48 hours customer development

Customer Development

Steve Blank

www.steveblank.comTwitter: sgblank

Five Short Stories

Not All Startups Are Equal

Small Business

Startup

Small Business Startups

• Serve known customer with

known product

• Feed the family

Small Business

Startup

Exit Criteria

- Business Model found

- Profitable business

- Existing team

< $1M in revenue

Small Business Startups

• known customer

known product

• Feed the family

Small Business

Startup

- Business Model found

- Profitable business

- Existing team

< $10M in revenue

Small Business Startups

• 5.7 million small businesses in the U.S. <500 employees

• 99.7% of all companies

• ~ 50% of total U.S. workershttp://www.sba.gov/advo/stats/sbfaq.pdf

ScalableStartup

Large Company>$100M/year

Scalable Startup

Goal is to solve for:

unknown customer and

unknown features

ScalableStartup

Large Company>$100M/year

Exit Criteria

-Total Available Market > $500m

- Can grow to $100m/year

- Business model found

- Focused on execution and process

Scalable Startup

ScalableStartup

Large Company>$100M/year

-Total Available Market > $500m

- Can grow to $100m/year

- Business model found

- Focused on execution and process

- Typically requires “risk capital”

Scalable Startup

• In contrast a scalable startup is designed to grow big

• Typically needs risk capital

• What Silicon Valley means when they say “Startup”

ScalableStartup

Large Company

-Business Model found

- i.e. Product/Market fit

- Repeatable sales model

- Managers hired

What’s A Startup?

A Startup is a temporary organizationused to

search for a scalable business model

Search Execute

ScalableStartup

Large Company

Transition

-Founders depart

- Professional Mgmt

- Process

- Beginning of scale

What VC’s Don’t Tell You:

The Transition – Founders Leave

Build ExecuteSearch

TransitionLarge

CompanyScalableStartup

Sustaining Innovation

•Existing Market / Known customer

•Known product feature needs

Large Company Sustaining Innovation

Large Company Disruptive Innovation

New Division TransitionLarge

Company

Disruptive Innovation

• New Market / Unknown customer needs

• New tech / Unknown product features

• Looks like a scalable startup

Why Startups Are Not Small

Versions of Large Companies

ScalableStartup

Large Company

Transition

Business Model found

- customer needs/product features found

i.e. Product/Market fit

- Found by founders, not employees

- Repeatable sales model

- Managers hired

The Search for the Business Model

Startups Search and Pivot

ScalableStartup

Large Company

Transition

-Business Model found

- Product/Market fit

- Repeatable sales model

- Managers hired

- Cash-flow breakeven

- Profitable

- Rapid scale

- New Senior Mgmt

~ 150 people

The Search for the Business Model The Execution of the Business Model

Startups Search, Companies Execute

ScalableStartup

LargeCompany

Transition

Traditional Accounting

-Balance Sheet

- Cash Flow Statement

- Income Statement

The Execution of the Business Model

Metrics Versus Accounting

ScalableStartup

LargeCompany

Transition

Startup Metrics

- Customer Acquisition Cost

- Viral coefficient

- Customer Lifetime Value

- Average Selling Price/Order Size

- Monthly burn rate

- etc.

Traditional Accounting

- Balance Sheet

- Cash Flow Statement

- Income Statement

The Search for the Business Model The Execution of the Business Model

Metrics Versus Accounting

ScalableStartup

LargeCompany

Transition

Sales

-Sales Organization

- Scalable

- Price List/Data Sheets

- Revenue Plan

The Execution of the Business Model

Customer Validation Versus Sales

ScalableStartup

LargeCompany

Transition

Customer Validation

- Early Adopters

- Pricing/Feature unstable

- Not yet repeatable

-“One-off’s”

