The Four Steps to the Epiphany
Joseph Campbell popularized the notion of an archetypal journey that recurs in the mythologies and religions of cultures around the world.
in the marginjordan peterson must have referenced him
In hindsight, I now realize that while educators and startup investors had adapted tools and processes useful for executing a business model, there were no tools and processes to search for a business model. It seemed obvious to me that searching is what startups actually do, but it was a pretty lonely couple of years convincing others.
Figure 1.1 The Product Development Model
Concept and Seed Stage
In the Concept and Seed Stage, founders capture their passion and vision for the company and turn them into a set of key ideas, which quickly becomes a business plan, sometimes on the back of the proverbial napkin. The first thing captured and wrestled to paper is the company's vision.
Next, issues surrounding the product need to be defined: What is the product or service concept? Is it possible to build? Is further technical research needed to ensure the product can be built? What are the product features and benefits?
Third, who will the customers be and where will they be found? Statistical and market research data plus potential customer interviews determine whether the ideas have merit.
Step four probes how the product will ultimately reach the customer and the potential distribution channel. At this stage companies start thinking about who their competitors are and how they differ. They draw their first positioning chart and use it to explain the company and its benefits to venture capitalists.
Product Development
In stage two, Product Development, everyone stops talking and starts working. The respective departments go to their virtual corners as the company begins to specialize by functions. Engineering designs the product, specifies the first release and hires a staff to build the product.
Meanwhile, Marketing refines the size of the market defined in the business plan (a market is a set of companies with common attributes), and begins to target the first customers. In a well-organized startup (one with a fondness for process) the marketing folk might even run a focus group or two on the market they think they are in and prepare a Marketing Requirements Document (MRD) for Engineering. Marketing starts to build a sales demo, writes sales materials (presentations, data sheets), and hires a PR agency. In this stage, or by alpha test, the company traditionally hires a VP of Sales.
Alpha/Beta Test
In stage three, alpha/beta test, Engineering works with a small group of outside users to make sure the product works as specified and tests it for bugs. Marketing develops a complete marketing communications plan, provides Sales with a full complement of support material, and starts the public relations bandwagon rolling. The PR agency polishes the positioning and starts contacting the long lead-time press while Marketing starts the branding activities. Sales signs up the first beta customers (who volunteer to pay for the privilege of testing a new product), begins to build the selected distribution channel, and staffs and scales the sales organization outside the headquarters. The venture investors start measuring progress by number of orders in place by first customer ship.
The CEO refines his or her fund-raising pitch, and hits the street and the phone searching for additional capital.
Product Launch and First Customer Ship
Product launch and first customer ship mark the final step in this model, and what the company has been driving for. With the product working (sort of), the company goes into “big bang” spending mode. Sales is heavily building and staffing a national sales organization; the sales channel has quotas and sales goals. Marketing is at its peak. The company has a large press event, and Marketing launches a series of programs to create end-user demand (trade shows, seminars, advertising, email, and so on). The board begins measuring the company's performance on sales execution against its business plan (which typically was written a year or more earlier, when the entrepreneur was looking for initial investments).
What's Wrong With This Picture?
In fact, there are 10 major flaws to using the Product Development model in a startup.
1. Where Are the Customers?
The greatest risk—and hence the greatest cause of failure—in startups is not in the development of the new product but in the development of customers and markets. Startups don't fail because they lack a product; they fail because they lack customers and a proven financial model.
2. The Focus on First Customer Ship Date
The first customer ship date does not mean the company understands its customers or how to market or sell to them.
Think about what happens after the first customer ship party is over, the champagne is flat, and the balloons are deflated. Sales now must find the quantity of customers the company claimed it could find when it first wrote its business plan. Sure, Sales may have found a couple of “beta” customers, but were they representative of a scalable mainstream market? (A mainstream market is where the majority of people in any market segment reside. They tend to be risk-averse, pragmatic purchasers.) Time after time, only after first customer ship, do startups discover their early customers don't scale into a mainstream market, the product doesn't solve a high-value problem, or the cost of distribution is too high.
3. An Emphasis on Execution Instead of Learning and Discovery
In startups the emphasis is on “get it done, and get it done fast.” So it's natural that heads of Sales and Marketing believe they are hired for what they know, not what they can learn. They assume their prior experience is relevant in this new venture.
Before we can build and sell a product, we have to answer some very basic questions: What are the problems our product solves? Do customers perceive these problems as important or “must-have”? If we're selling to businesses, who in a company has a problem our product could solve? If we are selling to consumers how do we reach them? How big is this problem? Who do we make the first sales call on? Who else has to approve the purchase? How many customers do we need to be profitable? What's the average order size?
