STARTUP

How to Use the ’20/20/20 Rule’ to Know If Demand For Your Startup Will Last

A simple, easy and cheap way to separate fad from a lasting opportunity.

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BY Eddie Yoon - 28 Jun 2017

PHOTO CREDIT: Getty Images

Startups are often reincarnated a few times before they hit their stride. Hitting the reset button is always costly--be it time, opportunity cost, or capital and cash flow, even if you do manage to 'fail fast and fail cheap.'

Having clarity and confirmation of demand for your startup is the obvious solution to avoiding a costly do over. So small and large companies pour huge resources into market research, market data and validation to ensure. And yet over 85 percent of new products fail and 95 percent of startups fail.

Beyond avoiding failure, having credible demand for your startup is the gift that keeps on giving. It can be manna from heaven for investors when you are either asking for more money, time or patience. It can give new life and energy for your team. It can frankly help convince skeptical customers to take a chance on you.

Don't Ask The Wrong Question The Wrong Way To Validate Demand

After nearly two decades of identifying and quantifying latent demand and successfully driving growth, my observation is that most folks are simply asking the wrong question the wrong way. The question most people ask when quantifying demand is like playing the lotto, where you have to guess the exact number (which is nearly impossible). The game people should be playing is over/under (which is a 50/50 shot). Secondly, you should not ask "if this will truly happen" but rather, "what would need to be true for this to happen".

Use the Simple, Fast and Cheap 20/20/20 Rule of Thumb

I have a simple rule of thumb I call the 20/20/20 rule to see if your idea for innovation or startup has staying power. The 20/20/20 rule asks:

  • What must be true for 20 percent of the population to have this unmet need?
  • Does it have a 20 year trajectory?
  • Is it occurring faster in the top 20 cities/local markets for your category?

Case Example-Nerds Lucha Grande

Nestl USA's confection team used the 20/20/20 rule to create a new product concept in just three weeks (vs. the typical three to four months) and rapidly launched in nine months (vs. the two year+ norm in consumer packaged goods). They took a legacy brand, NERDS, which consumers have deep affection for but lukewarm growth. Daniela Simpson, the director of marketing, and her team saw that Hispanics had a clear love and affection for candies like NERDS with fruity flavors more so than chocolate. They recognized the category did not have any true Latino brands and flavor profiles. But was this enough to make a big bet?

Using the 20/20/20 rule it was clear to them that while Hispanics are only 18 percent of the population today, they were on their way to clearly more than 20 percent. It was also clear that the love affair with Latino brands and flavor profiles was a 20-year up-trend in other categories. In the beer market, brands like Dos Equis and Modelo have been surging. In other aisles, tortillas has overtaken white bread and salsa has overtaken ketchup. And they saw that of the top 20 cities in the US, over half of them were already majority minority. In fact, these majority minority markets already account for 45 percent of the US GDP.

So Daniela and team made a bet that is paying off. At the recent 2017 Sweets and Snacks convention (the largest confections & snacks industry event in the US) , NERDS Lucha Grande won the award for the most innovative new product. It was selected by retailers across 300+ of the latest and greatest new products.

Look For the 20/20/20 Trends Around Us

Some people might be tempted to react to the Nestl story with some skepticism that the importance of Hispanics isn't new news. And that is the point. If it truly seems new and ground breaking, it probably doesn't pass the 20/20/20 rule. And that things that are not new, have probably not yet fully run its course, which means there is lots of opportunity still.

It's easy to apply across industries. Craft beer already has 20 percent dollar share, is 20 year long trend and is happening much faster in specific cities. When Netflix was at its absolute lowest point in 2011 after the price hike and Qwikster debacle, I wrote with confidence that Netflix's best years were ahead because the conversion to streaming is a 20 year trend. AirBnB, Blue Apron, iTunes and Lyft are all part of an unbundling movement that has been going on for decades.

Put it this way. If you have young children as I do, ask yourself this. What are the things they will and will not be doing when they are adults? My children will never know how to make a full pot of coffee thanks to Keurig and Nespresso, will always be able to binge TV thanks to Netflix and may very well never own a car or even drive a car. They may grow up believing that Nerds was always a Latino brand. The 20/20/20 rule is a great way to generational trends you can bet on with confidence.