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By brantcooper, July 28, 2010 7:36 pm

Now a couple of days away from the Lean Startup Machine startup weekend, I wanted to get down some initial thoughts on the event.  When approached about participating in the event, I was immediately intrigued by the idea, as long as it took the lean startup principles seriously.  Much to their credit, organizers Trevor Owens, Ben Fisher and Kyle Kelly were open to any and all ideas to make the event conform to Lean Startup and customer development principles.  And much to Eric Ries‘ credit, he threw his support behind the idea once such conformity was demonstrated.  Still, this was an experiment.

The more one adopts these principles, the more one can find ways to adopt them in all areas of life — they become “meta,” as Patrick Vlaskovits would say — and this event was no exception.  It was Lean Startup Machine’s Minimum Viable Product.

By all accounts (that I’ve heard), the event was a rousing success.  Here are some more or less random thoughts about the weekend, some of which I hope to cover in more depth soon:

1) I’m blown away by the people who attended: smart, opinionated, creative, dedicated team-players with some really interesting ideas.  And they all want to be startup founders.  Many will scoff at whether this is a good thing or not, but I think it’s great.

2) Customer Development is a great conflict resolution tool.  When you reach a loggerhead, formulate opposing opinions as hypotheses and go test them.

3) While there was reluctance among some and a few Engineers stayed inside completely, whole teams hit the streets of NYC to engage customers.  It was awesome to see!  I can’t wait for the video.

4) Clearly enterprise B2B ideas are at a disadvantage when it comes to weekend customer development.  But B2C rocked it and B2SMB took advantage of New York’s vast number of local businesses.

5) Good team balance was essential.  Those teams with naturally social members kicked customer development butt.  People were making phone calls to business owners across the country, setting up Craigslist ads, conducting surveys, interviewing by telephone and pounding the pavement for person-to-person discussions.  There was more combined customer development in one weekend than most startups do in a year!

6) Customer Development is hard.  Several assumptions were crushed over the weekend and for the more brutal failings, there were no easy follow on steps.  It’s one thing for a market segment to fail, it’s another when a core idea is roundly  rejected.  But it happened.   It’s easy to become demoralized by negative validation, but the teams pressed on.

7) We saw some amazing pivots, product mockups that reflected the changes, and then customer validation of the pivots!  That’s pretty amazing for a weekend’s work.

8 ) Some people had a tough time understanding the difference between seeking evidence for their idea and testing their assumptions.

9) This event has great potential.  There were some rough spots, but no major problems and the learning that went on was tremendous.

10) It will be interesting to hear more feedback, but my general impression is that this was the first real encounter with customer development for most of the participants and that the experience they gained was invaluable.  My belief is that to truly grok customer development, you must “get a win;” meaning you need to experience first hand the empowerment that comes from customer validated ideas.  I think we had a lot of that!

If there’s something in particular you’d like to hear more about the weekend, please let me know in comments.

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By brantcooper, July 19, 2010 1:23 pm

What are Market Segments Really?

I’ve written about market segmentation before both on this blog and as an important concept to understand in The Entrepreneur’s Guide to Customer Development. I think it is vital to grasp because it’s fundamental to achieving Product-Market fit and building a scalable business. I’m writing about it again because it has come to my attention that I have perhaps not explained one of its primary precepts well enough.

As I wrote before, Geoffrey Moore in Crossing the Chasm defined a market segment as:

* a set of actual or potential customers
* for a given set of products or services
* who have a common set of needs or wants, and
* who reference each other when making a buying decision.

Most of this is pretty intuitive. In a nutshell, a market segment is comprised of like buyers who share the same pain. But there’s more to it. The reference part trips some people up. The key point to understand is that the customers and potential buyers must be willing AND able to reference each other.

This doesn’t mean that two customers need to know each other or even speak to one another, but simply that one respects the opinion of the other for a particular purchasing decision and that somehow the sharing of that opinion happens. Go to any well-marketed B2B web site and you’ll see case studies of successful customer implementations, often arranged by vertical industry, because the decision maker in one company likely respects his or her counterpart’s decision making about specific products.

Note that verticals are not necessary to define segments, since for some products, buyers may not consider industry a significant factor. Same holds true for other classic market segment variables, such as geography and buyer profile (gender, age, income, etc.). Those factors may come into play, but only as defined by “willing AND able to reference each other.”

One can quickly understand the tremendous importance of social media marketing within the context of market segments. Facebook’s “Like” feature by itself instantly expands the scope of “sharing a reference” by several orders of magnitude.

Market Segments and Product-Market Fit

As you search for Product-Market Fit, you are likely to investigate multiple market segments. Ideally, you want to reach Sean Ellis’ 40% “very disappointed” metric in one segment. In other words, if you have achieved 40% across your user base, you still need to segment those users and measure within the segments.   You don’t want to find yourself in the situation of treating a group of users who are only willing to pay $5/mo — or nothing at all — with one willing to pay more.   By segmenting those users, you might discover a lower score among the group you assumed you were targeting. Or you might find your 40% “very disappointed” is in a segment that is ridiculously small or has no money. In this case, you might choose to continue to work to get over 40% in the more promising segment.