- Done by founders

Sales

- Sales Organization

- Scalable

- Price List/Data Sheets

- Revenue Plan

The Search for the Business Model The Execution of the Business Model

Customer Validation Versus Sales

ScalableStartup

Large Company

Transition

Product Management

- Delivers MRD’s

- Feature Spec’s

- Competitive Analysis

- Prod Mgmt driven

The Execution of the Business Model

Customer Development Versus

Product Management

ScalableStartup

Large Company

Transition

Customer Development

- Hypothesis Testing

- Minimum Feature Set

-Pivots

-Founder-driven

The Search for the Business Model The Execution of the Business Model

Customer Development Versus

Product Management

Product Management

- Delivers MRD’s

- Feature Spec’s

- Competitive Analysis

ScalableStartup

Large Company

Transition

The Execution of the Business Model

Engineering Versus

Agile Development

Engineering

- Requirements Docs.

- Waterfall Development

- QA

- Tech Pubs

ScalableStartup

Large Company

Transition

Agile Development

- Continuous Deployment

- Continuous Learning

- Self Organizing Teams

- Minimum Feature Set

- Pivots

The Search for the Business Model The Execution of the Business Model

Engineering Versus

Agile Development

Engineering

- Requirements Docs.

- Waterfall Development

- QA

- Tech Pubs

ScalableStartup

Large Company

Transition

- Plan describes “knowns”

- Known features for line extensions

- Known customers/markets

- Known business model

The Execution of the Business Model

Startups Model, Companies Plan

ScalableStartup

Large Company

Transition

-Unknown customer needs

- Unknown feature set

- Unknown business model

- Model found by iteration

The Search for the Business Model

Startups Model, Companies Plan

The Execution of the Business Model

-Plan describes “knowns”

- Known features for line extensions

- Known customers/markets

- Known business model

ScalableStartup

Large Company

Transition

-Pains in the butt

- Always looking at something different

- Doesn’t get with the program

Startups Protect Mavericks,

Companies Fire Mavericks

The Execution of the Business Model

ScalableStartup

Large Company

Transition

-Pains in the butt

- Always looking at something different

- Doesn’t get with the program

The Search for the Business Model

Startups Protect Mavericks,

Companies Fire Mavericks

The Execution of the Business Model

- CEO of your company

-Finds your next market

ScalableStartup

Large Company

Transition

- Business Model found

- Product/Market fit

- Repeatable sales model

- Managers hired

- Cash-flow breakeven

- Profitable

- Rapid scale

- New Senior Mgmt

~ 150 people

Startups Don’t Last Forever

You failif you remain a startup!

Plan versus Model

Business Plan

• A document your investors make you write that they

don’t read

• A useful place for you to collect your guesses about

your business

- Size of Opportunity

- Customers

- Channel

- Demand Creation

- Revenue/Expenses/Profit

• The template to look like everyone else when you

present to VC’s/Management

No Business Plan survives first

contact with customers

So Search for a Business Model

What Is a Business Model?

• Diagram of flows between company and customers

• Scorecard of hypotheses testing

• Rapid change with each iteration and pivot

• Product Management-driven

* Alex Osterwalder

VALUE

PROPOSITION

COST

STRUCTURE

CUSTOMER

RELATIONSHIPTARGET

CUSTOMER

DISTRIBUTION

CHANNELVALUE

CONFIGURATION

CORE

CAPABILITIES

PARTNER

NETWORK

REVENUE

STREAMS

gives an overall view of

a company's bundle of

products and services

portrays the network of

cooperative

agreements with other

companies

describes the channels

to communicate and

get in touch with

customers

describes the

arrangement of

activities and resources

explains the

relationships a

company establishes

with its customers

sums up the monetary

consequences to run a

business model

describes the revenue

streams through which

money is earned

describes the

customers a company

wants to offer value to

outlines the capabilities

required to run a

company's business

model

INFRASTRUCTURE CUSTOMER

OFFER

FINANCE

Business Model = Keeping Score in a Startup

Any Business Model in 9 Boxes

But,

Realize They’re Hypotheses

9 Guesses

Guess Guess

Guess

Guess

Guess

Guess

Guess

GuessGuess

How Do Startups Search For A

Business Model?

