To find out is there is a market that is large enough to sustain a new line of business, you need to make 100 phone calls.

To your target audience.

Right now.

The usual reaction here is Whoa! What!? Where am I going to get those names? How will I get them to talk to me? What if they don’t want what I’m selling?

That’s it! That’s exactly what you do want to know; and know it now before you spend too much capital designing and building the wrong product.

So where are you going to get these 100 names? The exact same place you’re going to get them when you’re ready to unveil your product. You need to know today who your customers are going to be, how much your cost of acquisition per account will be, and how many potential customers exist. You not only need to know how many names you can get your hands on, but you need to know how productive your leads will prove to be from a marketing-response standpoint. If you’re going to sell through telemarketing, for example, interviewing 100 potential customers will give you a good indication of what your future sales forecast should be.

By the way, the industry average response rate for direct response methods is 0.8 percent--yes, that’s 8/10 of 1 percent--so typically you’ll need to obtain a really healthy number of names to make your telemarketing operation productive. If you can't find 100 names now, how will you find many more names a year from now when your product hits the market?

The next step in the 100 calls regimen is to come up with an interview script. You need to write down all your questions in advance. This is so that you can take every interviewee through the same set of questions, ensuring consistency of data . And be prepared to throw away a lot of material. If a potential customer doesn’t make it to the end of the process, you can’t use that interview. In my experience you need to be off the phone with them in 15 minutes; if your interview stretches much beyond that, your hang-up rate will go sky high.

You’re probing the market to understand how your potential customer addresses the problem you’re hoping to fix. Your mission is to find out what pain your customers really have, and to ask them how they fix the problem today. You want to find out how satisfied they are with their current solution; ask them to state the three best and worst things about how they address this particular problem today. And ask them how about your competition; if they use another product or service, ask them to rate it on a scale of 1-10. Find out how important fixing the problem is on their current list of priorities.

One thing to keep in mind: No matter what, avoid the temptation to discuss the new product that your company intends to bring to market. Mention no names, and no features, not even a hint that it might exist. You will find not discussing a new product to be an incredible challenge. It's your natural instinct to sell. But keep in mind: You’re looking for the pain your potential customers suffer from. Looking for pain means not proposing how to fix it. If you start talking about products, customers will stop telling you what they really think because they’ll feel like they’re being sold something.

And here's the good news: interviewing potential customers is far more productive than selling in the early stages. People at the other end of the phone are far more responsive to being asked questions about products than they are about being sold products. In my experience you will get 2-3 times the response rate interviewing by phone versus selling by phone, so factor that into your sales and marketing program productivity numbers. Stick with the plan and you’ll come back with an incredible understanding of what’s happening out there in your market.

I think you’re getting the idea. Ask these kinds of questions of 100 people in your target market and you’ll find yourself developing a much different offering than before you asked these questions. Take the time to invest a little in market validation and you can save a lot of the headaches that innovators face when they devise products having never soliciting ideas and information from the very people they hope to serve.

In my last post I talked about market validation as the tried and true process for figuring out if there’s a market for your new product. It’s the "Ready, Aim, Fire" approach to getting products out the door; versus the "Ready, Fire, Fire, Fire, Go Out of Business" process, which most companies use. I also covered the first step in that process, figuring out if the market is big enough to enable you to hit the revenue target you need in order to be successful.

If you passed that part of the market-validation process, it's time to take a hard-core look at your competitors. This is one of the most under-looked ways of validating your market: If someone is in the market with a successful product, that's a good sign that a market for your product exists. But don't get too cocky.

My experience in working with companies is that they typically put down their competitors as mindless automatons that accidentally got into the market; they denigrate the management team, the quality of the product, and claim the company just plain can’t execute. It's time once again for me to give you a good hard dope slap. The truth is that most competitors are clearly doing A LOT better than you; they’re in the market, they already have a product, and someone is buying what they have.

For you, then, the goal is to be objective and to learn as much about the competition as you can. Scour their websites. Talk to their salespeople. Contact their distributors. Talk to their customers. Get aggressive and do everything you can to analyze their offering, their target market, their features, and how they position themselves.

