for US Based groups would be 5 million people, ideally more like 10 million people or more if possible. In our Acquisition 101 course, you’ll learn how to use tools like Facebook’s audience insights or Google’s keyword planner to research audiences and interest groups in depth.
A common rookie mistake here is to say “if I can only get 1% of the XYZ market, then we’ll be rich!” yeah, that top down approach is pretty much B.S. The way that real pros approach a market assessment is from the bottom up — where they physically see how many actual people make up their target market inside of the largest and most effective customer acquisition platform in the world — Facebook. If market research reports say that your industry is HUGE but you go to Facebook’s audience insights and only see 100k members in that interest group and decide to rethink your market — then congratulations — you have just avoided your first landmine in your entrepreneurial journey.
INSIDER TIP: If you find a passionate audience that seems to be large enough but feels like it may be a “Fad” market — like beanie babies — it’s ok to launch a product that rides that wave with full knowledge that it will eventually crash and you’ll need to seriously pivot the business to survive. Also, do your best to make sure you are on the front part of the wave to maximize your opportunity — if you jump into it as it’s already crashing, you will nose dive in record time.
Questions to Ask Yourself:
How big is my target market inside of Facebook?
Are there enough people in my passionate audience to make a profitable business out of this?
If not, is there a similar interest group that I could expand my offering to that has more scale?
What pains or frustrations do the people in this market have?
Criteria #3: Unique Product
Once you have identified a large, passionate audience then you need to create a product that has unique benefits built into its experience — NOT JUST FEATURES — that the audience instantly identifies with and finds compelling. Now, you’re probably asking yourself: What’s the difference between a benefit and a feature? Good question. Benefits are the reasons why people buy things — they are the value people get out of using the product or service and it’s where the emotional connection is made. It’s the “why” behind the product.
Features are the “what” that goes into the product — the technical specs, sizes, materials, etc. While these are important and definitely factor into a purchasing decision, it’s the benefits that get people’s attention and ultimately drive the purchase.
Google is not a search engine (the feature) it is a gateway to learn anything your heart desires (the benefits). We’ll dive deeper into this positioning difference in the later courses on Content, specifically as it relates to writing copy that sells.
Some great examples of unique products are watches made of wood, galaxy patterned yoga pants, DIY craft beer kits, Blue Bottle Coffee, Uber, Cirque du Soleil, and Tesla,… All of these examples are differentiated in their respective marketplace and designed to stand out from the crowd, get people’s attention and convert potential customers into passionate loyalists. Don’t just be another “me too” in a saturated market — it will be virtually impossible to standout and extremely difficult to acquire customers. Create something unique that stops people in their tracks when browsing online, gets them to click on your ad and ultimately take out their wallet right then and there.
In the Customer Acquisition and Data Analytics courses, we will discuss how creating a unique product from the outset will lead to lower customer acquisition costs, higher viral factors (when customers tell other friends) and ultimately higher profitability in the long run.
INSIDER TIP: Need some inspiration on how to stand out from the crowd? Read the marketing classic Purple Cow by Seth Godin who will inspire you for years to come on how to think outside the box and be unique. Warning, the examples may be a bit outdated since it was written about 10 years ago — but the ideas behind the concept remain strong!
Questions to Ask Yourself:
1. Is my product unique enough that somebody would stop browsing their Facebook feed to click on my ad to learn more? If not, rework it until it is.
2. What is compelling about your product or service to your target customers? Why should they care?
3. If not, is there a similar interest group that I could expand my offering to that has more scale?
4. What makes your product so much better than what your competitors do? If you’re not saving people time or money, you better be delivering them something so cool and so unique that they have to have it.
Criteria #4: Compelling Economics
Criteria #4 is one of the most important pieces of the framework and it’s where the majority of concepts go wrong. Compelling unit economics means you are selling your product to customers at a disruptive price point and you have large enough profit margins to create a sustainable, profitable business at the same time. The greater the disruption in your price-to-value ratio, the better. Your goal is to save people time and money while delivering outstanding value.
But don’t confuse offline shopping behavior with online shopping behavior — they are very different beasts that require a different understanding of the psychology of the shopper. Online shoppers have thousands of options and data points available to them at their fingertips in a matter of seconds, whereas retail shopping is all about instant gratification and opportunity cost of physically having to go somewhere else to get that product all in the name of potentially saving a few dollars.
In today’s world of Amazon prime, comparison shopping engines and a race to the bottom on price — if you launch a product online that is overpriced based on value or competitor options, your customers will know immediately and you will be dead in the water. This means that you will have to be very clever with your supply chain to figure out ways to cut costs while maintaining quality and ethics along the way so you can pass those savings onto your customer. Also, as an aside, it’s not ok to cut ethical corners just to sell a few products and make a buck. Don’t take this easy route as it is not a defensible position against from your competitors and, it’s just not the right thing to do. Instead, think strategically about how you can produce, buy or source your products differently in a way that disrupts your industry. Chances are, whatever industry you’re entering into there is an opportunity to cut out a middleman, manufacture something more efficiently or create strategic partnerships that give you an advantage over your competition.
What about selling a luxury product online you might ask? Well, unless your luxurious product is so differentiated that people truly have no alternatives, merely setting a high price point as the differentiation strategy is a recipe for failure.
Compelling economics for the business means that whatever price point you sell to your customers, you have reserved enough gross profit margin in your business to run promotions, sell into multiple channels, cover customer acquisition costs, pay for operational expenses, process returns & exchanges and have enough working capital left over to buy more inventory. We highly recommend that you do not drop below 50% gross margins when you are selling only direct to consumer online, otherwise you will not have enough profit to create a sustainable business. Ideally, you can operate at 75% profit margins or greater and still offer a disruptive price point to your customers.
