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Customer Development Gut Checks

Through the evolution of their start-ups, entrepreneurs will face many  inflection points, at which decisions made or not made will determine their future.   The painful truth is that a wrong turn may lead to its demise, whereas a right turn leads to another inflection point.

Relevant to ongoing discussions about Blank's "Customer Development," I wish to highlight a few of these "inflection points."

The first step in Blank's model is "Customer Discovery."   This step seeks to answer this fundamental question:

Are there customers who are experiencing a problem severe enough that they are willing to pay for your solution.

You assume this to be true or you would not start the business.

Gut check #1 - Validate the vision

You need to test the assumption.  I have a sneaking suspicion that some entrepreneurs would rather work on a funded project that has no chance to succeed, than have their vision painfully rebuked at the outset.  (It's amazing and unfortunate that such ventures get funded.)

Perhaps there are nagging doubts in the back of your mind.  It is important to have the discipline to expose those doubts, regardless of whether you can get funding or have good contacts into 4 or 5 organizations who you can convince to beta your future product.  Is there a real market?  There are myriad reasons why the answer might be no, but the most typical is that the pain is just not big enough right now.  No matter how great your solution is, the problem must be so painful, such that:

pain  > ($ of product + $implementation + risk of change) * status quo coefficient.

In other words, even if you can cost-effectively solve a real problem, you have to be good enough to overcome inertia.

Of course,  typical investor pitches claim the opposite phenomenon -- there are too many potential customers to shake a stick at and the target market is all of 'em.  This is followed by a "conservative" estimate of 1% of the market, and voila, we have 100M/year business.  Not only is this a red flag that true market validation wasn't done, but you can't build a viable business plan based on "going after all of 'em."

Gut check #2 - Go-to-market segmentation

When building your business plan, you need to choose which customer you will target and choose wisely.  Who your customer is determines the operations you need to build in order to sell to and support the customer.   There are numerous criteria you can use to determine which segment to pursue, but a few of the most important are severity of pain and market type.

Severity of pain typically dictates availability of budget, length of sales cycle, and size of market, i.e., revenue proximity.  Market type determines business model, competition, marketing strategy and ultimately, cost of acquisition.

The point is that if your product has broad enough appeal, you are likely to be able to choose your segmentMarket Type is one criteria of segmentation.   Even if a "new product in an existing market" or a "new product in a new market," you can operate like a "new product in a segmented market" with proper segmentation.

Regardless, segmentation should provide you several candidate customer types to target and customer validation provides you the process for testing and choosing which to pursue.

The additional benefit from proper segmentation when developing your business plan, is that that your revenue targets are built from the bottom-up and hence are more achievable than the top down approach of taking a "conservative" guess at your sliver of the TAM.

The lure to pursue several segments (and more) simultaneously will be tremendous.  I would daresay that most high tech businesses take an opportunistic approach early on.

Gut check #3  - Avoiding  Opportunism

If you set sales folk free on the market prior to knowing how to sell what to whom, you might hit your first revenue target.  Congratulations.  You might not hit another.  Opportunistic selling most often results in false positives.  It leads to creating multiple customized products for niche markets, marketing into dead-ends; exposure to unintended competition; confused customers; mis-labeling by media and analysts; and ultimately, a company without a vision, without an identity, and without ability to scale.

Avoid opportunism by segmenting your market and validating your assumptions prior to launching massive marketing and sales campaigns.

So what do you do if you are in a company with flat revenues, customers spread across multiple segments, and internal resources are stretched thin across the morass?

Gut check #4 - Starting Over (almost)

Perhaps the most impressive thing about Steve Blank's SuperMac story is that he was allowed to apply his customer development process at all.  Blank says:

So perhaps a more accurate description was that the company was a “restart.”

The fortitude to start over really can't be overstated.   Businesses fail all the time.  There are millions of reasons shy businesses fail.  In many respects, it's easier to admit failure, point fingers at external (uncontrollable) conditions or internal scapegoats, than admit mistakes.  (Blank talks about this, too.)

My experience applying principles similar to the customer development model tells me that the most difficult time to apply customer development process is after the first revenue targets are missed.  Remember, typically these are businesses who have completely built out their sales teams.  "Marketing" is either run by sales and so is reactively building competitive analysis models and sales tools trying to overcome the objection du jour or is a "Madison Ave" group arguing for thousands to run an print ad campaign.

The team has missed 1 or 2 revenue targets, the board is getting impatient, the CEO is getting anxious...heads are going to roll.

Clearly, the earlier customer development principles are applied the better.  Investors should demand to see a go-to-market strategy that is built upon a process-oriented approach to validating the business model.  There's no reason why hardware and software companies cannot be validating customer assumptions at the same time engineering is building first prototypes, in a fashion similar to some Internet based companies.

As one is learning how to sell, some opportunism may be inevitable.  But a proper feedback process minimizes going too far afield through the continuous  measurement of relevant metrics and phase gates.  It's not wrong to make a mistake, but hopefully you have a mechanism that let's you know sooner than later, and you shouldn't make the same one twice.  Finally, in the business world, it would be wrong to say "it's never too late to start again."  Failed businesses rarely get another chance.

13 COMMENTS ON THIS POST To “Customer Development Gut Checks”

  1. Jay Ehret April 28, 2009 at 8:48 pm

    Regarding gut check #2, I would recommend not pursuing several segments simultaneously early on. This segmentation of customers, leads to other segmentation, namely segmenting your time and your brand.

  2. Jay Ehret April 29, 2009 at 5:01 am

    Brant, Thanks for the response. I guess this hits to the heart of the problem with larger businesses. Resources are spent making the management team and board members comfortable. That is the foundation of compromise.

  3. Bill Allred April 29, 2009 at 2:16 pm

    Brant,

    Enjoyed this post, thanks. Agree with you that Customer Development should be implemented as early as possible, and I suspect that it will become more and more common to see founders implementing it from day one.

  4. Etienne Garbugli December 11, 2014 at 8:27 pm

    Great post. I love the idea of the Status Quo Coefficient which was included in the book Lean B2B: Build Products Businesses Want (leanb2bbook.com). Brant contributed to the book. Thanks.

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