4. The Lack of Meaningful Sales, Marketing and Business Development Milestones
Simply put, a startup should focus on reaching a deep understanding of customers and their problems, their pains, and the jobs they need done to discover a repeatable roadmap of how they buy, and building a financial model that results in profitability.
The appropriate milestones measuring a startup's progress answer these questions: How well do we understand what problems customers have? How much will they pay to solve those problems? Do our product features solve these problems? Do we understand our customers’ business? Do we understand the hierarchy of customer needs? Have we found visionary customers, ones who will buy our product early? Is our product a must-have for these customers? Do we understand the sales roadmap well enough to consistently sell the product? Do we understand what we need to be profitable? Are the sales and business plans realistic, scalable, and achievable? What do we do if our model turns out to be wrong?
5. The Use of a Product Development Methodology to Measure Sales
6. The Use of a Product Development Methodology to Measure Marketing
For Marketing, first customer ship means feeding the sales pipeline with a constant stream of customer prospects. To create this demand, marketing activities start early in the Product Development process. While the product is being engineered, Marketing starts creating corporate presentations and sales materials. Implicit in these materials is the “positioning” of the company and product.
Figure 1.3 The View from the Marketing Organization
Most first-time marketers spend a large part of their time behind their desks. This is somewhat amazing, since in a startup no facts exist inside the building, only opinions.
if we get the marketing people out from behind their desks and into the field, the deck remains stacked against their success. Look at the Product Development model. When does Marketing find out whether the positioning, buzz, and demand creation activities actually work? After first customer ship. The inexorable march to this date has no iterative loop that says, “If our assumptions are wrong, maybe we need to try something different.”
Premature Scaling
Startup executives have three documents to guide their hiring and staffing: a business plan, a Product Development model and a revenue forecast. All are execution documents – they document spending and hiring as if success is assured. As mentioned earlier there are no milestones saying, “Stop or slow down hiring until you understand customers.”
8. Death Spiral: The Cost of Getting Product Launch Wrong
9. Not All Startups Are Alike
startups fall into one of four basic categories: Bringing a new product into an existing market Bringing a new product into a new market Bringing a new product into an existing market and trying to resegment that market as a low-cost entrant Bringing a new product into an existing market and trying to resegment that market as a niche entrant
Webvan's ability to predict customer acceptance and widespread usage was not based on facts, just untested business plan hypotheses. (Modeling customer adoption rates using traditional quantitative models like Bass Curve are impossible at first customer ship for category 2 and 3 companies. There aren't sufficient initial sales data to make valid sales predictions.)
10. Unrealistic Expectations
So What's The Alternative?
The Technology Life Cycle Adoption Curve
The biggest problem in crossing the chasm is that few of the hard-won early marketing and selling lessons and successes can be leveraged into the mainstream market, as mainstream customers do not find early adopters to be credible customer references. Therefore, completely new marketing and sales strategies are necessary to win over this next, much larger group of customers.
Figure 1.4 The Technology Life Cycle Adoption Curve
Before any of the traditional functions of selling and marketing can happen, the company must prove a market could exist, verify someone would pay real dollars for the solutions the company envisions, and then go out and create the market. These testing, learning, and discovery activities are at the heart of what makes a startup unique, and they are what makes Customer Development so different from the Product Development process.
The Four Steps To The Epiphany
Figure 2.1 The Customer Development Model
Broadly speaking, Customer Discovery focuses on testing whether a company's business model is correct, specifically focused on whether the product solves customer problems and needs (this match of product features and customers is called Product/Market fit).
The nature of finding a market and customers guarantees you will get it wrong several times. Therefore, unlike the Product Development model, the Customer Development model assumes it will take several iterations of each of the four steps. It's worth pondering this point for a moment, because this philosophy of “It's OK to screw it up if you plan to learn from it” is the heart of the methodology presented in this book.
Notice the circle labeled Customer Validation in Figure 2.1 has an additional iterative loop, or pivot, going back to Customer Discovery. As you'll see later, Customer Validation is a key checkpoint in understanding whether you have a product customers want to buy and a roadmap of how to sell it. If you can't find enough paying customers in the Customer Validation step, the model returns you to Customer Discovery to rediscover what customers want and will pay for.
Step 1: Customer Discovery
More formally, this step involves discovering whether the problem, product and customer hypotheses in your business plan are correct.
