One of the most prominent problems for a newly found startup company is identifying a problem that’s worth solving for customers that make up a considerable amount of the market. That goes to say, they need to be able to build a viable and scalable business around the solution to said problem. In other words, they need to meet customer needs, but they also need to establish the right amount of demand. While, intuitively, a company would start building their solution right away, the better way is to introduce the Customer Development model into the equation, before anything else.
What is Customer Development?
Customer Development is a formalized methodology to help entrepreneurs build startups and new ventures. Steve Blank first introduced the concept in the ‘90s, noticing certain patterns in startup business development. However, it wasn’t until 2005, when he published his book “The Four Steps to the Epiphany: Successful Strategies for Products that Win”. And, that’s when it started becoming a part of the Lean Startup movement; later to become a methodology, defined by Eric Ries in his book “The Lean Startup”, in 2008.
Fundamentally, Customer Development is the part of the Lean Startup methodology that helps understand the customer’s problems. More particularly, the ones worth solving. Customer Development, typically — and practically — happens after the first version of the business model has been designed. In Lean Startup, we can draft a business model as a leap of faith on a set of hypotheses, put on paper; in the form of a Lean Canvas. Once we’ve got a good grasp of the market (TAM, SAM, SOM) and the specifics of customer needs and requirements, we can start developing a solution to the problem(s); using Agile Engineering.
The Lean Customer Development approach
Customer development can be as hard or as easy as we want to make it. But, following the concept described by Steve Blank, we can combine it with the Lean Startup methodology; to achieve a more swift and pragmatic approach. And, while this type of approach may be useful for established companies, it’s absolutely essential for startup companies. That is, to enable them to work in swift cycles, learning fast and failing even faster; before they run out of funds. In essence, that is the only viable way to come up — in time — with a process that works well in establishing the business model.
Who can do it?
Lean Customer Development is a versatile concept. Nearly anyone can do it! A lone founder with no working version of their product and absolutely no customers, whatsoever; or a big corporation with a host of finished, market-proven products and a healthy amount of customers. It doesn’t really matter. It can and will help any type of company do better.
Why go down that path?
In the days of yore, we’d work on a product without talking to a single customer. This was a less than ideal approach to product development, as it would often result in a perfectly functional product nobody needed to use; let alone, buy!
Lean Customer Development — which, for brevity, we’ll simply refer to as Customer Development — helps discover the nuanced intricacies of each customer segment; in terms of pains, needs and requirements. It helps understand how well people will be able to understand our product and how affordable it is to them. And, if we do it right, we’ll understand the reason(s) why they would buy our product, against a competitive one. In all cases, it will also help us define just the right amount of customer-oriented product activities we need to incorporate into our business model, to make it work.
In other words, Customer Development will help us establish a functional and scalable business model out of that initial Lean Canvas; validating or invalidating most of our hypotheses. For each hypothesis stated in the Lean Canvas, we need to find potential buyers to talk to. And, we need to find a way to ask them the right questions — with the Build-Measure-Learn loop; and make sense out of them, to define what features we need to build into our product.
Combining Customer Development with the Build-Measure-Learn loop will provide us with the reality-check moments we need to establish our hypotheses as reality; or modify them and try again. As such, Customer Development never really ends. But, there are 4 distinct steps that define its process.
The 4-step process to Customer Development
The customer development process provides a way to scientifically approach and validate — or invalidate — assumptions pertinent to the business model; and, consequently, the product. That helps in a series of different levels. That is, from discovering the problem(s) worth solving, to building a product that meets the customer’s needs, to finding the right way to distribute the product and acquiring customers, to identifying the resources required to do great work for them. The first two phases are considered the “Search” stage, while the last two phases are considered the “Execution” stage.
1. Customer discovery
Every founder starts with a vision. That vision enters the ideation phase, where several ideas and hypotheses are put on the table, to form the first version of a potentially viable business model, through the Lean Canvas. In the Customer discovery phase, the startup needs to find answers regarding their prospective customers’ needs, the consequent Problem/Solution fit, the structure and potential of their solution as a Minimum Viable Product (MVP); and how they could draft their first version of their Sales — or conversion — funnel.
2. Customer validation
With the absolutely necessary — but fully functional and well made — features of the product ready to hit the market, the product development team can now talk to customers and ascertain their interest — their intent, even — to use the product; given, of course, that it satisfies their needs. The Customer validation phase should be able to establish one or more customer segments as obtainable market segments (SOM) that can bring a viable amount of customers, as new business. With that under their belt, the team may establish a working version of their business model; along with a sales & marketing road map.
It’s important to note that, if this phase leads to failure, the company needs to consider pivoting into another product, market or industry; repeating the Customer discovery phase, from scratch.
3. Customer creation
A few customers being enthusiastic about the product is not enough for full fledged market positioning. For that reason, in the Customer creation phase, the team needs to use their sales and marketing road map, to establish that the product satisfies the customer needs; that is, for all intended customer segments, as per the customer’s perception. In doing that, the team will approach the next stage of product validity, which we call a Product/Market fit. At this point, caution is warranted, as abruptly scaling up our business may prove detrimental to the company’s viability. That said, this is essentially the point where the company starts growing with the potential to scale up.
4. Transition to customer — or company — building
The customer building phase involves increasing the demand for the product or service — making it into a necessity, a commodity, even; and bringing a lot more customers on board. After the tipping point in the famous hockey-stick graph, this should not be that hard. And, with greater demand, comes great responsibility 🙂 ; in this phase, the company needs to start scaling up their teams and operations to accommodate the volume of customers; that is, with the same — if not better — responsiveness and quality of service.
Up till now, the company was vision-driven. They kept an eye on establishing a viable business model, achieving Product/Market fit and a repeatable sales cycle; hiring C-level executives and staff as needed. But, the Customer — or company — building phase, requires a transition; a shift from a vision-driven company to a mission-driven one. Now, the team needs to become cash-flow positive, remain profitable and induce rapid scaling. This might need them to redefine senior management; breaking teams into smaller, more manageable ones, to keep them spry and highly responsive. And, this might prove to be the only way to retain the quality of service offered.
Now, that means an ever growing group of people for the company. The visionary CEO will no longer be able to manage everything single-handedly. Nor will they be able to take each new hire by the hand and show them the vision and the ropes. A mission statement is required, for everyone to follow. And that’s why the management style needs to change into a mission-driven one.
The usefulness of the Customer Development model
It may have become obvious, by now; but, the Customer Development model is here to help guide a startup from conception to fruition. And the journey could abound in wasted effort, time and money, if not walked carefully.
The customer development model helps the team(s) build a shared understanding about customers and their needs; identifying the right problems to solve, long before they allocate any resources into building the solution(s). Validating any important assumptions before building a team and understanding the customers before developing a product are timesaving and valuable steps; especially since they save the team great amounts of frustration, wasted effort, valuable time and funds, if they were to go on a wild goose chase, hoping for the better.
At the end of the day, while entrepreneurship should always come with enthusiasm, it should not cloud the team’s judgment of any limitations in their endeavor. With enough data, through the Customer Development process, the team will be able to avoid emotional responses about their product; delaying financing and resourcing until all hypotheses are sufficiently rationalized and validated.
Verifying the business model
The business model, essentially, represents the way the company will be organized. And, most importantly, how they will produce value for themselves, while delivering products and services for their customers.
As per Steve Blank’s quote, the answers cannot be found in the building. One has to “get out of the building” to get them. These days, getting out of the building can also be done with digital media, which is a 3 in one deal; a timesaver, a cost optimizer and an enabler. That goes to say, a company is now able to serve any market in the world; irrespective of its geographical location.
Taking the 4 steps to Customer development, a company can take their business from concept to growth without being wasteful, by validating their hypotheses, one-by-one, as they go. And, in each different phase, they will have ample opportunity to perform reality checks — which they, otherwise, might not have — identifying the need to pivot or persevere; patiently working towards their goals. To do that, one needs to:
- select the type of market they wish to work on and then
- do their user research.
Types of startup markets to choose from
Essentially, there are three distinct types of markets for a startup to choose from; each with their challenges, benefits and caveats.
1. Existing markets
Existing markets are already developed markets, which means there are already competitive products or services available to people. And, while this means the existence of mild to excessive competition to fight against, it also means people already know why this type of product exists, how it works, what benefits they’ll be able to reap out of it and whether or not they need it. This means a lot smaller marketing and education budget will be required to penetrate said markets.
2. Re-segmented markets
Re-segmented markets are also existing markets. The difference is that one can create the specific space — via resegmentation — if the product is able to offer a considerably different user experience than what is available in competitive solutions; or some other type of disruption. Re-segmented markets can be divided into two different categories, as per the intent:
As the term indicates, niche re-segmentation refers to specific — or specialized — market segments, with a viable but potentially relatively low SOM, but with the lower limit in price elasticity being really high, due to lack of competitive solutions.
The consumerization re-segmentation refers to what one might call the “democratization of the Enterprise”. In other words the company may — usually — disrupt the market in terms of pricing; coming out with a low-cost alternative, as compared to competitive solutions. While a low-cost product may mean reduced feature sets, lower performance or smaller range, it may also mean that more long tail segments will now be able to afford it. And, if they, indeed, only need a reduced set of features for their needs, this provides access to a massive portion of the market that would, otherwise, remain untapped.
3. New markets
There are no competitors in a new market. It’s new, after all. This will provide the company with a first mover advantage. BUT:
- The market’s potential and customer segmentation will have to be defined from scratch; which is not an easy task.
- It may be disproportionately more difficult to reach customers. Great spending of time, money and resources will have to be made, in order to educate users and develop a sufficiently viable customer base to accommodate the business model.
Of all types of markets, the “New market” is the most difficult to strike a balance between research and development. It’s not as straightforward as identifying a problem, developing a solution and launching a product. As such, we’ve seen one too many companies entering the proverbial “spiral of death”; trying to educate their audience, creating demand and avoiding running out of runway, before they can take off.
Customer Development is not user research
While Customer Development may share some of the techniques used in User Research, it’s not a part of User Research. To explain, while these techniques and practices have served researchers really well, to date, the context, timing and resources in Customer Development are very different.
Crudely put, User Research is advocating for the end-user. Customer Development, on the other hand, is advocating for the business. In other words, Customer Development is not something we should do to make for happy customers. It’s something we need to do to build a viable and sustainable business around a product or service.
With that out of the way, User Research is also essential. But, this time, among other things, it helps:
- Understand a user’s problems and needs
- Identify when and why they need to make a decision
- Define the structure and usability of the product or service
- Keep the user experience as easy as possible
- Ensure that the users solve their problems with ample moral rewards
- Try to turn using the product into a healthy — ideally, daily — habit, for users
- Identify when and why they’ll need help
User Research is, evidently, a different game. But, it should also be conducted, with care; just as Customer Development should.
The stakeholders in Customer Development
Regardless of the way a startup is developed, it will eventually need its engineering, product management, marketing and sales teams. The product management and marketing teams are, perhaps, the first to need — and incorporate — the results of Customer Development, into their work. That’s why they would also be the best people to lead the effort. After all, talking to customers and then analyzing the input and translating it into customer — or market — requirements, is in their ballpark.
In all truthfulness, though, Customer Development should be a horizontal process, involving several important stakeholders. Founders and executives can also contribute their experience and ideas into the process. Besides, things should work a lot smoother if they buy-into the goals of these activities. Especially if the findings from interviews, demos, surveys or usability observations contradict any of their initial assumptions; as described on the Lean Canvas.
How does a business benefit from Customer Development?
While most of the benefits from Customer Development are already implied throughout this article, it’s always a good idea to neatly gather things up.
- Discover the problem(s) worth solving
- Achieve Problem/Solution fit
- Define and structure the Minimum Viable Product (MVP)
- Build a product that meets the customer’s needs
- Finding the right way to distribute the product
- Identify the different methods that help acquire customers
- Build a sales — or conversion — funnel
- Achieve Product/Market fit
- Structure a viable and scalable Business Model
- Come up with a sales & marketing roadmap
- Identify the resources required to do great work for customers
- Scale the company and its operations
It goes without saying, with access to all these insights, the team is able to defer investing funding or resources into building anything, until the last moment. Then, with the most recent and updated information and insight into the market, they can specify each part of the build, with knowledge; avoiding wasteful decisions.
Using the Build-Measure-Learn loop, they’ll also be able to rigorously test and validate — or invalidate — any assumptions, with real market data. This helps avoid reacting emotionally with any decisions about the product, making for a more precise, more reliable, data-driven approach.
Eventually, Customer Development functions like a protection layer against bad business decisions. And, as a hidden bonus, this may make the company quite more “irresistible” to investors; as an investment opportunity.
Now, with all that, one might think that Customer Development might eventually become their Product Development process. But, of course, although it serves as an enabler to help define the product, it isn’t the same as Product Development.
Customer Development is not Product Development
If we absolutely have to compare the two, we’d have to say they answer two different questions. That goes to say, while Customer Development will help answer the question of whether customers will buy our product, Product Development helps with what they’re willing to buy, in what form and when they intend to do it.
In essence, Product Development is the process of designing and building a product. It even includes launching it to market. Conversely, Customer Development is the process of learning all we can about our market, to reduce the risk of them not needing it — or not buying it.
Integrating Customer Development into Product Development
As it might be evident, Customer Development does not replace Product Development either. It’s an entirely different process; in fact, the two work in parallel.
On one hand, Customer Development involves customer-oriented activities, keeping an eye outside the building, for any changes in the market.
On the other hand, Product Development involves product-oriented activities, keeping an eye inside the building, using market insights to guide the team in developing the product, with minimal waste.
In tandem, the two can work towards helping the team understand how the feature-set should be shaped for existing and future customers, how they would accommodate their needs, solving their problem(s), and how much they would be willing to pay for them. This ensures product validity and usefulness; while maximizing the potential for acquiring the maximum part of our Serviceable Obtainable Market (SOM), improving profitability.
And, of course, this round-tripping — and healthy dissemination — of information is a great segue into Agile Engineering, with any framework that facilitates the Build-Measure-Learn loop.
Disadvantages and pitfalls
As any other methodology, Customer Development is not entirely devoid of disadvantages. If used right:
- Customer Development will challenge the team to admit they don’t already have all the answers
- There’s a risk the team — or the product — will create the problem to solve, instead of finding an existing one to solve
- To make matters worse, it will challenge their subject matter expertise, at times
- In full blown implementations, it will actually delay Product Development, in favor of doing the right thing, at the right time. This may affect the time-to-market marker
- It’s prone to cognitive bias. Caution is always required, to avoid seeing “market signals” where there are none
- The team can’t deal with their product as their brain child. They need to support every decision they make with cold, brutal data, avoiding validating themselves, instead of the product
- It never ends; Customer Development is an ongoing process. This calls for a constant investment in resources, to continuously validate the efforts have not veered off course
All this sounds like a bleak and depressing predicament, at first, maybe. But, the journey is usually as useful as the destination. Confronting and dealing with these challenges is more than half the job done, in making sure we’re making the right thing, for the right reasons, for the right people.
All things considered, while Customer Development may not seem like the Holy Grail to a thriving business, it does, actually, tremendously help discover many of the things we need to build a business around a product; our product. It may just be what a novice entrepreneur needs to find their way right through and out of the uncertainty and constant flux their market is in. In fact, keeping it on a continuous loop will eventually ensure that they get where they need to be.
Customer Development helps us reach our destinations in many different ways. It facilitates our endeavors in discovering the problem(s) worth solving, building a product that meets the customer’s needs, building a conversion funnel, structuring a viable and scalable Business Model and, eventually, scaling the company and its operations. Of course, this goes to say that, if nothing else, it’s worth a try to find out the different levels of value it will bring into building a healthy, thriving business, out of a mere idea.