Validating an idea? Start with price.

Product Validation

Entrepreneurs usually start with an idea of something to build or a market they want to go after. Then they speak with users to validate, build a prototype, get their first users, and often, last of all, they figure out the right price point for the product.

While this approach works, if your goal is financial freedom, as it is for many Indie Hacker, starting with price can bring much-needed clarity to every stage of the validation process.

Price Validation

Price determines the kind of business you can build and affects everything about a startup’s target user, market, acquisition channel, LTV, and of course profitability.

Years ago I made a spreadsheet called MRR Lifestyle, to help me decide where I wanted to be on the price curve. It helped me think about how many customers I would need in the short and mid-term to reach my financial goals.

An individual at a company can often signup for a service and expense it, but above a certain dollar figure, they’ll need their manager's approval. As the price increase, the owner of the budget changes; this triggers additional reviews, approvals, and meetings. Jumping through all of these hoops will be needed to sell high-cost products into an organization.

Budgets:

The target budget and resulting sales cycle will determine how quickly you can gain new customers and grow your business.

It isn’t always true but the higher the price the slower things move.

The spreadsheet is color-coded to highlight the different budget brackets for each price. This allowed me to quickly see the inherent trade-offs at each point:

Fifteen customers at $778 sounds obtainable and “easier” than a thousand at $12. But $778 a month is over $11k a year, which is outside the budget of most first-level managers.

Once you have a financial goal in mind (e.g. $140k or $1M ARR) and a target price to customer ratio (80 customers @ $146/mo), it is time to think about value creation:

How can you build something that creates at least 150 dollars of value for your customers?

I’ll discuss this step in my next post. :)