02/11/14

Customer Financing: Is It Right For You?

I love technology especially when it consolidates and streamlines something I use or do daily with a simple and sexy looking design. Every once in a while I get really excited about new innovations that will affect my every day life.

Recently I came across Coin on a Facebook advertisement. Usually I don’t click on these ads but this one caught my attention. After watching their concept video, I was sold. I’m always looking for ways to consolidate my wallet and this was a huge solution. All my credit cards and gift cards on one card? I want it!

The interesting thing about coin is their product isn’t even ready for consumer purchase, yet. You can pre-order it for half of the normal cost at $50 with the promised date this summer. In a CNN Money article, CEO of coin said it hit its fundraising goal of $50,000 in forty minutes.

Fred Wilson, venture capitalist and managing partner of two venture capital firms, wrote a blog post about this titled “Financing Options: Customers”. In this post he states the benefits of financing your company through your customers:

 “Customers are a great way to finance a business for many reasons. First, customer financing is typically non dilutive. They want something from you other than equity in your business. Customers also help you fit your product to the market. And customers will help debug and improve the quality of the product. An early customer will give you credibility with other customers. And an early customer may spend more with your company down the road.”

He continues on to point out that using your customers to finance your business is difficult—maybe even impossible in some situations. I think this option of “financing” really depends on the problem your product solves, can you actually make it, the price, your target audience, and how much money you’re will to investing into marketing early on.

Here are some questions you should ask yourself before jumping with both feet into financing through customers:

Does the product solve a pervasive problem?

The more universal the problem, the bigger your target market is going to be. Early adopters want a product that isn’t only going to solve their problem but it’s simple and sexy. If you product can solve a pervasive problem, it’s simple and easy to use, and it’s sexy — the more likely you’ll reach your fundraising goal.

Is the product feasible?

People come up with great ideas everyday. You need to show and explain to your customer that you can make the product. If your product can’t be done in a reasonable amount of time, don’t expect customers to buy-in to your product.

What am I going to price it at?

Price is one of the most important factors. It can make or break any product or service. There are many different philosophies to setting a price for a product. The main questions you should be asking yourself when looking into pricing should be:

  • Will my customer buy my product at this price?
  • What is my breakeven point?
  • At this price what are my margins looking like?

However you choose your pricing just make sure you don’t throw a dart at board to pick it.

Who is your target audience?

The ignorant answer is “everyone!” In reality there is no product that everyone will buy. Pick one or two target markets to focus on. Create a persona of their challenges, needs, wants, lifestyle, and income. Get down into the details — give him/her a name and even a face. This will help your product better resonate with your target audience.

How much money do we have to spend on marketing?

Marketing is your best friend when trying to get your customers to finance your start-up idea. You’re going to need to create a prototype, video(s) demoing the product, and several different types of lead gen marketing to get people to visit and make a purchase on your website.

Starting a new business and launching an innovative product can be scary especially when it comes to getting the right capital. The most important thing to do is to look at all your financing options available to take advantage of. You know what they say, “It takes money to make money.”

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About the author

Mike Alder
Mike Alder is a University of Utah business marketing student and marketing specialist at Lendio. Passionate about entrepreneurship, small businesses, and inbound marketing. Mike shows his passion by sharing stories of successful entrepreneurs and companies with small business owners on the Lendio blog. He makes these big success stories easy-to-apply in simple and easy to read language for the everyday small business owner and entrepreneur.  

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