Customer Development Process for Startups

Customer Development Process for Startups 

Steve Blank is a serial entrepreneur and the author of The Four Steps to the Epiphany and The Startup Owner’s Manual.  Blank also teaches entrepreneurship at Columbia University, Stanford University and University of California at Berkley.  In March, 2012, he presented at South by Southwest (SXSW) in Austin, Texas, as part of The Lean Startup series presented by 500 Startups and Eric Ries, where we focused on business models and the customer development process.  Blank’s presentation is applicable to startups, as well as new businesses within existing companies.  Below are the key points:

1 – Startups are not smaller versions of large companies.  Startups are searching for a business model (requires testing a hypothesis).  Large companies are executing an existing business model (requires delivering a financial forecast/operating plan).  Most businesses schools teach large company execution.

2 – Business is moving from physical products and channels to virtual products and channels.  For example, physical product/virtual distribution (Zappos); virtual product/virtual distribution (Google). This has made adapting to change, optimization and testing much faster.  Physical startups run at different speeds than virtual startups.

3 – Startups should not be organized like large companies.  For example, a startup with a VP Sales assumes there is a known business model to execute against.  In reality, startups are solving for a series of unknowns.  A startup is a temporary organization designed to search for a repeatable and scalable business model.

4 – What is a business model?  It is how a company creates value for itself while delivering products or services for customers.  According to Alex Osterwalder, author of Business Model Generation, every business model has nine core components.  While some may be more important early on, all are important over time.  They include:

  • Customer Segments – Customers do not exist to buy, you exist for them.  Who are they?  Why would they buy?
  • Value Proposition – What need or problem are you solving?  It is about the customer, not you.
  • Channels – How does the product or service get from the company to the customer (physical, virtual or both)?
  • Customer Relationships – How do you get, keep and grow customers?  Different if physical or virtual.
  • Revenue Streams – How does the company make money from each customer segment (e.g., Freemium)?
  • Key Resources – What are the most important assets to make the business model work (e.g., engineers)?
  • Key Partners – What key partners are needed to make the business model work?  What is their function?
  • Key Activities – What are the most important things the company must do to make the business model work?
  • Cost Structure – What are the costs, both direct and indirect, to operate the business model?

5 – What is customer development?  The customer development process consists of four steps: customer discovery, customer validation, customer creation and company building.  Steps one and two deal with searching for a business model.  Steps three and four deal with executing a business model.  In a nutshell, ideas about customers and markets are at best a guess (hypothesis).  Customer development involves getting outside of the building and validating a hypothesis by designing experiments and running tests (do customers agree and does the product solve a problem?).  You test the problem then the solution.  These experiments and tests either confirm a hypothesis or prompt an iteration based on customer feedback.  An iteration re-starts the process with the ultimate goal of converting a new hypothesis into fact.  Note customer development is not the law of numbers, it is the law of insight.  Many times key insight is in the outliers.  If it was the law of numbers, accountants would run startups.

UPDATE (04-19-12)
In Steve Blank’s new post, “How to Build a Billion Dollar Startup,” he states, the value proposition of a business model fits into one of two categories: it solves a problem for a company or consumer (e.g., software) or it fulfills a human social need (e.g., dating).  According to Blank, human social needs have always been fulfilled face-to-face, but now they are moving online (e.g., Match.com).  Creating businesses to fulfill human social needs is the ultimate for entrepreneurs because the size of the market is equal to the entire human race.

All contents copyright © 2012, Josh Lowry. All rights reserved.

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