Customer Development

Customer development is a formal methodology for building start-ups and new corporate ventures.
It is one of the three parts that make up a Lean Start-up (Business Model Design, Customer
Development).

The process assumes that early ventures have untested hypotheses about their business model (who
are the customers, what features they want, what channel to use, revenue strategy/pricing tactics,
how to get/keep/grow customers, strategic activities needed to deliver the product, internal
resources needed, partners needed and costs.).

Customer development starts with the key idea that there are no facts inside your building so get
outside to test them.

Many start-up businesses devote all of their efforts to designing and refining their
product and very little time “getting out of the building. The customer development
model encourages that more time be spent in the field identifying potential
consumers and learning how to better meet their needs. The Customer Development
concept emphasizes empirical research. (Gaining knowledge by means of direct
and indirect observation or experience).

Customer development is the opposite of the “if we build it, they will come” product
development-centered strategy, which is full of risks and can ultimately be the
downfall of a company.

The customer development method was created by serial entrepreneur-turned-

educator Steve Blank, father of the lean start up movement. According to Blank,
start-ups are not simply smaller versions of larger, more developed companies. A
start up operates in a fashion vastly different from that of a large company and
employs different methods. While larger companies execute known and proven
business strategies, start-ups must search for new business models. Customer
Development guides the search for a repeatable and scalable business model.

The four-step process

The customer development method consists of four steps that are designed to help avoid
common pitfalls and repeat successful business strategies:

 Customer discovery first captures the founders’ vision and turns it into a series of business
model hypotheses. Then it develops a plan to test customer reactions to those hypotheses
and turn them into facts.
 Customer validation tests whether the resulting business model is repeatable and scalable. If
not, founders should return to customer discovery.
 Customer creation is the start of execution. It builds end-user demand and drives it into the
sales channel to scale the business.
  Company building transitions the organization from a start up to a company focused on
executing a validated model.

Customer Discovery Checklist

To move through that phase, you should do the following things:

Find a problem you want to solve. I have written an extra guide on this topic.

Write down your guesses about the following areas:

Market Size

Value proposition (what do you want your company to become? What is your long-
term vision? What is your product and why will people use or buy it? How will a
finished version look like? etc.)

Customers and the problems they want to solve (who will be the end users? Who will
make the buying decision? Who might influence these guys to buy the product –
celebrities, leaders, experts? Who might veto buying your product?)

Distribution and pricing (How will you reach your customers? Which channels will be
suitable for advertising? How much will your customers pay for your product?)

Market type (Are you entering a new or an existing market? Will you ‘resegment’ an
existing market with a niche or low cost product? Are you creating a ‘clone market’
that already exists elsewhere?)

Customer Relationships (How will you be able to get your customers to purchase?
How can you keep them? How can you ‘grow’ them to generate more revenue from
them or make them create more customers for you?)

Competition

Already identify team members that are crucial to your business model.

Build a list of 50 potential customers to learn about your guesses.

If you’re not familiar with the problem you want to solve, talk to them about it until
you have the best possible understanding!

As soon as you think that you understand the problem you want to solve, prepare a
“problem presentation” that you can show to your users. It’s a description of their
problem from your perspective.

Use your interviews and your presentation to find out if the problem you see is really
important for your customers and if you’ve gotten it right.
Talk to industry experts and visit conferences to understand your market. See who
has power and who your competitors might be. Learn about how you need and can
be different to them. Tip: At a conference always approach the technical guy and ask
them anything about the product. They will tell you. Don’t talk to a company’s
business guy because he has his own hidden agenda.

After you have gained an understanding of the problem and the market, pool your
knowledge with your product development team. Revise your product idea. Make it a
suitable solution for the problem you found.

Develop for the few, not for the many. No startup can afford to create a product that
satisfies the ‘mainstream customer’ from the beginning.

Find your “early adoptors”. People that will be ready to buy a basic version of the
solution from unknown start-ups. Take the criteria that Steve provides us with an
orientation:

These people have a business problem.

They are aware that they have this problem.