• The Search is called Customer Development

• The Implementation is called Agile Development

The Lean Startup

Customer

Development

Solving For Customer Risk:

Customer Development

Customer Development

Get the Hell Out of the Building

The founders

^

More startups fail from

a lack of customers than from a

failure of product development

Yet All We Had WasThis…

Concept/Seed Round

Product Dev.

Alpha/Beta Test

Launch/1st Ship

New Product Introduction Model

A Critical Assumption…

Concept/Seed Round

Product Dev.

Alpha/Beta Test

Launch/1st Ship

New Product Introduction Model

Customer Problem: known

Tradition – Hire Marketing

Concept/Seed Round

Product Dev.

Alpha/Beta Test

Launch/1st Ship

- Create Marcom Materials

- Create Positioning

- Hire PR Agency- Early Buzz

- Create Demand- Launch Event- “Branding”

Marketing

Tradition – Hire Sales

Concept/Seed Round

Product Dev.

Alpha/Beta Test

Launch/1st Ship

- Create Marcom Materials

- Create Positioning

- Hire PR Agency- Early Buzz

- Create Demand- Launch Event- “Branding”

• Build Sales Organization

Marketing

Sales • Hire Sales VP• Hire 1st Sales Staff

Tradition – Hire Bus Development

Concept Product Dev.

Alpha/Beta Test

Launch/1st Ship

- Create Marcom Materials

- Create Positioning

- Hire PR Agency- Early Buzz

- Create Demand- Launch Event- “Branding”

• Hire Sales VP• Pick distribution Channel

• Build Sales Channel / Distribution

Marketing

Sales

• Hire FirstBus Dev

• Do deals for FCSBusiness

Development

Tradition – Hire Engineering/

Product Mgmt

Concept Product Dev.

Alpha/Beta Test

Launch/1st Ship

- Create Marcom Materials

- Create Positioning

- Hire PR Agency- Early Buzz

- Create Demand- Launch Event- “Branding”

• Hire Sales VP• Pick distribution Channel

• Build Sales Channel / Distribution

Marketing

Sales

• Hire FirstBus Dev

• Do deals for FCSBusiness

Development

Engineering/

Product Mgmt

• Write MRD • Waterfall • Q/A •Tech Pubs

Traditional Product Introduction:Two Implicit Assumptions

Concept Product Dev.

Alpha/Beta Test

Launch/1st Ship

Customer Problem: known

Product Features: known

Customer Development

Concept/Bus. Plan

Product Dev.

Alpha/Beta Test

Launch/1st Ship

Product Development

CustomerDevelopment

CompanyBuilding

CustomerDiscovery

CustomerValidation

Customer Creation

+

• Stop selling, start listening

• Test your hypotheses

• Continuous Discovery

• Done by founders

Customer Discovery

CustomerDiscovery

CustomerValidation

CompanyBuilding

CustomerCreation

Test

Hypotheses:

•Product

• Market Type

• Competition

Turning Hypotheses to Facts

Test

Hypotheses:

•Problem

• Customer

• User

• Payer

Test Hypotheses:

•Channel

Test

Hypotheses:

•Problem

• Customer

• User

• Payer

Test

Hypotheses:

•Demand

Creation

Test Hypotheses:

•Channel

Test

Hypotheses:

•Product

• Market Type

• Competitive

Test Hypotheses:

•Pricing Model / Pricing

Test Hypotheses:

•Size of Opportunity/Market

• Validate Business Model

Test

Hypotheses:

•Channel

• (Customer)

• (Problem)

Test

Hypotheses:

•Problem

• Customer

• User

• Payer

Test

Hypotheses:

•Demand

Creation

Test Hypotheses:

•Channel

Test

Hypotheses:

•Product

• Market Type

• Competitive

Test Hypotheses:

•Pricing Model / Pricing

Test Hypotheses:

