Hi! My name is Eugene, and I’m a system analyst at Purrweb — a studio that designs and develops MVPs for startups. I communicate with startuppers a lot and often see their dreams crash and burn because no one calculated unit economics or questioned their target audience beforehand.
In this article, we will provide a simple guide for those who haven’t launched their startups yet but want their idea to rocket. In a few words, here is what you need to do:
- Identify the pain points your app covers
- Conduct CustDev interviews
- Calculate unit economics
- Calculate the market size
I can’t guarantee a triumph, but if you follow all the steps, you will be twice as successful as your competitors and will impress your investors. Make some tea and get ready for a long read with examples and practical tips — no copypasta from the Internet, just our real experience.
Step 1: identify the pain points your app covers
Often, startuppers come to me with the idea of creating a social network. I warn them right away that they will hardly benefit from such a project because it’s a delighter app. Such apps give users joy, but don’t address their needs — this is why it will be harder to make any profit from them. Would you pay for access to yet another Facebook twin? Or to react to posts or comments on Linkedin? I think that the answer is probably ‘No.’
Delighters pay off only in the long run when they scale up and grow. Then, major advertisers may come to you to get the attention of your audience. But users will hardly pay for your app, especially at the beginning.
Social networks are a typical example of delighters. This category also includes short video services like TikTok and mobile games. Look at the reasons why people use them every day 👇
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| To react to pictures with cats | To scroll around on some funny videos | To communicate with friends and share a couple of memes with them |
Developing delighters is a profitable business for corporations that are ready to invest a lot of money in an app and wait for a few years till it pays off. Startuppers need to get profit as soon as possible — delighters are not good for this purpose.
It’s more profitable for a startup to begin with a painkiller — an app that covers somebody’s needs. First, identify your prospective user’s pain points, something that bothers and irritates them, or doesn’t make them feel comfortable. Answer these questions before you start the development:
Painkillers are so beneficial that their elements are being implemented into the classic delighters. For example, Telegram offers a paid subscription that allows businesses to have a professional web presence and multi-agent support. YouTube Premium lets users listen to podcasts and music even when the screen is blocked.
Here are the painkillers we created in Purrweb 👇
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| Online therapy service
for online consultations |
App for fitness coaches
Allows them to plan workout sessions and track customers’ performance |
App for organizing parties with friends.
Here, users can plan all the important details, such as location, time, etc. |
If you understand that you are developing a delighter, I highly advise you to turn it into a painkiller app. For example, narrow down your audience and search for the problems they want to solve. Then, there will be more chances that your app will find its users, and they will be willing to pay for the service.
Step 2: conduct CustDev interviews
I know how hard it is to reject your own ideas. Or to make even the smallest changes in them. But being in a euphoric state, startuppers are at risk of creating an isolated app with no audience or purpose. And if the market doesn’t need your startup — your business dies. This is why you need to conduct CustDev interviews before the development, talk to the prospective users, and find out what is important for them. It’s not as hard as it seems.
Interview about 20 people, if you develop an app in an industry that you know well, and if you don’t — talk to ~40 people instead. There are a few different ways to find respondents. Here are the easiest and most convenient of them 👇
Talk to the people you know. It’s OK even to interview your friends. But you must ask about the facts from their lives instead of some vague hypothesis — otherwise, the answers will be useless. Formulate the questions in such a way that even your mother will have to answer fairly.
At first, it may be hard to formulate questions based on facts, but after a couple of CustDev interviews later, you’ll become a real pro.
«Spam» people on social networks. Cold talks are not a bad solution. You can write directly that you are developing an app and want to gather the opinions of the potential users. From my experience, I can tell you that people are willing to cooperate.
Outsource this task for a small price. With services like Upwork, you can find people who will conduct CustDev interviews for a reasonable cost. You set the price yourself. To avoid wasting your budget, ask each freelancer to conduct one CustDev interview, then select the most trustworthy executor and entrust the rest of the work to them.
Hire a development agency. If your users are businessmen and top managers of some companies, you will hardly be able to have any CustDev interviews without connections. These people’s time is expensive, and they can ignore your request. There is a way out — turn to an agency. For example, we at Purrweb have contact details of many different startuppers, managers, and CTOs, with whom we constantly keep in touch. Among other things, we engage them in CustDev interviews for our clients.
If, after your CustDev interviews, you understand that people are not enthusiastic about your idea, look for another hypothesis or think about where to pivot the project you have. Here, you won’t be able to succeed without running through different options. Holding on to a hopeless idea only postpones your success, even if it is painful to admit it.
💡 Example from our practice. Once, I conducted CustDev interviews for a mobile diet planning app. It had already been released, but users kept disappearing — we had to find out why. The idea was for people to enter their weekly menu and get a list of products for shopping. The idea was to save users’ time.
Five CustDev interviews later, it became clear that there was no real need for this app. We asked our respondents how bad they felt if they didn’t plan their diet beforehand. People chose 2–5 points out of 10 — this meant that the problem didn’t bother them. This way, thanks to CustDev interviews, the startupper understood that he needed to pivot to a more intense need.
Step 3: calculate unit economics
Sometimes, startuppers don’t calculate unit economics beforehand. Their logic tells them not to go for the touchdown before they catch the pass or get users. They want to start calculating when users come. There is also an illusion that calculations require a lot of data, but there is nowhere to get it from.