An important insight is that the goal of Customer Development is not to collect feature lists from prospective customers, nor is it to run lots of focus groups.
The job of the Customer Development team is to see whether there are customers and a market for that vision. (Read this last sentence again. It's not intuitively obvious, but the initial product specification comes from the founders’ vision, not the sum of a set of focus groups.)
at Design Within Reach Rob Forbes was the consummate proponent of a customer-centric view. Rob was talking to customers and suppliers continually. He didn't spend time in his office pontificating about a vision for his business. Nor did he go out and start telling customers what products he was going to deliver (the natural instinct of any entrepreneur at this stage). Instead, he was out in the field listening, discovering how his customers worked and what their key problems were.
Step 2: Customer Validation
The sales roadmap is the playbook of the proven and repeatable sales process that has been field-tested by successfully selling the product to early customers.
Customer Validation proves you have found a set of customers and a market that react positively to the product.
If, and only if, you find a group of repeatable customers with a repeatable sales process, and then find those customers yield a profitable business model, do you move to the next step (scaling up and crossing the Chasm).
Step 3: Customer Creation
Step 4: Company Building
The Four Types Of Startup Markets
No one knew what a PDA could do, there was no latent demand from end users, and emphasizing its technical features would have been irrelevant. Palm needed to educate potential customers about what a PDA could do for them. By our definition (a product that allows users to do something they couldn't do before), Palm in 1996 created a new market. In contrast, Handspring in 1999 was in an existing market.
Table 2.1 Market Type Affects Everything Customer Market Sales Finance Needs Market Size Distribution channel On going capital Adoption Rate Cost of entry Margins Time to profitability Problem Recognition Launch Type Sales cycle Positioning Competitive Barriers Before any sales or marketing activities can begin, a company must keep testing and asking, “What kind of a startup are we?”
A New Product in an Existing Market
You are in an existing market if your product offers higher performance than what is currently offered. Higher performance can be a product or service that runs faster, does something better or substantially improves on what is already on the market.
You can enter an existing market with a cheaper or repositioned “niche” product, but if that is the case we call it a resegmented market.
A New Product in a New Market
A new market results when a company creates a large customer base that couldn't do something before. This happens because of true innovation, creating something brand-new; dramatically lower cost, creating a new class of users; or because the new product solves availability, skill, convenience, or location issues in a way no other product has.
(By “created the market” I do not mean “first-to-market”; I mean the company whose market share and ubiquity are associated with the market.)
If you're creating a new market, your problem isn't how to compete with other companies on product features but how to convince a set of customers your vision is not a hallucination. Creating a new market requires you to understand whether there is a large customer base that couldn't do this before, whether these customers can be convinced they want or need your new product, and whether customer adoption occurs in your lifetime.
A New Product Attempting to Resegment an Existing Market: Low Cost
Low-cost resegmentation is just what it sounds like—are there customers at the low end of an existing marketing who will buy “good enough” performance if they could get it at a substantially lower price? If you truly can be a low-cost (and profitable) provider, entering existing markets at this end is fun, as incumbent companies tend to abandon low-margin businesses and head up-market.
A New Product Attempting to Resegment an Existing Market: Niche
Niche resegmentation is slightly different. It looks at an existing market and asks, “Would some part of this market buy a new product designed to address their specific needs? Even if it cost more? Or had worse performance in an aspect of the product irrelevant to this niche?’
In-n-Out Burger is a classic case of resegmenting an existing market. Who would have thought a new fast-food chain (now with 200 companyowned stores) could be a successful entrant after McDonald's and Burger King owned the market? Yet In-n-Out succeeded by simply observing the incumbent players had strayed from their original concept of a hamburger chain. By 2001 McDonald's had over 55 menu items and not one of them tasted particularly great. In stark contrast, Inn-Out offered three items: all fresh, high-quality and great tasting. They focused on the core fast-food segment that wanted high-quality hamburgers and nothing else.
Market Type and the Customer Development Process
During the first step, Customer Discovery, all startups, regardless of Market Type, leave the building and talk to customers.
a company creating a new market has an open-ended set of questions. Completing the Customer Development processes may take a year or two, or even longer.