A few important points: When sizing up the competition, you must include substitutes for your product or service under the umbrella of "competitors." If it competes for the same budget dollars you’re going after, it’s clearly a rival. No. 2, you must also consider the biggest and most consistent competitor around, a guy who affects all companies of all sizes in all markets—his name is "I just want to keep my money," and he does particularly well in a tough economy. You want to know how much of a competitor he is before you enter a new market.

As you begin to assess the competition and compare your product against theirs, make sure you understand how your customers define success. In my experience, entrepreneurs radically underestimate the return on investment most customers expect from making a new product or service; CEOs typically expect that a 30 percent ROI will get a customer excited. Not so. The reality I’ve experienced is that it usually takes between 200 and 300 percent (meaning a 2-3 X return on the cost of a product) just to get the customer to pay attention to what you're saying. You need to figure this out before you go to market.

So where are we here? First, you’ve got to know who all of your competitors and substitutes are. Then, learn everything about them that you can learn. Remember that “I just want to keep my money” is the biggest competitor you face. Finally, understand the economics needed, from the customer’s point of view, to consider your product worthwhile. You’ll be amazed what you learn from conducting this kind of rigorous competitive analysis.

When considering launching a new line of business, how can you figure out if there’s really a market for a product?

The technique that’s served me extremely well is one that I like to call “Market Validation.” Market Validation is a systematic approach to evaluating your market before you jump in with a product. I call it the “Ready, Aim, Fire” approach to getting your product out. Most companies’ take more of a “Ready, Fire, Fire, Fire, Aim” approach, sucking up huge amounts of capital and lots of management bandwidth. Like Yosemite Sam indiscriminately using his six-shooter, eventually, by chance, you might hit a target of one sort or another. Using Market Validation, you’re more like a sniper, taking a little bit of time to sneak up on the target, study and evaluate it, aim, then take your shot. This gives you one product, one market; versus the alternative of multiple products, and no market.

How do you do this? It’s a combination of tactics that involves thinking and doing a little bit of rational thought before heading off to market; thinking before you act. I can hear the entrepreneur moaning now: "Wait a minute, I’ve got to get to market now before the window of opportunity closes." Well, I’m gonna give you a good hard dope slap and tell you that if your supposed market opportunity can’t stand a time investment of 60 days to get it right, you really don’t have a market to begin with.

Let’s look at the first step. Revenue is the ultimate measure of success here, so how much revenue do you want to generate? You should build a three-year forecast of what you expect it to be. Then you need to answer some fundamental questions. How big is the market? Is it big enough to meet the revenue expectations you've set for the product? How much market share do you need in your first three years to stay on target with your revenue plan?

The reasoning here is pretty straightforward. I can’t tell you how many product plans I see where, in order to be successful, a new product needs 200 percent market share in Year Three. That's nuts. You’ve got to understand the current size of the market and figure out if it’s big enough to justify getting into. For example, say the U.S. market for a certain kind of widget is $100 million a year, and growing around 6 percent a year. What kind of penetration do you need in Year One to be successful?

If the answer is $1 million dollars in revenue, that’s probably doable with a strong product and a real marketing budget. But if the answer is $10 million (or any other double digit penetration number in the first year), that’s pretty doubtful for a new product, even with a huge marketing budget.

Let’s look out three years. We’ve already established that the market in this example is growing 6 percent a year. What’s your expected growth rate? If it’s at or below 6 percent, and you have an average sales and marketing budget, assuming a competitive product, you could reasonably hit that. But if you expect to grow faster than 6 percent, what kind of additional investment in sales and marketing will you make to justify it? If your competitors spend 40 percent of gross revenues on sales and marketing to grow at 6 percent, how much will you spend? Can you reasonably expect to devote a sum equal to 60 percent of sales in order to hit a growth rate above 6 percent? Where will that investment come from? How long will you have to make it to be successful? How much market share will you need in Years 2 and 3 to hit your numbers? The rule of thumb I’ve always followed is single digit market penetration in the first three years of a new product is doable; getting to double digits requires a lot of sales and marketing money and an incredible amount of luck.