So you’re probably asking, what if my compelling price point means I have to go below 50% gross profit margins? Then do one or more the following: negotiate or create an equity partnership with your supplier for better pricing, find another supplier and get them into a bidding war, or figure out a way to produce your product that disrupts your industry’s entire supply chain all together. If none of that works, then you probably don’t have the amazing business you thought you did.
If that’s the case, either adjust your concept until you can hit the target margins and price point - or - come up with a new idea all together. Whatever you do… DO NOT LAUNCH YOUR BUSINESS IF YOU HAVE CRAPPY MARGINS. It would be the equivalent of boarding the Titanic with the full knowledge of how the story ultimately ends.
There is a lot more that goes into determining your unit economics that we will cover in the Customer Acquisition, Data Science and P&L Management courses to help you truly understand and refine your pricing strategy, but if you follow the guidelines we just reviewed together, you’ll already be ahead of the pack.
INSIDER TIP: We find the magic price point for online consumer goods to be between $39 - $99, depending on your cost-of-goods-sold and product. Anything above $99 becomes a psychologically significant commitment where customers really do their research before purchasing, which leads to a drop off in potential customers converting to buyers.
Questions to Ask Yourself:
1. Am I really getting the absolute best price on my product from my suppliers?
2. Can I renegotiate or create a deeper partnership with my suppliers in a way that will give me disruptive pricing?
3. Am I working direct to my suppliers or are there middlemen that are taking unnecessary markups that eat into my margins? If so, how can I cut them out of the equation?
4. Will I sell my product direct to consumer or will I want to sell my product to retail outlets as well? This will be critical in determining your pricing strategy and you cannot successfully pursue both channels when just starting out.
Criteria #5: Solve a Market Pain
Alright… saving the best for last. Number 5 on our Criteria list has to be my favorite one because as an entrepreneur, it’s extremely easy to convince yourself that your idea solves a pain when it really only sorta solves a pain, or maybe solves a fake pain you’ve convinced yourself of. Yeah… We’ve all been there. But the best way to tell if your product solves a true pain is if the idea was born from you saying “there’s GOT to be a better way…” When products are created out of a frustration in the market they have the best chance of succeeding — assuming that frustration is one that many other people like you have also experienced.
For example, Uber was created because its founders couldn’t get a taxi while in Paris on a snowy evening and realized that hailing taxis worldwide was a global pain in the ass…
If your product does not solve a true pain in the market or you’re not the first mover, the conversion rate of turning prospects into customers will be significantly reduced. Your product goes from “must-have” to “nice-to-have” to “why-would-I-even-need-that” — which is the true kiss of death for any business.
In a nutshell, if you’re creating something that doesn’t solve a pain for your audience, no matter how well you’ve nailed the 4 preceding criteria, your business will be destined to fizzle out. However, if you have a product that truly solves a pain and you’ve clearly checked off the other 4 criteria — you, my friend, are positioned well for success and should feel confident to move forward in launching or scaling your business!
Questions to Ask Yourself:
1. What is the pain that I solve by providing my product or service?
2. If I were to ask 100 people in my core demographic if they had that pain, would they say yes?
3. Is my product or service a “nice-to-have” or is it a “must-have”? If it’s not a necessity, then you really need to make sure your value proposition is extremely disruptive to get them to change their behavior and adopt your product.
——
OK! Congratulations! You literally just got 10+ years and millions of dollars of hard earned advice in a few short minutes… I know it’s probably like drinking through a firehose, so let’s do a quick recap of the 5 Criteria:
1. Passionate Audience — Make sure it’s clearly defined and not too broad.
2. Scale Potential — Make sure the audience is big enough to create a sustainable business.
3. Unique Product — Create something so unique or valuable that customers can’t say no.
4. Compelling Economics — Sell your product for a disruptive price point with 50% + margins.
5. Solve a Market Pain — Create a solution to a real problem your audience experiences.
INSIDER TIP: Download the 5 Criteria PDF included in this course and use it as a checklist for your concept to see where you hit the nail on the head and where you need to go back to the drawing board.
The Criteria you just learned are the common denominators of ALL the successful online brands we’ve ever worked with, no matter the niche and are responsible for over $100M in ARR in the last 4+ years… But what’s more important to note, is that the brands who only hit 3 or 4 out of the 5, are all either struggling or out of business completely. This checklist literally is an all-or-nothing game. If it’s not a crystal clear YES — then it is a crystal clear NO. It’s binary. Yes or no — there are no shades of grey — and “kinda” is a NO by the way… Be brutally honest in this process because the only person you’d be cheating is yourself.
So, how did your idea hold up? Did you pass with flying colors on all 5? Or do you fall short on a few? Don’t be discouraged if you discover your idea doesn’t hit one or more of the criteria! Whether you’re already in business or you’re still in ideation phase, this is your opportunity to do a hard look inward, re-calibrate and adjust accordingly. Sometimes brilliance is just a few small tweaks away… so don’t throw the baby out with the bathwater — but make sure you don’t let blind love of your original idea cloud your rational business judgement. These criteria we’ve come up with are tried and true and based on real market data, so be honest with yourself, make the changes necessary, then run the concept through the checklist as many times as you need until you have a clear definitive YES for all 5.
When you hit 100% of the criteria, you’re ready to truly test customer demand by launching an MVP or Minimum Viable Product — which will be the topic of our next course. Remember, being brutally honest early in this process will help you cement a solid foundation for your entrepreneurial dreams to grow upon for years to come.
Enthusiastically,
Brent Freeman
Founder & President, Stealth Venture Labs, Inc.
