The importance of listening to the market
As you may have noticed, growing a business can be hard work. It often feels like the unknowns massively outnumber the knowns – that there are many more things we don't fully understand, and far fewer things about which we actually have accurate information.
The fact is that it remains extremely easy for companies to fail, not least when they’re still small and in the early stages of growth. Although the world’s business libraries are crammed with a huge body of purported knowledge about success and how to achieve it, many firms go bust every year.
Meanwhile, entirely new market categories continue to spring into life. Novel ideas gain traction and give rise to groundbreaking sectors. Innovations take hold and turn into game-changers. The gale of creative destruction keeps blowing.
Amid this relentless churn, many businesspeople exist within a kind of bounded rationality. They would like to think they know more than they really do, but their ability to realise this ideal is limited by the insights they’re able to gather, analyse and absorb.
The situation is neatly summed up by an apocryphal story about a group of Venture Scouts who get lost in the Alps during a snowstorm. Their situation is serious, and there's a chance they may not survive.
Fortunately, one of them finds a long-forgotten map in his rucksack. It’s creased, faded and a little frayed at the edges, but it does the job. They use it to somehow navigate a route through blizzards, ravines and assorted other hazards. It delivers them to safety.
Except it doesn’t – not really. It’s not until the following day that the Scouts look at the map again and realise it covers a completely different area of the Alps. It might as well have been a map of the Peak District or the Malvern Hills.
So, the map didn’t give them a sense of direction. Rather, it gave them confidence. It gave them belief – something to cling to, something to build on. It brought a tiny degree of structure to the chaos enveloping them.
The moral of the story: any plan is better than no plan at all. This is certainly the case in business, where it’s important to look for structure amid the constant confusion of markets, clients, competitors and opportunities.
Let the market tell you what to do
So how can you find structure? How can you endeavour to manage uncertainty? One highly effective way of tackling challenges that are otherwise nigh on impossible to address via conventional means is to conduct market experiments.
Maybe the biggest appeal of such an approach is that it uses the actual market to answer your questions. By designing and implementing these experiments, you can shed light on key business issues without expending large amounts of money or effort.
This is in some ways the principle behind the concept of lean start-ups. These fledgling businesses use customer interactions – particularly those that are close to or proxies for purchase decisions – to judge whether a product or service is fit for purpose and how it might be improved.
By launching a “virtual product” that doesn’t yet exist, for instance, you can get a good feel for whether the genuine article is likely to sell. Alternatively, you might unveil numerous product names in parallel to gauge which has the greatest customer resonance and value recognition and therefore offers the best potential and lowest risk.
Perhaps the simplest market experiment is the A/B test, in which alternate offerings are given to two sample customer groups. Assessing and comparing the results should show which is superior, clearing the way for further research into precisely why.
Of course, any market experiment will work well only if it’s underpinned by a reliable and suitable measurement process or feedback loop. That’s how you’re most likely to end up with the right map for the right district of the Alps.
The standard alternative to a sound market experiment is to put faith in a framework or a piece of business theory. You take the framework or the theory, try to apply some logic to it, throw in some snippets of information and hope a brilliant decision miraculously emerges. And that’s how you end up with the wrong map.
Sometimes, like our intrepid troop of Venture Scouts, you might just get lucky. On the whole, though, it’s infinitely better to have an authentic notion of where you are, where you need to go and how the heck to get there.
Particularly in this age of far-reaching digitisation, it has never been cheaper or more straightforward to engage with your would-be customers. Growing a business will always be hard work, but it makes no sense to ignore a means of making the task just a little bit simpler.
David Falzani MBE is a Professor at Nottingham University Business School’s Haydn Green Institute for Innovation and Entrepreneurship (HGIIE) and president of the Sainsbury Management Fellowship.
Nottingham University Business School is one of the 48 Small Business Charter accredited schools currently delivering the Help to Grow: Management Course. To find out more, click here.