•Size of Opportunity/Market

• Validate Business Model

Test

Hypotheses:

•Channel

• (Customer)

• (Problem)Customer

Development

Team

Agile

Development

Test

Hypotheses:

•Problem

• Customer

• User

• Payer

Test

Hypotheses:

•Demand

Creation

Test Hypotheses:

•Channel

Test

Hypotheses:

•Product

• Market Type

• Competitive

Test Hypotheses:

•Pricing Model / Pricing

Test Hypotheses:

•Size of Opportunity/Market

• Validate Business Model

Test

Hypotheses:

•Channel

• (Customer)

• (Problem)Customer

Development

Team

Agile

Development

Testing the Business Model is

Customer Development

CustomerDiscovery

CustomerValidation

CompanyBuilding

CustomerCreation

Pivot

Search Execution

Customer Discovery

Customer

Discovery

Phase 1AuthorHypothesis

Phase 2TestProblemHypothesis

Phase 4Verify, Iterate &Expand

Phase 3TestProductHypothesis

To Validation

Test “Problem” Hypothesis

Customer Discovery

Demand

Creation

Hypothesis

Market Type

HypothesisProduct

Hypothesis

Customer

& Problem

Hypothesis

Distribution

& Pricing

Hypothesis

Competitive

Hypothesis

Hypotheses

Market

Knowledge Friendly

First Contacts

“Problem”

PresentationCustomer

Understanding

Second

Reality CheckFirst Reality

Check

“Product”

PresentationYet More

Customer

Visits

Test “Product” Hypothesis

Iterate or

ExitVerify the

Product

Verify the

Problem

Verify the

Business

Model

Verify

Customer Development in the High-Tech Enterprise

Fall 2009

Test “Problem” Hypothesis

Customer Discovery

Demand

Creation

Hypothesis

Market Type

HypothesisProduct

Hypothesis

Customer

& Problem

Hypothesis

Distribution

& Pricing

Hypothesis

Competitive

Hypothesis

Hypotheses

Market

Knowledge Friendly

First Contacts

“Problem”

PresentationCustomer

Understanding

Second

Reality CheckFirst Reality

Check

“Product”

PresentationYet More

Customer

Visits

Test “Product” Hypothesis

Iterate or

ExitVerify the

Product

Verify the

ProblemVerify the

Business

Model

Verify

Inside the Building

Outside the Building

Hypothesis

Product

Customer/Problem

Distribution/Pricing

Demand Creation

Market Type

Competition

Demand

Creation

Hypothesis

Market Type

HypothesisProduct

Hypothesis

Customer

& Problem

Hypothesis

Distribution

& Pricing

Hypothesis

Competitive

Hypothesis

Customer Validation

CustomerDiscovery

CustomerValidation

Customer Creation

CompanyBuilding

• Repeatable and scalable business model?

• PassionateEarlyvangelists?

• Pivot back to Discovery if no customers

Pivot

Customer Development is the Search

CustomerDiscovery

CustomerValidation

Pivot

Search

Customer Validation

Phase 1Get Readyto Sell

Phase 2Sell toEarlyVangelists

Phase 4Business ModelVerified

Phase 3Positioning

From DiscoveryTo Creation

CustomerValidation

Customer Validation

Product

Positioning

Company

Positioning

Present to

Analysts &

Influencers

Develop Positioning

Sell to “EarlyVangelists”Sell to

Channel

Partners

Contact

Visionary

Customers

Sell to

Early

Customers

Refine Sales

Roadmap

Refine

Channel

Roadmap

Prelim Sales

Roadmap Hire a

“Sales Closer”

Articulate

a Value

Proposition

Prelim Sales

& Collateral

Materials

Prelim

Distribution

Channel Plan

Align Your

Executives

Get Ready to Sell

Formalize

Advisory

Board

Verify

Verify the

Business

Model

Verify the

Product

Verify the

Sales

Roadmap

Verify the

Channel

Roadmap

Iterate or

Exit

Customer Development in the High-Tech Enterprise Fall

Sell to “EarlyVangelists”