Table 2.2 sums up the differences among Market Types. As you'll see, the Customer Development model provides an explicit methodology for answering “What kind of startup are we?” It's a question you'll return to in each of the four steps. Table 2.2 “Market Type” Characteristics Existing Market Resegmented Market New Market Customers Existing Existing New/New usage Customer Needs Performance Cost Perceived need Simplicity & convenience Performance Better/faster Good enough at the low end Good enough for new niche Low in traditional attributes improved by new customer metrics Competition Existing incumbents Existing incumbents Non-consumption/other startups Risks Existing incumbents Existing incumbents Niche strategy fails Market adoption
Synchronizing Product Development And Customer Development
In contrast, most startups can only guess who their customers are and what markets they are in. The only certainty on day one is the product vision. It follows, then, the goal of Customer Development in a startup is to find a market for the product as spec'd, not to develop or refine a spec based on a market that is unknown. This is a fundamental difference between a big company and most startups.
Put another way, big companies tailor their Product Development to known customers. Product features emerge by successive refinement against known customer and market requirements and a known competitive environment. As the product features get locked down, how well the product will do with those customers and markets becomes clearer. Startups, however, begin with a known product spec and tailor their Product Development to unknown customers. Product features emerge by vision and fiat against unknown customer and market requirements.
In short, in big companies, the product spec is market-driven; in startups, the marketing is product-driven.
A few examples of synchronization points are:
In each step—Customer Discovery, Customer Validation, Customer Creation and Company Building—the Product Development and Customer Development teams hold a series of formal “synchronization” meetings.
In Customer Discovery, the Customer Development team strives to validate the product spec, not come up with a new set of features. Only if customers do not agree there's a problem to be solved, think the problem is not painful, or don't deem the product spec solves their problem, do the Customer and Product Development teams reconvene to add or refine features.
Summary: The Customer Development Process
The Customer Development model consists of four well-defined steps: Customer Discovery, Customer Validation, Customer Creation, and Company Building.
While each step has its own specific objectives, the process as a whole has one overarching goal: proving there is a profitable, scalable business for the company.
Being a great entrepreneur means finding the path through the fog, confusion and myriad of choices. To do that, you need vision and a process.
CHAPTER 3 Customer Discovery
When I got a demo of Front Desk, my reaction was, “Wow, that's really an innovative device. I'd love to have one at home. How much is it?” When Steve told me it was $1400, my response was, “Gosh, I wouldn't buy one, but can I be a beta site?” I still remember Steve's heated reply: “That's the reaction everyone has. What's wrong? Why wouldn't you buy one?” The stark reality was FastOffice had built a Rolls Royce for people with Volkswagen budgets. Few—unfortunately, very few—small home businesses could afford it. Steve and his team made one of the standard startup mistakes. They had developed a great product, but neglected to spend an equivalent amount of time developing the market. The home office market simply had no compelling need that made Front Desk a “must-have,” especially at a high price. FastOffice had a solution in search of a problem.
FastOffice fired its VP of Sales and came up with a new sales and marketing strategy. Now, instead of selling to individuals who worked at home, the company would sell to Fortune 1000 corporations that had a “distributed workforce”— salespeople who had offices at home.
While the new strategy sounded great on paper, it suffered from the same problem as the first: The product might be nice to have, but it did not solve a compelling problem. Vice Presidents of Sales at major corporations were not going to bed at night worrying about their remote offices. They were worrying about how to make their sales numbers.
Time and again, startups focus on first customer ship, and only after the product is out the door do they learn customers aren't behaving as expected.
in the marginIn a way customer developmet and jjst asking about a product befre itis offered sortof krganicslly generates interest and primes the market. In biology terms its like the primaey messeger which enables the seckndary hormones to productivrly alter the genome given an environmental signal. In social terms its sort of how indirect suggestion primes people to think a certain way. The periphery route is essential to lay the grojndworm for the car to speed.
What the company lacked was a set of early Customer Development goals that would have allowed it to measure its progress in understanding customers and finding a market for its product. These goals would have been achieved when FastOffice could answer four questions: Have we identified a problem a customer wants solved? Does our product solve these customer needs? If so, do we have a viable and profitable business model? Have we learned enough to go out and sell?
So the general goal of Customer Discovery amounts to this: turning the founders’ initial hypotheses about their business model, market and customers into facts. And since the facts live outside the building, the primary activity is to get in front of customers, partners and suppliers. Only after the founders have performed this step will they know whether they have a valid vision or just a hallucination.
All the rules marketers learn about product management in large companies are turned upside down. It's instructive to enumerate all things you are not going to do: Understand the needs and wants of all customers Make a list of all the features customers want before they buy your product Hand product development a features list of the sum of all customer requests Hand product development a detailed marketing requirements document Run focus groups and test customers’ reactions to your product to see if they will buy
Instead, you are going to develop your product iteratively and incrementally for the few, not the many. Moreover, you're going to start building your product even before you know whether you have any customers for it.