Market Segments and the Scalable Business

Simplistically speaking, your Startup becomes a scalable startup when you have learned how to acquire and convert a big (or multiple) market segments.  If you are raising money, part of your story should be detailing your target segment and how you will convert its members, as well as how winning this segment will lead to a scalable business.
As in the diagram to the left, you might find that your total addressable market (TAM) can be split into various segments.  The TAM includes all users who share a problem to some degree and who you believe will be receptive to your solution.  The level of pain might differ, however, between some identifiable groups of users.  The features required in the solution might also differ.  Further, who the buyer is, who they consider trustworthy references, and how they are acquired and converted (funnel) are likely not the same across all the groups.

Your growth strategy — how you build a scalable business model — will depend on your strategy to capture these segments.   Best practices dictate that you choose and focus on 1 segment at a time, the reasoning being that 1) you don’t have the resources to tackle specific functionality required by the different segments; and 2) you don’t have the resources to acquire and convert multiple funnels simultaneously.

Whether this is truly best practices depends on your startup.  How different are the feature requirements?  How different are the funnels?  How much bleed over into adjacent segments does your social media marketing provide?   For web-based business models anyway, as the costs of online marketing have decreased and the ability to track the return on your marketing dollars has increased, the need to focus on only 1 segment has diminished.  (When you are  first starting out, however, there’s still a lot of benefit to the learning that is accomplished by focusing on narrowly drawn segments.)

The one core principle that remains, however, is to focus on one core value proposition. If you start selling to a segment with a different need or change the product for a group of users because they’re solving a different pain, in actuality you are “pivoting.”   In this case, you are better off not serving multiple masters and must “fail one” in order to pursue another.

Market Segments and Early Adopters

Early Adopters are not a segment unto themselves.  Early adopters are those prospective customers who readily recognize the problem you are trying to solve and are often looking for solutions for themselves.  Early Adopters are important since they are likely closer to the pain then you are and will help modify and validate your core customer-problem-solution assumptions.   They will also likely champion your product if you are successful at solving their problem and will form the base of core passionate users you seek that determine Product-Market Fit.  In the early going, you will likely find that your early adopters represent different segments and you will eventually disappoint some of them.

I hope this clarifies some of my past writing on market segments.  What has been your experience?

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By brantcooper, June 14, 2010 12:22 pm

Last December, I created the first version of this image, depicting how you might think through your customer acquisition and conversion funnel.

In January, I modified the image and added tooltips.

In April, a newer, tighter version was released in The Entrepreneur’s Guide to Customer Development. (We will update the image in the ebook with this one.)

Today’s version is tighter still, I believe and is self-explanatory.  I don’t think the tooltips are necessary, if you carefully read through the boxes from left to right.  (Reading the old tooltips might provide some clarity, if necessary.)

I’ve added a few notes on funnel stages, as well as a blank version (in a variety of formats) to my Customer Development Tips download. (Other tips included, too!)

Here’s the new version:

click on image for full size

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By brantcooper, May 26, 2010 12:23 pm

The consultants came out in droves to weigh in on Steve Blank’s recent post, “Consultants Don’t Pivot, Founders Do.” (Myself included.)  Generally, all were in agreement with Blank’s primary point:

Founders get out of the building (physically or virtually) to test their hypotheses against reality. There are times when customers are going to tell you something that you don’t want to hear.  Or you’re going to hear something completely unexpected or orthogonal to what you expected.

As I like to say, those that hold the assumptions need to test the assumptions.   In the comments, several of us pointed out that teaching Customer Development is a viable service for which entrepreneurs can hire outside consultants. Sean Murphy:

We work with teams as they prepare for and then execute the customer discovery and validation steps in B2B markets. We helping them rehearse leaving the BatCave, we often go with them on customer discovery interviews or sale calls, we debrief from prospect meetings to formalize lessons learned and adjust the sales presentation or the target prospect definition or sometimes the feature set.

Clearly, there’s some value being provided here.  In my experience, entrepreneurs have repeatedly sought help with both Customer Development basics, as well as some of its more nuanced components.  Sean Ellis raises a separate issue, agreeing that consultants can provide value, but wondering how the economics work.

I believe the need is there and most consultants have the expertise to fill the need; the problem is that their cost exceeds their value at this stage.

There is no doubt in my mind that this is a challenge, but there’s more that one way to skin a cat, so I’m not sure such a blanket statement is accurate.  (Note that Ellis isn’t suggesting that consultants don’t provide fair value for their compensation, but that the compensation is likely to be too high for the particular stage the business is in.)

