If you start without any sense of the competition, you're setting yourself up for failure. The last thing you want to do is find out after weeks/months of development that there is a well-funded competitor offering everything you've got for free. Or worse, there is NO competition, and there's no market at all.

Doing the customer-development first is (sorry to beat a dead horse here) the way to go. For a few hundred bucks spent on adwords traffic and an unbounce page, you can get a sense of what if anything you can do to beat the competition, and see if there is a demand at the same time.

For most developers, a few hundred dollars equals a few hours of billable time, and is worth the investment.