Testing The Market

5 Min Read
Graphic with the words "The price is based on what the market will bear"
The price is based on what the market will bear

There’s one way a business is going to make money and that’s by selling their products/services/goods. The successful entrepreneur focuses at least 80% of their time on marketing. It’s imperative to know as quickly as possible if there is a market that’s ready, willing and able to purchase whatever it is that’s being sold. The entrepreneur has to know exactly what their costs are and the acceptable price point the market will bear for their products and services.

The sooner this is known, the better. The best strategy is to gather this information prior to making any big investments, which includes writing business plans, manufacturing, stocking and kitting out an office. Why make a big investment if the idea isn’t right? Now this strategy flies in the face of how things may be set up or even conventional wisdom, but it’s the least risky way of doing things.

A great example of how this works can be learned from Philip Knight. He was a middle distance runner on his university’s track team back in the 1950s. At that time, track shoes were poorly made out of old tyres. They only cost $5 a pair at the time, but they were only good for one or two races before there was a blowout. Philip tried customising his shoes managing to get a little more durability and traction.

Later when he went to graduate school and took a course in small business, as one of his school assignments he came up with the idea of making superior athletic shoes. His thought then was to have the shoes manufactured in Japan to keep the costs down.

It was a few years later on a trip to Japan that he found himself drawn to a particular brand of athletic shoes sold in the department stores called Tiger. He met with the CEO and they ended up shaking on a deal where he would represent those shoes in the northwest states of America.

While he waiting for the shoes to arrive, he got a job as an accountant and started studying marketing in his free time. By the time the shoes arrived a year later, he had written a business plan and made some good connections. One contact was the track coach at his alma mater. Philip was hoping for an endorsement from Bill Bowerman, but they ended up becoming partners with each putting $500 into the business as capital.

In 1964 they formed Blue Ribbon Sports. For the ensuing 5 years, Bill focused on improving the shoe designs and Philip sold the Tiger shoes out of the trunk of his car at track meets. Both still had their day jobs. Neither one of them risked their jobs, security or savings. However, they built the business up to 45 employees and sales of 1,000,000 pairs of shoes a year.

It was at that point that they decided to change the company’s name. Names were rejected until one friend made a suggestion that came to him in a dream. The name was that of the Greek winged goddess of victory – Nike.

The start of Nike is a perfect example of what to do.

Philip had experience with track shoes and knew what the problems or limitations were of the existing brands. Rather than immediately launching into manufacturing shoes, he found a successful supplier. He worked so he had his needs covered while he studied marketing and built the business to a point where it would support his partner, him and the employees before leaving his job.

He partnered with someone that brought another dimension to the business that he didn’t have thereby allowing the company to grow at a steady pace. While Bill continually improved the products, Phil found a low cost, highly effective way of selling the shoes.

On the other hand, there’s Ariel Diaz, an entrepreneur that started up YouCastr. He and a friend came up with the idea for the company while taking a trip in a car. They were bouncing ideas around and thought of blending mystery science theater with sports and live commentary. Within months, a team of 4 entrepreneurs created their plans and started building an alpha version.

Initially 3 of them were learning new technologies and working on building a product. They continued to work their day jobs, spending evenings and weekends developing the alpha and beta products. Over the next 3 years, they quit their jobs, raised money, invested in opening offices, hired and fired staff, went back to bootstrapping trying to keep the business open, but finally had to kill it.

As they were developing the product, they kept changing what the end result would be. They started out focusing on live audio sports broadcasting of untelevised games but found there was no demand. Then they added video broadcasting and focused on high school and college sports. Again, no demand.When that didn’t work, they tried to de-emphasise sports and added features that leaned towards video producers for schools and teams.

Even though they were running the business on a shoestring, they closed down because they ran out of money. Ultimately no one was willing to pay for the content. In the end, they did find some industry specific verticals where the model works, but the market wasn’t large enough to support an independent company.

In their postmortem, the reasons for failure were clear.

• They didn’t make hard choices quickly enough.

• No experience or knowledge of the market and the technologies.

• Weren’t committed to the idea so when problems came up, they lacked the energy and motivation to sustain the business.

• They hired too early and grew the company expenses too quickly.

• With hindsight, they said they failed because they didn’t test their ideas.

Author: David

As a retired traveler, IT systems engineer by trade, Electronics engineer by hobby. I spend my free time writing about subjects giving the reader events in history to ponder, as well as current events.

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