Develop the Product for the Few, Not the Many
Earlyvangelists: The Most Important Customers You'll Ever Know
Earlyvangelists are a special breed of customer willing to take a risk on your startup's product or service because they can envision its potential to solve a critical and immediate problem—and they have the budget to purchase it. Unfortunately, most customers don't fit this profile.
Imagine a bank with a line around the block on Fridays as customers wait an hour or more to get in and cash their paychecks. Now imagine you are one of the founders of a software company whose product could help the bank reduce customers’ waiting time to 10 minutes. You go into the bank and tell the president, “I have a product that can solve your problem.” If his response is “What problem?” you have a customer who does not recognize he has a pressing need you can help him with. There is no time in a startup's first two years of life that he will be a customer, and…
Another response from the bank president could be, “Yes, we have a terrible problem. I feel very bad about it, and I hand out cups of water to our customers waiting in line on the hottest days of the year.” In this case, the bank president is the type of customer who recognizes he has a problem but hasn't been motivated to do anything more than paper over the symptoms. He may provide useful feedback about the…
If it's a good day, you may run into a bank president who says, “Yes, this is a heck of a problem. In fact, we're losing over $500,000 a year in business. I've been looking for a software solution that will cut down our check cashing and processing time by 70 percent. The software has to integrate with our bank's Oracle back end, and it has to cost less than $150,000. And I need it delivered in six months.” Now you're getting warm; this customer has “visualized the solution.” It would be even better if the president said, “I haven't seen a single software package that solves our problem, so I wrote a request for our IT department to develop one. They've cobbled together a solution, but it keeps crashing on my tellers and…
Finally, imagine the bank president says, “Boy, if we could ever find a vendor who could solve this problem, we could spend the $500,000 I've budgeted with them.” (Truth be told, no real customer has ever said that. But we can dream, can't we?) At this point, you have…
Earlyvangelists can be identified by these customer characteristics (see Figure 3.1): The customer has a problem The customer understands he or she has a problem The customer is actively searching for a solution and has a timetable for finding it The problem is painful enough the customer has cobbled together an interim solution…
Moreover, when you meet them, you mentally include them on your list of expert customers to add to your advisory board (more about advisory boards in Chapter 4
Start Development Based on the Vision
The shift in thinking is important. For the first product in a startup, your initial purpose in meeting customers is not to gather feature requests so you can change the product; it is to find customers for the product you are already building.
If, and only if, no customers can be found for the product as spec'd do you bring the features customers requested to the Product Development team.
If Product Development is simply going to start building the product without customer feedback, why talk to customers at all? Why not just build the product, ship it, and hope someone wants to buy it? The operative phrase is “start building the product.” The job of Customer Development is to get the company's customer knowledge to catch up to the pace of Product Development—and in the process, to guarantee there will be paying customers the day the product ships. An important side benefit is the credibility the Customer Development team accrues internally within your organization. Product Development will be interacting with a team that understands customer needs and desires. Product Development no longer will roll their eyes after every request for features or changes to the product, but instead understand they come from a deep understanding of customer needs.
In sharp contrast to the MRD approach of building a product for a wide group of customers, a successful startup's first release is designed to be “good enough only for our first paying customers.” The purpose of Customer Discovery is to identify those key visionary customers, understand their needs, and verify your product solves a problem they are willing to pay to have solved—or not.
Overview Of The Customer Discovery Process
Phase 1 is a rigorous process of writing a series of briefs that capture the hypotheses embodied in your company's vision and business model. These hypotheses are the assumptions about your product, customers, pricing, demand, market, and competition you will test in the remainder of this step.
In Phase 2 you qualify those assumptions by testing them in front of potential customers. At this point you want to do very little talking and a lot of listening. Your goal is to understand your customers and their problems, and arrive at a deep understanding of their business, workflow, organization, and product needs.
In Phase 3 you take your revised product concept and test its features in front of customers. The goal is not to sell the product but to validate the Phase 1 hypotheses by having customers say, “Yes, these features solve our problems.” At the same time you've been testing the product features, you've been also testing a bigger idea: the validity of your entire business model. A valid business model consists of customers who place a high value on your solution, and find the solution you offer is (for a company) mission-critical, or (for a consumer) a “have-to-have” product (product/market fit.) In front of potential buyers, you test your pricing, channel strategy, sales process and sales cycle, and discover who is the economic buyer (the one with a budget). This is equally true for consumer products where a sale to a teenager might mean the economic buyer is the parent while the user is the child.
