Lesson: Demand Horizon with Gerry Campbell

Step #4 Demand Discovery: The starting point is not vision; the starting point is a humble offering of an idea

So in the old world, the most important thing to think about is in the old world, you start by defining a product. Back in the early days of CompuServe, when we were going to create a new website, you would start by a vision. You would say, "I want to build this. I think the world needs this," and that vision would be based on experience, would be based on a bunch of different things.

You would build it. You'd write a document and that would be given to an engineer and they would make something and six months later, you get something you throw out on to the web or on to a computer, and you would sell it and you would push it. And ultimately, the alignment is difficult.

I worked at Compaq in late '90s and we built too many computers. So the price would drop and we wouldn't build enough computers, and everybody would get mad and the supply and demand was out of whack.

That same thing passed through to the way we design startups today. Here's the problem, why do you think there are so many apps in the app store that have never been downloaded? People don't need it.

The vision is driving the creation of the apps. People say, "Oh my gosh, I really want an app that tells me when I scan a UPC code, whether the food is gluten-free or not." Brilliant, right? That's a vision, but unless that's checked against demand, it's following the old method.

The new world, and what we're going to spend some time talking about is, demand discovery. So I'm making a very clear point here that demand is a resource that is to be discovered. The starting point isn't vision. The starting point is a humble offering of an idea.

Over 60% of the apps in the IOS App Store have never been downloaded, never once. So think about all the work that it takes, all the money it takes to create apps. People are chugging these things out, believing that they're on to something. Driving with a huge amount of passion because there are 1900 flashlight apps. Somebody believes that 1901 flashlight app is going to be the one that makes them happy, wealthy, fill in the blank, whatever. So the point is, there's a lot of failure everywhere.

I've talked about demand, I can wave my hands in the air and say demand is really important. Here's the way it breaks down. There's potential demand which is there in the market but hasn't formed into need for a product yet. There's current demand and there's declining. Declining is not interesting. It is interesting, people pay me to help think through that, it's not interesting in the realm of startups.

So let's talk about potential and current. Potential demand is identical to potential energy. There's something there, it's starting to be able to be actuated but it hasn't fully happened yet. This break right between here is where a couple of things happen. First of all, potential demand is all about the unknown. You bring up Steve Jobs, the unknown, how do people want their tablet? What was it going to be like? How many of them were people going to buy? What were the features? How big does the screen need to be? All of those things are the unknowns that lived in the realm of potential demand until the product hit the market, it became real and the current demand for the iPad surfaced. So that's the difference.

Now when you get into business theory there's some really interesting things about how the unknown worked with respect to the known. This is about risk, this is about unknown, the idea is that if you can see potential demand you have the opportunity to make some money.

The way I think about potential demand is now, think about you're standing in a marketplace. You're in a busy spot, kind of a medieval marketplace like in the movie Aladdin or something. You're there, it's just noise everywhere. And this is the noise; it's hard to tell what people are buying and selling. It's hard to tell what's going on and at some point you hear a signal. Somebody yells above the crowd, "I've got bananas." And now you hear people, "I want bananas." And that starts to gel into a noise or a signal you can hear.

That's the way it works in startups as well. I have an idea, I'm listening. I'm listening for the demand. Oh, the demand is in this way. And then that demand, as soon as there becomes a clear need for the demand, now the signal gets louder and louder and louder. Again, declining demand we're not interested in. But the idea that market demand is a signal that can be listened to, tuned into and understood is a really important idea.

What's happened in the market and my background in search having been at AltaVista and at AOL, I stumbled on something I didn't recognize that I knew it, but here's what I knew.

I knew that search, where somebody comes in and enters something into a search box, is a more valuable environment. It's the place where more business takes place; it's where more great things happen. And here is the great thing that happens.

If you look at advertising, a thousand display ads shown on a website, whether on the Huffington Post or pick your site, they're probably making somewhere between $2 per thousand in that ad. But a search engine where users come and expose their interest and into that search entry box they put what they're interested in, they put their demand into that, the revenues in that environment can go up to $1000 per thousand searches or even higher.

So $2 per thousand pages or $1000 per thousand pages. The economics are way off. What's driving that? Demand. When users come and expose their demand in a search entry box, that's where they create the awareness for the advertiser to come match that demand.

The point I'm making here is that if all business theory is based on the supply side driving the supply and demand balance and now because users go to search and they put their query in the box and expect everything to come to them.

People go the Chevy dealer and tell them I want a small to mid-size, blue turbo-charged thing with five seats and whatever and pretty much anything we want as consumers, whether it's information to us, advertising, the cars we drive; everything in our lives now has flipped.