Actually, to figure out the initial unit economics, you don’t need to have a scientific degree. Any startupper can calculate indicators. You will understand with what figures your app brings money, and then you’ll be able to make a top-notch investor presentation. Of course, the forecast is going to be approximate. To calculate unit economics down to the smallest details, you will have to go to analysts from a development agency. But even an approximate forecast is still better than nothing.
The most important thing in unit economics is to calculate the number of users over a month. If you take half a year or more, the parameters will be too vague and average.
Here are three important metrics of unit economics 👇
AC (User Acquisition Cost) is the cost of attracting one user. To calculate it, divide the money you spent to attract all the users by the number of users you got. These can be spending such as advertising from bloggers and targeted ads on social networks.
ARPС (Average Revenue per Customer) is the average income you get from one customer. Here, you multiply an average payment from one customer by their average number of payments. As a rule, they pay only once, but this depends on your app.
LTV (Lifetime Value) or Average Margin Per User (AMPU) is the revenue a user brings in over the entire period of interaction with your app. Multiply ARPC by the percent of the profit margin from the average payment and by the percentage of conversion to purchase. Don’t worry, I’ll explain everything now.
The profit margin is the percentage of checksum we get from selling; we must subtract variable costs from 100%. For example, if our average checksum is $3, and our profit margin is 70% of this sum, then taxes and variable costs make 30% from the check. For example, it can be the fee charged by the payment system we use to receive payments in the app.
Now, calculate conversion to purchase. For the B2B segment, it is estimated in the hundreds and thousands of percent. I recommend you to turn to an agency for analytics if you need precise numbers. The B2C users can use the benchmarks:
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- 1% and less — users don’t really need the app and can solve their problems without it. For example, they meditate with a simple phone timer without a special program — but their life can get better with your startup.
- 50% and more — users really need your app. For example, they download a taxi aggregator to order a taxi right away.
AC = Cost of acquiring users ÷ Number of users you got
ARPС = Average payment per customer × Number of payments per customer
LTV = ARPС × Profit margin from an average payment × Conversion to a purchase
Finally, compare the results: ideally, AC should be lower than LTV/AMPU. In this case, the app will bring in money instead of taking it from startuppers and investors.
It’s vital to calculate the real figures — otherwise, you’ll just fantasize over unit economics. Here, you can benefit from your experience with previous startups, communication with other entrepreneurs, and — the best of all — turning to a development agency.
If you want to learn more details about the magic of metrics, read a special article about the key metrics in our blog.
Step 4: calculate the market size
If you don’t have a degree in economics, the advice to calculate the market may discourage you, as it’s unclear how to do it. For example, in the US, there are over 260 million grown-ups, and nearly everyone has a smartphone in their pocket. Does this mean that we have 260 million prospective users? Huh… that was easy. Sorry to give you this spoiler, but no 🙂
In real life, if people don’t need it, they will not install even the most convenient app in the world. That’s why you need to figure out how many users you need for your future product and compare this number with the potential real indicators. This is called calculating the market size.
You don’t have to immediately become an economist and calculate the market size down to a dollar. It’s enough just to approximately estimate the general size. This is what you need to do 👇
- Determine the customer segment of your app, and clearly define the demand and geographical limits. For example, you may want to make a dating app for New Yorkers.
- Calculate the potential users of your app. You can do this by analyzing search queries in such services as Google Trends. In filters, choose the region where you plan to launch the app.
Google Trends shows that the phrase “dating app” is frequently searched for in Nigeria and Ghana — this shows that there is a strong demand for the app in these regions
If the market has more potential users than the minimum you need, it’s a perfect fit — you are doing everything right. If not, try looking at your segment from a different perspective. Perhaps the audience is actually wider. For example, it’s easy to attract those who have just recently become parents to use a pregnancy tracker for their next pregnancy. You need only to add useful information about baby care and a weaning chart.
💡 Real-world example. Once, I knew a startupper who got money from investors thanks to his amazing charisma. It was quite a lot of money, $120,000. He planned to make a service for real estate advertisements, but the startupper neither calculated the market size nor conducted CustDev interviews. As a result, the app was not finished, and they went to the market with great effort and a single complete fragment. They didn’t even attract their first paying users, and the investments didn’t pay off. Six months of work and thousands of dollars were wasted.
What to do before the development: summary
Let’s sum it up. To find your user, increase your chances of attracting investors, and succeed, you need to:
- Identify the pain points of your future users. This means finding the problem that doesn’t let them live in comfort. I insist on starting with a painkiller: you will cover the costs and find users faster.
- Conduct CustDev interviews. Interview 20 to 40 people. Ask them about their past experience and avoid abstract stuff like: “Will you use my app when I finish it?” Emphasize the important things, the features they want to have in the app, and under what conditions they are willing to download it.
- Calculate the unit economics. Your spending per customer should be less than the profit they bring.
- Calculate the market size. If you need 1,000 users to cover the cost, but only 100 people in the market actually need your app, your startup is not likely to rocket. Try to expand your target audience and add new features.
You can say: “Great! I got it, I’ll take four steps, but what’s next?” Next, you need to create a Minimal Viable Product (MVP) to show it to investors and collect feedback from your first users. Then, refine it and launch your startup.
In Purrweb, we create MVPs in various industries — from traveling to fintech. In total, we have released over 300 MVPs. You can find more useful content about startups in the blog on our website.