Customer Validation

Prelim Sales

Roadmap Hire a

“Sales Closer”

Articulate

a Value

Proposition

Prelim Sales

& Collateral

Materials

Prelim

Distribution

Channel Plan

Align Your

Executives

Get Ready to Sell

Sell to

Channel

Partners

Contact

Visionary

Customers

Sell to

Early

Customers

Refine Sales

Roadmap

Product

Positioning

Company

Positioning

Present to

Analysts &

Influencers

Develop Positioning

Verify the

Business

Model

Verify the

Product

Verify the

Sales

Roadmap

Verify the

Channel

Roadmap

Verify

Formalize

Advisory

Board

Refine

Channel

Roadmap

Iterate or

Exit

Inside the Building

Outside the Building

The Pivot Turns Failure Into Insight

• The heart of Customer Development

•Business Model changes without crisis

•Fast, agile and opportunistic

A Pivot Changes the Business Model

Test

Hypotheses:

•Problem

• Customer

• User

• Payer

Test Hypotheses:

•Demand Creation

Test

Hypotheses:

•Channel

Test

Hypotheses:

•Product

• Market Type

• Competitive

Test Hypotheses:

•Pricing Model /

Pricing

Test Hypotheses:

•Size of

Opportunity/Market

• Validate Business Model

Test

Hypotheses:

•Channel

• (Customer)

• (Problem)

Customer

Developme

nt Team

Agile

Developme

nt

The Business Model/Customer Development Canvas

Speeding Up Cycle Time

•Speed of cycle minimizes cash needs

•Minimum feature set speeds up cycle time

• Near instantaneous customer feedback

drives feature set

Sidebar

There Are Three Types Of Startups

The Role of Market Type

New Product Conundrum

• Product introductions aren’t predictable

– Why?

– Is it the people that are different?

– Is it the product that are different?

• Are there different “types” of startups?

Three Markets Types

• Market Type changes everything

• Sales, marketing and business development differ radically by market type

Existing Market Resegmented

Market

New Market

Three Types of Markets

• Existing Market

– Faster/Better = High end

• Resegmented Market

– Niche = marketing/branding driven

– Cheaper = low end

• New Market

– Cheaper/good enough = creates a new class of product/customer

– Innovative/never existed before

Existing Market Resegmented

Market

New Market

Market Type Changes Everything

Market– Market Size

– Cost of Entry

– Launch Type

– Competitive Barriers

– Positioning

Sales– Sales Model

– Margins

– Sales Cycle

– Chasm Width

Existing Market Resegmented

Market

New Market

Finance• Ongoing Capital

• Time to Profitability

Customers• Needs

• Adoption

So What Does Engineering Do?

Customer Problem: known

Product Features: known

Waterfall / Product ManagementExecution on Two “Knowns”

Requirements

Design

Implementation

Verification

Maintenance

Source: Eric Ries

http://startuplessonslearned.blogspot.com

Problem: Known Solution: Unknown

“Product Owner” or

in-house customer

Agile - Customer Problem is KnownExisting Company/Market

Source: Eric Ries

http://startuplessonslearned.blogspot.com

Unit of progress: a line of working code

Problem: Unknown Solution: Unknown

Lean StartupCustomer Problem + Product Features are Unknown

Source: Eric Ries

http://startuplessonslearned.blogspot.com

Checklists and Synchronization

8

Customer Creation

• Creation comes after proof of sales

• $’s for scale

• Lean Startups are not cheap startups

CustomerDiscovery

CustomerValidation

CompanyBuilding

CustomerCreation

Company Building

CustomerDiscovery

CustomerValidation

Customer Creation

CompanyBuilding

• (Re)build company’s organization & management

• Re look at your mission

Thanks

www.steveblank.com

I Write a Blog

www.steveblank.com

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