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What is Customer Development?

(For more on Customer Discovery, take a look at my book, The Entrepreneur's Guide to Customer Development.)

Customer Development stepsCustomer Development is a four-step framework developed by serial entrepreneur and  business school Professor Steve Blank for discovering and validating the right market for your idea, building the right product features that solve customers’ needs, testing the correct model and tactics for acquiring and converting customers, and deploying the right organization and resources to scale the business.

At a high level, Customer Development is about questioning your core business assumptions. In other words, Customer Development teaches that rather than assume your beliefs about your business to be true, you should apply an engineering, or scientific method, to what is really not a scientific endeavor (building a business), in order to validate the ideas.

The primary advantages of implementing the framework are that you don't spend gobs of money discovering what works, but rather save the money for executing and scaling what you have already shown to work. An organization applies a learning process, rather than merely executing what you assume to be the right business model.  If implemented properly, Customer Development helps a business become highly focused,  capital and resource efficient, and while not a guaranteed success, more likely to find Product-Market Fit and market traction.

The process resembles the scientific method:

  • Observing and describing a phenomenon
  • Formulating a causal hypothesis to explain the phenomenon
  • Using a hypothesis to predict the results of new observations
  • Measuring prediction performance based on experimental tests

When building a business, the process is used to discover, test and validate the following your business assumptions:

  • A specific product solves a known problem for an identifiable group of users (Customer Discovery)
  • The market is saleable and large enough that a viable business might be built (Customer Validation)
  • The business is scalable through a repeatable sales and marketing roadmap (Company Creation)
  • Company departments and operational processes are created to support scale (Company Building)

Where to Start?

Where you are as a business determines where you are input into the Customer Development process.  The earlier you start the better, since you are less likely to waste time and money.  Where do you fit?

Companies that are pre-Product-Market fit should start with Customer Discovery.

You are pre Product-Market Fit if you:

  • Have a great product idea, or
  • Are building the product, or
  • Have finished a product, but have few to no customers, or
  • Have a product and several customers, but little market traction

There are three phases to Customer Discovery:

  1. Problem-Solution fit: You validate with prospects that a specific solution will solve a known problem to such a degree that they will buy it.
  2. MVP: You build a product that achieves (1) above and have validated it with prospects.
  3. Sales Funnel: Through interviews, surveys and analytics you have crystallized a proposed "sales and marketing roadmap," which lays out the customer's buying process and the business activities you must undertake to move prospects through the process (funnel).

Companies that are at Product-Market fit should start with Customer Validation.

You are at Product-Market fit, if you have built a product that customers need and this has been validated by high user adoption or through a significant number of paid users, and to some degree adoption and retention are "running themselves."  P-M fit is an esoteric concept you only know you've achieved after you've achieved it.  It's like declaring the "turning-point" in a game: only once you've won or lost, can you reasonably hypothesize the actual turning point.

Customer Validation is about validating your proposed MVP and sales and marketing roadmap.  You're not ready to scale -- hire outside sales, conduct a PR blitz, etc. -- until after Customer Validation.

There are three phases to Customer Validation:

  • Validated MVP:  You understand the core value you are providing your customers and they are passionate about your product.
  • Validated Sales and Marketing roadmap:  You understand your market segment and have optimized its conversion funnel from initial knowledge of your product through reference-able (or referring) customer. You have proven that every dollar you put into marketing and selling your product results in more than one dollar back.
  • Validated Business Model: You have proven that your market can scale to sustain the business and that the lifetime value of your customer exceeds to costs of operating the business.

Non Customer Development Death Spiral

Customer Discovery and Validation are often overlooked.  Businesses go straight from concept to product to scaling with little external validation.  Customer Discovery is replaced by "market research," which serves to support your assumptions rather than validate them.  Money flies out the door, while little comes in.  Pressure to be "first to market" is greater than "fitting the market."  In the B2B world especially, the downward cycle is almost inevitable:

CEO blames VP of Sales, who blames VP or Marketing, who blames budget.  Eventually, they are all replaced by the Board and the cycle continues.  The reasoning being, "Who can afford to stop and validate at this point?"

Myriad unforeseen problems arise during this stage of the company.  Unseen, since they were not accounted for and tested.

  • The market isn't big enough (relative, perhaps, to investment)
  • The distribution plan doesn't scale
  • Buyers aren't buying the way it was assumed
  • The competition pivots
  • Sales are too expensive
  • Competition outspends on marketing

It is in the Customer Validation stage that Steve Blank's insightful "Market Type" analysis truly comes into play and if you've implicitly chosen a strategy corresponding to the wrong type, when that lack of validation comes home to roost.  I won't repeat the market type analysis here, other than to say that how you position your product (relative to the competition for your customers) depends on market type.  And how much money you need to spend on marketing depends on market type.  In a nutshell:

  • if you are a completely new product type, you have to spends lots of money teaching your customers what you are and why you exist.
  • if your key benefit is higher performing or less expensive (regardless of how new your technology is), you have to spend lots of marketing money to compete with existing players.  Don't fool yourself:  your competition will do anything it can to squash you; all is fair in love and product wars.  Not only will your competition spread FUD, your ideal customer will resist you (status quo coefficient).
  • if you can take your higher performance or lower cost and target a specific market niche, then your marketing costs are lower, but your segmentation and funnel discipline must be extremely high and your revenue plan must reflect the niche you're in.

Upcoming: My take on the remaining Customer Development phases.

If you would like to learn more, you should check out my book The Entrepreneur's Guide to Customer Development,) look at my services and downloads, or feel free to contact me.

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