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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
Both Books on Amazon
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