This begs the question, what exactly can be outsourced and at what cost?

What Part of Customer Development Can be Outsourced?

It’s worth pointing out that one of the best Customer Development practitioners I know is Cindy Alvarez, who is a Product Manager and not a founder at KISSMetrics. Theoretically, at least, Alvarez could be doing what she does as a consultant, rather than as an employee.  If she had internal assistance (say, a less Senior PM  or a technical marketer), she could potentially have two or to three clients and perhaps make a pretty good living.  And while KISS is likely at or near Product-Market Fit, Cindy has been executing Customer Development for them for quite awhile.

As with employees, the key element to working with consultants is trust.   Further, Founders must process outside information to make decisions.  Is it better, for example, for Founders to pivot based on analytics than Customer Development information provided by a trusted adviser?  If a Founder has a “salesperson mentality,” and cannot stop selling when supposed to be listening, does that doom the company?  Or can a trusted adviser steeped in Customer Development best practices provide better information?

The more I reflect, the more I think blanket statements about what can or cannot be outsourced are dubious at best.  Learning must happen.  How it happens is not particularly relevant.  The key measure is willingness to learn.  If you belong to one of the archetypes of anti-lean, you are not likely to do Customer Development anyway.  If you are willing to learn, you can likely learn from a trusted consultant, too.  I do think the level of understanding potentially suffers, however, so the stage of Customer Development you’re in should influence who the lead CustDev actors should be and what other roles might benefit the process.

In the book, Entrepreneur’s Guide to Customer Development, we break Customer Discovery down into three stages:

• Problem-Solution fit, i.e., validating your core C-P-S (Customer-Problem-Solution) assumptions:  This is the most important stage for Founders to be heavily involved in.  Consultants might help you articulate your assumptions, define market segments, find prospects to talk to, help prepare the presentation and the presenter, and help analyze results.  I have, in fact, also done the interviews for a Founder with both positive and negative results.
• MVP development: Best if Founders are still heavily involved with early adopters, since they likely need to hone in on the core value they’re providing.  I don’t see much value in consultants here, other than help with process,, like coaching Product Managers (and Founders) to not engage in feature mongering.  This phase requires a dedication to minimum viability, and a balance between customer-driven solution and vision.  If the two diverge, a pivot is required and only Founders pivot.
• Proposed Funnel, i.e., learning your sales and marketing roadmap:  Founders need to be engaged relative to their adamancy regarding their sales and marketing assumptions.  Other business model assumptions are typically exposed here, as well.  I believe consultants can play a larger role in this phase, since many founders can use a lot of help thinking through marketing basics.  Consultants might help with defining market segments, proposing funnel hypotheses, and preparing (or conducting) conversations, surveys, etc., to test and validate assumptions.

Clearly I believe a high level of Founder involvement is necessary.  Founders who actually practice Customer Development themselves are arguably in a better position than those that delegate.  But not only are there parts of Customer Discovery that can be effectively delegated, consultants may have a role as well.  The question remains, however, whether (1) consultants can make a living doing this, and (2) whether startups can afford fees that result in (1).

What Model Works for Outsourcing Customer Development?

I know several individuals who practice customer development as consultants.  Clearly, Sean Murphy has found a model that works for him and his clients; Nick O’Connor is another.  I have helped several clients, though finding the right model has been a challenge.  I am passionate about working with early stage companies and have done so for years as a volunteer mentor at San Diego’s CONNECT Springboard program.  Figuring out how to make some money, too, isn’t a bad thing and admittedly, I’ve struggled to find the right model that serves well early stage Founders.

Recently, Patrick Vlaskovits, pointed to me a startup lawyer with a unique business model, Kevin Houchin. Houchin charges a low monthly retainer for a long(ish) range commitment, which allows clients unlimited contact, but not unlimited access.  So I’m trying the same thing. So far, so good!  I haven’t solved my scaling problem, but I get to work with some great entrepreneurs who are willing and able to execute on Customer Development principles.  They are high-energy, have bought into Customer Development and truly value (and benefit from) feedback, pointers and actionable recommendations.  For more information, see here.

In light of this more in-depth conversation regarding outsourcing and leaving aside for a moment, the general evils of consultants, what do you think about outsourcing components of Customer Development?

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By Patrick Vlaskovits, May 17, 2010 11:26 am

Diaspora is now a certifiable Black Swan.

As of this post, they have raised $176,165 from 4,860 backers and still have 15 days to go.  I maintain that aside from tapping into the current anti-Facebook zeitgeist among the tech elite, their success is partially fueled by a pricing/bundling strategy that cleverly (or accidentally) includes t-shirts that signal hard-to-fake social proof of geekiness at a good price.

I have updated my two quick-and-dirty graphs on how pricing/bundling these sorts of social signals/proof (read: t-shirts, in this case) may help with raising micro-capital below.

Enjoy!

Data table below: