“So what is it that makes some startups successful and leaves others selling off their furniture? Simply this: startups that survive the first few tough years do not follow the traditional product-centric launch model….[The] winners invent and live by a process of customer learning and discovery….This book describes the ‘Customer Development’ model in detail. The model is a paradox because it is followed by successful startups, yet articulated by no one. Its basic propositions are the antithesis of common wisdom yet they are followed by those who succeed. It is the path that is hidden in plain sight” (pp. iv, v).
What is the Product Development model?
- Concept and Seed: “[Founders] capture their passion and vision for the company and turn them into a key set of ideas, which quickly become a business plan….Next, issues surrounding the product need to be defined: What is the product or service concept? Is it possible to build?….Second, who will the customers be and where will they be found?….Step three probes how the product will ultimately reach the customer and the potential distribution channel….pricing…financial plan”(pp. 2-3).
- Product Development: “Everyone stops talking and starts working. The respective departments go to their virtual corners as the company begins to specialize by functions….Engineering…. Marketing” (p. 3).
- Alpha/Beta Test: “Engineering works with a small group of outside users to make sure the product works as specified and tests it for bugs. Marketing develops a complete marketing communications plan, provides Sales with a full complement of support material, and starts the public relations bandwagon rolling” (p. 4).
- Product Launch and First Customer Ship: “Product launch and first customer ship is the final step in this model, and what the company has been driving for. With the product working (sort of), the company goes into ‘big bang’ spending mode. Sales is heavily building and staffing a national sales organization…” (p. 4)
What’s wrong with the Product Development model?
- Where are the Customers? “To begin with, the Product Development diagram completely ignores the fundamental truth about startups and all new products. The greatest risk — and hence the greatest cause of failuire — in startups is not the development of the new product but in the development of customers and markets. Startups don’t fail because they lack a product; they fail because the lack customers and a proven financial model” (p. 5).
- The Focus on First Customer Ship Date: “Using the Product Development model forces sales and marketing to focus on the first customer ship date. Most competent sales and marketing executives look at the first customer ship date. look at the calendar on the wall, and then work backwards figuring out how to do their job in time….The flaw in this thinking is that ‘first customer ship’ is only the date when Product Development thinks they are ‘finished’ building the product. The first customer ship date does not mean the company understands its customers or how to market or sell to them….Obviously, your new division or company wants to get a product to market and sell it, but that cannot be done until you understand who you are selling your product to and why they are buying it” (p. 5).
- An Emphasis on Execution Instead of Learning and Discover. “In startups the emphasis is on ‘get it done, and get it done fast.’ So it’s natural that heads of Sales and Marketing believe they are hired for what they know, not what they can learn….This is usually a faulty assumption. Before we can sell a product, we have to ask and answer some basic questions: What are the problems our product solves? Do customers perceive these problems as important or ‘must have?’ If we’re selling to consumers, how do we reach them? How big is this problem? Who do we make the first sales call on? Who else has to approve the purchase? How many customers do we need to be profitable? What is the average order size?…For startups in a new market, these are not merely execution activities; they are learning and discovery activities critical to the company’s success or failure” (p. 6).
- A Lack of Meaningful Sales, Marketing, and Business Development Milestones. “What kind of objectives should a startup want or need? That’s the key question. Most executives and marketers focus on execution activities because at least these are measurable. For example, in sales, revenue is the number one thing that matters….Some startup sales execs also believe hiring the core sales team is a key objective….In reality none of these are true objectives. Simply put, a startup should focus on reaching a deep understanding of customers and their problems, discovering a repeatable road map of how they buy, and building a financial model that results in profitability. The appropriate milestones measuring a startup’s progress answers these questions: How well do we understand what problems customers have? How much will they pay to solve those problems? Do our product features solve these problems? Do we understand our customers’ business? Do we understand the hierarchy of customer needs? Have we found visionary customers, one who will buy the product early? Is our product a must-have for those customers? Do we understand the sales road map enough to consistently sell the product? Do we understand what we need to be profitable? Are the sales and business plan realistic, scalable, and achievable? What do we do if our model turns out to be wrong?” (p. 7).
- The Use of a Product Development Methodology to Measure Sales. “[The Product Development Plan] calls for selling in volume the day Engineering is finished building the product. What plan says that? Why, the business plan, which uses the Product Development model to set milestones. The consequences is selling isn’t predicated on discovering the right market or whether any customers will shell out cash for your product. This ‘ready or not, here we come’ attitude means you won’t know if the sales strategy and plan actually work until after first customer ship” (p. 8).
- The Use of a Product Development Methodology to Measure Marketing. “The head of Marketing looks at the same [process] and sees something quite different….For Marketing, first customer ship means feeding the sales pipeline with a constant stream of customer prospects….At first glance this process may look quite reasonable, except for one small item: all this marketing activity occurs before customers start buying — that is, before Sales has had a chance to actually test the positioning, marketing strategy, or demand-creation activities in front of real customers” (p. 9).
- Premature Scaling.
- Death Spiral.
“The Customer Development model of a startup starts with a simple premise: learning and discovering who a company’s initial customers will be, and what markets they are in, requires a separate and distinct process from Product Development….Before any of the traditional functions of selling and marketing can happen, the company has to prove a market could exist, verify someone would pay real dollars for solutions the company envisions, and then go out and create the market….Where Product Development is focused on first customer ship, the Customer Development model moves learning about customers and their problems as early in the development process as possible. In addition, the model is built on the idea that every startup has a set of definable milestones no amount of funding can accelerate” (p. 15).
What is the Customer Development Model?
“Most startups lack a process for discovering their markets, locating their first customers, validating their assumptions, and growing their business” (p. 18).
“Broadly speaking, Customer Development focuses on understanding customer problems and needs, Customer Validation on developing a sales model that can be replicated, Customer Creation on creating and driving end user demand, and Company Building on transitioning the organization from one designed for learning and discovery to a well-oiled machine engineered for execution” (p. 19).
“[Each] step in the Customer Development model is iterative. That’s a polite way of saying, ‘Unlike Product Development, finding the right customers and market is unpredicable, and we will screw up several times before we get it right'” (p. 19).
Step 1: Customer Discovery. The goal of Customer Discovery is…finding out who the customers for your product are and whether the problem you believe you are solving is important to them. More formally, this step involves discovering whether the problem, product and customer hypotheses in your business [model] are correct” (p. 20).
Step 2: Customer Validation. The goal of this step is to build a repeatable sales road map for [the sales and marketing teams to follow later….”In essence, Customer Discovery and Customer Validation corroborate your business model. Completing these first two steps verifies your market, locates your customers, tests the perceived value of your product, identifies the economic buyer, establishes your pricing and channel strategy, and checks out your sales cycle and process. If, and only if you find a group of repeatable customers with a predictable sales process, and then find those customers yield a profitable business model, do you move to the next step (scaling up and crossing the Chasm)” (p. 21).
Step 3: Customer Creation. “Customer creation builds on the success the company has had in it initial sales. Its goal is to create end-user demand and drive that demand into a company’s sales channel. This step is placed after Customer Validation to move heavy marketing spending after the point where a startup acquires its first customers, thus allowing the company to control its cash burn rate and protect its most precious asset” (p. 22).
Step 4: Company Building. “Company building is where the company transitions from its informal, learning and discovering-oriented Customer Development team into formal departments with VPs of Sales, Marketing and Business Development. [Founders] now focus on building mission-oriented departments exploiting the company’s early market success” (p. 22).
Notes on Customer Discovery
“So the general goal of Customer Discovery amounts to this: turning the founders’ initial hypotheses about their market and customers into facts” (p. 33).
“In a startup, the first product is not designed to satisfy the mainstream customer. No startup can afford the engineering effort or the time to build a product with every feature a mainstream customer needs in its first release….A successful startup solves this conundrum by focusing its development and early selling efforts on a very small group of early customers who have bought into the startup’s vision….But we need a key word to describe visionary customers — those who will not only spread the good news about unfinished and untested products but also buy them. For that reason I often refer to them as earlyevangelists” (p. 35).
“Early evangelists can be identified by these customer characteristics
- The customer has a problem.
- The customer understands he or she has a problem.
- The customer is actively searching for a solution and a timetable for finding it.
- The problem is painful enough that customer has cobbled together an interim solution.
- The customer is committed, or can quickly acquire, budget dollars to solve the problem” (p. 35).
“You can think of these characteristics as making up a scale of customer pain [the lower on the scale, the more pain and the more likely a customer]” (p. 35).
“The purpose of Customer Development is to identify those key visionary customers, understand their needs, and verify your product solves a problem they are willing to pay to have solved — or not. Meanwhile, you start development based on your initial vision, using your visionary customers to test whether that vision has a market. And you adjust your vision according to what you find out” (p. 36).
Overview of the Customer Discovery Process
“Phase 1 is a rigorous process of writing a series of briefs that capture the hypotheses embodied in your company’s vision. These hypotheses are the assumptions about your product, customers, pricing, demand, market, and competition you will test in the remainder of this step [i.e., business model canvas exercise]. In Phase 2 you qualify those assumptions by testing them in front of potential customers. At this point you do very little talking and a lot of listening. Your goal is to understand your customers and their problems, and while doing so get a deep understanding of their (emphasis mine) business….In Phase 3 you take your revised product concept and test its features in front of customers. The goal is not to sell the product but to validate the Phase 1 hypotheses by having customers says ‘Yes, these features solve our problems.’ At the same time you’ve been testing the product features, you’ve also been testing a bigger idea: the validity of your entire business model….In front of potential buyers, you test your pricing, your channel strategy, your sales process,and sales cycle, and discover who is the economic buyer (the one with the budget)….Finally, in Phase 4 you stop and verify you understand customers’ problems, the product solves those problems, customers will pay for the product, and the resulting revenue will result in a profitable business model” (pp. 37, 38).
Notes on Customer Validation
“In the Customer Validation step, you are not going to hire and staff a sales team. You are definitely not not going to be executing your “sales strategy.” The reality is that you simply do not know enough to do any of these things. You may have your hypotheses about who will buy, why they will buy, and at what price they will buy, but until you validate those hypotheses, they are all educated guesses. One of the major outcomes of Customer Validation is a proven and tested sales road map. You will create this map by learning how to sell a small set of early visionary customers (earlyevangelists). They will actually pay for the product — sometimes months or even years before it is completed. However, the goal of this step is not to be confused with “selling.” The reality is you care less about the revenue you generate than you do about finding a scalable and repeatable sales process. Building a road map to sales success, rather than building a sales organization, is the heart of the Customer Validation step” (p. 82).
“A sales road map answers the basis questions involved with selling your product: Who influences a sale? Who recommends a sale? Who is the decision maker? Who is the economic buyer? Who is the saboteur? Where is the budget for purchasing the type of product your selling? How many sales calls are needed per sale? How long does the average sale take from beginning to end? What is the selling strategy? Is this a solution sale? If so, what are the ‘key customer problems?’ What is the profile of the optimal visionary buyer, the early evangelist every startup needs?” (p. 83).
Overview of the Customer Validation Process
Phase 1 consists of a series of “getting ready to sell” activities: articulating a value proposition, preparing sales materials and a preliminary collateral plan, developing a distribution channel plan and a sales road map, hiring a sales closer, ensuring your product and Customer Development teams agree about product features and dates, and formalizing your advisory board. Next, in Phase 2, you leave the building and put your now well-honed product idea to the test: will customers validate your concept by purchasing your product? You will attempt to actually sell customers an unfinished and unproven product, without a professional sales organization….With a couple of orders under your belt, you have enough information to move to Phase 3, in which you take your first cut at an initial positioning of the product and of the company….Finally, in Phase 4 you validate whether the company is finished with Customer Validation. Do you have enough orders proving your product solves customer needs? Do you have a profitable sales and channel model? Do you have a profitable business model? Have you learned enough to scale the business?” (p. 85).