Venture investing succeeds when the entrepreneur knows its customer

Psychology plays a massive role in a customer’s purchasing behavior, and consumer products companies take advantage of this.

Obviously, this is not news, but any company in which you invest must have a clearunderstanding of what motivates potential customers to buy their products.  

Are you sure that the company’s buyers are just as motivated to buy as you are to invest?  Consider carefully the catalysts to purchasing the product and whether the buyers will be adequately motivated to make this a successful venture. 

While there are many theories surrounding consumer behavior and what motivates a potential customer to make a purchase (see consumer decision-making model, behavioral influence model, experiential model, among others), often it is a combination of several.  To make matters even more complex, the motivation will vary across the customer base, as not everyone buys the same product for the same reasons.  

One example:  

Some customers (teenagers, perhaps) might buy iPhones because all their friends have one, and they might feel embarrassed to have something different.  

A different customer (a business professional) might buy the same iPhone model because all their work-issued devices are Apple products; the functionality that comes with integrating their personal phone into that same ecosystem is too important to risk purchasing an Android or other non-Apple product.   

And there are other customers, as you can imagine, with separate and different concerns and motivations as well.   

  • Was the product sustainably produced? 
  •  Is it more efficient?  
  • Is my current product wearing out or obsolete?  

Each example represents a pool of potential customers that a good marketer targets differently to capture  different motivations. 

Bottom line … it’s critical that a company thoroughly understand what motivates its customers’  buying decisions.   Otherwise, they are just seeing whether the “spaghetti sticks to the refrigerator” when projecting customer demand.

The company should also demonstrate it knows who is the ultimate customer (the end-user, a consultant, a distributor), as each has its own ax to grind.  

  • When that customer makes the decision to buy, has that decision been reached unilaterally, or was there another level of management involved?  
  • For that matter, does the buyer make decisions by committee?  Each of these affects how the product or service must be marketed (e.g., if to the CFO, price is certainly a major factor). 
  • Is this a one-time purchase, or does one sale lead to ongoing sales (such as in the case of consumables)? 
  • Are existing products being cannibalized, or is this a new category (think iPad versus iPhone)?  

This is just one of nine thoughts in a series of questions we recommend you consider before investing in a venture-stage company.  If you’d like to see all nine, please check out our white paper called Nine Leaps of Faith – 9 Key Questions for Evaluating Venture Stage Investments.





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