They have searched for a solution.

They have put together a “Do-it-yourself” solution.

They have access to the budget required to purchase a solution.

They are willing to pay even for an early version.

Test the value of your solution. Give users an idea of what you want to build by
preparing a “solution presentation”. It should explain both the problem and the
solution from a user’s perspective.

Show it to potential customers. You might take the people you already talked to (if
they want)

Find out if your users think that your product is a great solution. If they don’t, adapt it!
Change your lean canvas on a regular basis.

Make a list of functional and non-functional requirements that your product must
have to be marketable. Don’t include all the stuff that customers request, keep it as
basic as possible!

Create an MVP. It’s a minimal set of features that would provide value for your users.
Don’t work with feature lists so much. Write a ‘user story’ instead. It’s a short
narrative about the things that your product can do and why it matters.

Create user profiles for each customer group. Adapt them as you learn more.

Draw a day in the life of your customer (before and after your product).
‘Become the customer’: Participate in their culture, consume the media that they like.
Try to understand how they learn about new ways to spend their time.

Draw the organization chart of your users and buyers. You’ll have a hard time when
your potential user’s won’t be able to convince the decision makers!

If you’re building an online product, create a beta version when you’re in an

advanced state as described in Lean Start-up.

See how sticky your solution is. How often come user back, how long they stay and
how many refer it to their friends/colleagues.

Even if your problem and your solution sound great to your customers, check out if
they will be ready to pay a reasonable price!

If you can’t sell your product profitably, you won’t be able to build a company.

Sell before you build (or let build).

Customer Discovery Outcome

At the end of this phase, you should be able to answer three questions:

Market opportunity question: Is there a significant enough demand for our solution?

Customer question: Who are our customers and how do we reach them?

Business model question: Can we make money and grow the company?

Based on the answers, you either pivot or proceed.

Assess your insights carefully. It should be based on DATA. Be aware those

iterations are normal! According to Steve, you will move back from this point at least
once because your answers don’t look so good yet.

Customer Validation Checklist

To get through this stage, you should do the following things:

STEP #1: ‘GET READY TO SELL’.

Prepare for your first customer acquisition meetings. Do not just start by trying some
stuff, but create structured programs for trying different acquisition approaches.

Appoint a ‘chief data analyst’ who coordinates your programs. He or she must be
able to keep track of your important metrics and make things happen if things aren’t
happening as planned.
Craft a positioning statement that introduces your company, your product and the
reason why your customers should care about them. Why is your product different
and worth buying? Make it short, understandable and compelling.

Create some marketing material that makes people curious (however, it shouldn’t be
so detailed that they can decide not to buy!). Make a ‘collateral’ plan that states all
materials needed for your sales process.

Don’t create any stuff you don’t need. The materials include:

 a website
 simple presentations/1-pager
 demos
 data sheets
 price lists
 business cards
 email templates

Refine your plan for acquiring customers. Create the tools and content that ‘acquire’
customers (lead them to your site/app) and the ones that ‘activate’ your customer
(get them to buy/sign up).

Create an ‘acquisition plan’ that tells you how your upcoming customer acquisition
program will work:

who in your team will be responsible for it?

what will these guys do?

how much budget can your company spend for the first round of testing?

what is the timetable for the things that must be prepared before launch?

what are measurable goals for each activity?

do you have to put up with several parties (are your users different from your
payers)?

Prepare to collect as many data points as possible. Your tests will be a waste of time
if you can’t measure the results correctly.

Create an ‘activation plan’. This is what you want to test any action that could lead to
more customer activation (e.g. signups, referral, upsells…). To do that in a structured
manner, draw a plan that contains the following things:

The concrete measure (there are numerous possibilities on your homepage and
elsewhere, e.g. sending a follow-up email or putting a social media button on your
landing page).
A first test for each measure (e.g. you might check if a big social media button on
your homepage performs better than a small social media button).

The second test for each measure (e.g. you might check if a social media button on
the top of the page performs better than one at the lower end).

Each test will need to tell you if the measure has been a success at all (e.g. you
expect 100 shares or 10% more signups in those 3 days after you implemented your
social media button).

Optimize the content on your homepage: present the info that your customer needs
in order to make a decision, adapt it to the style and language of your audience,
include widgets that allow your customers to get engaged with your product, include
clear calls to action…

If none of the founders have any sales skills, you might hire a coach or get a mentor
who is ‘closer’ who can sell. One of the starters should read sales and marketing
blogs. Get my favourites here.

Create a fully-fledged ‘MVP’ that is a functional prototype of your product with a

minimum feature set (we’ll learn more about MVPs later). Don’t forget that you must
be able to collect as much behavioural data with it as possible.

Create a ‘roadmap’ that tells you how your product will reach customers. Are other
parties like manufacturers, distributors and retailers involved? How much percent of
the price will each party take as a fee?

If you’re an online company: Define measurable metrics that will allow you to
understand the behaviour of your users! Don’t overdo it. A few metrics will be
enough. Mostly ONE metric is sufficient — if it’s the right one. The right one
depends on the type of your business.

Don’t launch until everything is properly prepared. Your goal is to acquire and keep
customers – you won’t manage that if you promise stuff that doesn’t work.

STEP #2: SELL!

You should try to get the validation that counts most: signups and orders! That
means that you’ll best test your guesses of your business model.

If your company sells via web channels, you will test the acquisition and activation
plans you defined and try to optimize your most important metrics. Do this by
continually testing and improving your homepage, marketing channels, etc…. The
most common tests are A/B tests and Usability tests.

If your company sells via ‘physical’ channels (phone, appointments, etc.), you will try
to sell your products to the people you identified as “early evangelists”. Use the
profile you developed earlier and create a list of target people. Even if you prepared
well, be ready to be rejected by 95% of your prospects. That’s okay. That’s part of
the process.

STEP #3: PRODUCT POSITIONING AND COMPANY POSITIONING.

At this point, you should understand your customers so well than you can create a
positioning based on real facts.

In order to refine your knowledge, you might do a series of ‘audit interviews’ that ask
people whom they perceive your company and its competitors. You might run them
with customers, potential customers you didn’t get yet, industry experts,
competitors… Check out if they know your company, if they consider it credible and
what differences between you and your competitors they perceive.

You might do the same interviews with your team. It will be surprising how many
different views there are!

Create a one-page document that will inform all your sales and marketing materials
later. Match it to the type of market you want to tackle. In an existing or resegmented
market, you should describe what makes your product different, in a new or clone
market; you should refer to the problem your product solves.

Do the same with your company positioning.

Approach industry analysts and influencers (people with well-known blogs, authors,
regular conference speakers, etc.). Choose them carefully because it’s quite
embarrassing if you approach the wrong people. See if your positioning appeals to
them. If not, find out why and improve description and positioning.

STEP #4: PIVOT OR PROCEED?

At this point, you will review all the relevant information to decide if it’s time to move
on and scale your business.

Gather your data and look for anomalies that might pose a problem for your
company.

Go through your business model hypotheses and assess if each one has been
validated properly.

Check if your financial model really makes sense. Do you understand your customer
acquisition costs, operating costs and revenue streams? Will you be able to build a
profitable company based on these numbers?

#Customer Validation Outcome

At the end of this phase, you should have satisfying answers to the following
questions:

Can the business scale? (Can you get more and more customers?)

Do you have a repeatable sales roadmap?

Did you actually create some orders with that roadmap?

Is the sales funnel predictable?

It’s really important to make a careful assessment of the numbers and the feedback
you have. Moving back into Customer Validation or even into Customer Discovery
might seem incredibly exhausting. However, if you bet against the odds, everything
you did so far will be in vain.

However, if your company is so great that you can cross this point with confidence:
Congrats!

You’ve come much further than most ventures ever do. From now on, your company
will gradually lose its start up character as I define it. You will stop to search for a
repeatable business model and execute proven stuff instead. Stuff that you’ve
proven yourself! Isn’t this amazing?