The conclusions here? Make sure the market you’re going after has enough room in it to support your product ambitions before you build and launch that product. And make sure you’re budgeting enough dollars for sales and marketing to grow at the same rate as the market.

In my last blog, I talked about my experience getting companies off the ground, which really translates to making sure their first product is a hit in the market (I’ve been active in the founding, financing, or acquisition of more than 40 companies representing more than a billion dollars of capital, and involved in the launching of at least 100 products). The conclusion I’ve come to, reinforced time and time again, is that getting the product right--your first one, and hopefully each subsequent one--is the key to making your company work. The technique I’ve termed “Market Validation” is by far the most effective way to get this done, and here let me start with the big picture view of how to do it.

Why do companies succeed? They succeed because their products sell in the market. They have built something that gets customers to open up their wallets and part with their money on a regular basis. The bottom line is they generate more revenue than expense; sure. this is an overly simplistic statement, but the key is getting your company’s products to play in their markets. Any successful business person readily admits that strong revenue makes them look like a genius and covers up lots of missteps. On the flip side, these same entrepreneurs will tell you cutting expenses to meet reduced revenues is not the way to make a company work; budgeting your way to prosperity is not an effective business strategy.

The point here is that, in order to make your business successful, you should focus on your product and its viability in the market. A lot of human nature will drive us to do the small things that make us look busy and feel like we’ve somehow contributing to the company. These are things like focusing on the books, or the costs of goods from suppliers, and other items that matter to the company, but that are not related to generating revenue. It’s hard to call up a customer and get to the bottom of why he dropped you as a supplier; but in the end you need to hear the real reason and that’s a lot more important than the time it takes to save another 5 percent on office supplies.

So Rule No. 1 – Focus on revenue, the top line. Make sure this is where you’re spending the majority of your time. Don’t get caught up in the tangible, feel good aspects of knocking off a large to-do list of important items to make your business work unless, of course, all those items are directly related to getting your customers to buy more product and services.

My name is Rob Adams. I’m currently on the faculty of the MBA program at the University of Texas at Austin, where I teach entrepreneurship courses and run the Global Moot Corp program. Prior to doing this I ran several early stage venture funds after starting and building several software companies. I’ve been active in the founding, financing or acquisition of more than 40 companies representing more than a billion dollars of capital, and involved in the launching of at least 100 products.

My current position in the world gives me a front row seat of entrepreneurial activities in the incredibly vibrant city of Austin, Texas. I get to deal with a city full of entrepreneurs I’ve worked with before as well as work closely with the up-and-comers making their way through the various MBA programs available at the McCombs School of Business. Add to this running the Global Moot Corp program, dubbed the “Super Bowl of Business Plan Competitions," where I get to see plans from the top business school entrepreneurs from around the world, and I consider myself a very lucky start-up kind of guy.

One of the great things my current position lets me do is spend a lot of time helping people get their businesses off the ground. Sometimes you never really know how much you know until you start helping others do something. I figured out I really did learn a lot by launching and funding all those companies; some of which were incredibly successful and some that were big smoking holes in the ground. I now do my best to get the entrepreneurs I help through all the risks that come with getting a start-up off the ground, which are things time, experience and spending lots of money teach you. Fortunately I’ve done all of these and have a wealth of knowledge to draw from—drawn from both successes and failures.

Over the last decade I’ve also found once you get out of start-up land, start-up experience translates to established companies when they launch new products. Same sets of issues, except instead of trying to get that first product or service to sing and dance in the market, you’re trying to get a follow on one to do so. Experience has shown me much as it’s hard to get the first product to work in the market, it’s usually a lot harder getting a follow on to do so. Interestingly, the strategy I used and refined to get initial products to work translates directly to any company launching follow on products.

So this is where I’m investing my time these days and it’s what I’ll be blogging about here. I’ve got tons of start-up and new product experience and I’ll be addressing your issues on that front. I’ll also be writing about developing new products for both start-up and established companies. The process I use here I’ve termed “Market Validation” and look for lots of talk on the topic here over the coming weeks.