Understanding market demand is one of the two fundamental elements that drives a new business forward. The other is proposing a credible solution to specific drivers of demand. The solution, thus, embodies knowledge in products and services that people want to use to address their needs, concerns or wants.
The fundamental structure of a solution is quite simple: Starts with the foundational technology, which enables key features/functions that when used by the end customer, produce tangible results that can be directly quantified as benefits. Just think of anything you purchased lately, why did you do it? I am sure you can come up with measurable reasons.
In this quantification, the user naturally takes into consideration the costs of purchasing, adopting, operating, and - less frequently - disposing of the new solution. The net result is the value the customer gains from using a new solution.
The scientist founder’s job is to ensure the value enjoyed by the customer can be delivered consistently and sustainably. To know this, the scientist founder needs to perform fundamental economic analysis on the products and services he or she offers. The economic analysis is not complicated, but has many moving parts that are linked to what the offering is, how it is produced, delivered, and serviced.
Fundamental Economic Analysis: Is the business viable?
There are many books written on economic analysis, micro-economics, and entrepreneurial finance. We will not attempt to summarize this here. However, we are going to show the scientist founder a path for building an intuition about the economics of their business venture.
It all starts with price.
Pricing is the first step scientist founders can take is to guess or estimate the initial target customer would pay to capture the net value of the product or service. As a side note, we are very aware of the fact that many important disruptive technologies may not have a market or may be too early in their development to command any price, but promise high future utility.
Such technologies, like drug research and development, Large Language Models for Artificial Intelligence, fusion technology for energy, etc., are rare cases in which massive investments are needed to create the option of developing a viable business once the technology matures and its uses are clearer. Needless to say, the majority of high-tech business startups are not following such a disruptive path. Most offer novel solutions to known problems.
The price mechanism allows trade. It is through pricing that strangers can agree on exchanging items that are dissimilar or hard to barter. Every new product and service requires a market (e.g. buyers available and willing to transact) to get acquired, adopted, used, evaluated, and disposed of. Any product and service in the economy, from a bar of soap to a Boeing 777 airplane, are traded on the settlement of economic terms via price.
Setting a price for a novel solution is hard. The scientist founder needs to consider many variables that his or her customer experiences, such as pricing of alternative solutions (including doing nothing), adoption costs, operating costs, disposal costs, technology and maintenance costs (e.g. obsolescence), to name a few.
Assuming the scientist founder did her homework and understood in detail the demand drivers of her target customer segment, she needs to fine-tune how to solve those needs within a pricing schema that lets the customer enjoy sufficient value while making the business operations for delivering that value financially viable for the scientist founder. Profits, in this context, need to be at least equal to the next-best use of the resources being put into the company (e.g. the founder’s time and money).
The scientist founder’s task is to design financially viable solutions within a pricing schema that delivers with high accuracy results the customers are looking for.