Finally, in Phase 4 you stop and verify you understand customers’ problems, that the product solves those problems, customers will pay for the product, and that the resulting revenue will result in a profitable business model. This phase culminates in the deliverables for the Customer Discovery step: a problem statement document, an expanded product requirement document, an updated sales and revenue plan, and a sound business and product plan. With your product features and business model validated, you decide whether you have learned enough to go out and try to sell your product to a few visionary customers or whether you need to go back to customers to learn some more. If, and only if, you are successful in this step do you proceed to Customer Validation.
The Customer Development Team
More often than not it includes a “head of Customer Development” who has a product marketing or product management background and is comfortable moving back and forth between customer and Product Development conversations.
To succeed in this process, the team members must possess: The ability to listen to customer objections and understand whether they are issues about the product, the presentation, the pricing, or something else (or the wrong type of customer) Experience moving between the customer and Product Development team The ability to embrace constant change The capacity to put themselves in their customers’ shoes, understand how they work and what problems they have
Complementing the Customer Development team is a startup's product execution team. While Customer Development is out of the building talking with customers, the product team is focused on creating the product. Often this team is headed by the product visionary who leads the development effort.
Phase 0: Get Buy-In
You must make sure all the players—founders, key execs, and the board—understand the differences among Product Development, Customer Development and Market Type, and that they buy into the value of differentiating between them.
The Product Development process emphasizes execution. The Customer Development process emphasizes learning, discovery, failure, iterations and pivots. For this reason you want to ensure there is enough funding for two to three passes through the Customer Discovery and Customer Validation steps. This is a discussion the founding team needs to have with its board early on. Does the board believe Customer Development is iterative? Does the board believe it is necessary and worth spending time on?
Unique to the process is the commitment of the Product Development team to spend at least 15% of its time outside the…
You also want to articulate in writing both the business and product vision of why you started the company. Called a mission statement, at this point in your company's life this document is nothing more than “what we were thinking when we were out raising money.” It can be no more complicated than the two paragraphs used in the business plan to describe your product and the market. Write these down and post them on the wall. When the company is confused about what product…
Finally, next to the mission statement post the founding team's core values. Unlike mission statements, core values are not about markets or products. They are a set of fundamental beliefs about what the company stands for that can endure the test of time: the…
A good example of a long-lasting set of core values is the Ten Commandments. It's not too often that you hear someone say, “Hey, maybe we should get rid of the second commandment.” More than 4,000 years after they were committed to paper—well,…
in the marginwhat are islamic ethics and how are theg different
the founding team of a pharmaceutical company articulated a powerful core value: “First and foremost, we believe in making drugs that help people.” The founders could have said, “We believe in profits first and at all costs,” and that, too, would be a core value. Neither is…
For core values to be of use, a maximum of three to five…
the next phase of Customer Discovery is to write down all of your company's initial…
Your written summary of these hypotheses will take the form of a one-or two-page brief about each of the following areas: Product Customer and their problem Channel and pricing Demand creation Market Type Competition Initially, you may lack the information to complete these hypotheses. In fact some of your briefs may be shockingly empty. Not to worry. These briefs will serve as an outline to guide you. During the course of Customer Discovery, you will return to these briefs often, to…
In this first phase, you want to get down what you know (or assume you know) on paper and create a template to record the…
A. State Your Hypotheses: The…
First Product Development/Customer Development Synchronizaton Meeting
This is one of the few times you are going to ask the head of product execution and his or her partner, the keeper of the technical vision, to engage in a paper exercise.
The product brief covers these six areas: Product features Product benefits Intellectual property Dependency analysis Product delivery schedule Total cost of ownership/adoption
Product Hypotheses: Product Features
The product features list is a one-page document consisting of one-or two-sentence summaries of the top 10 (or fewer) features of the product.
In large companies, it's normal for Marketing to describe the product benefits. The Customer Development model, however, recognizes that Marketing doesn't know anything about customers yet. In a startup Product Development has all…
Product Hypotheses: Intellectual…
Are you inventing anything unique? Is any of your IP patentable? Do you have trade secrets to protect? Have you checked to see whether you infringe on others’ IP…
if you own critical patents in a nascent industry, they can become a major financial…
Product Hypotheses: Dependency…
The Product and Customer Development teams jointly prepare a one-page document that says, “For us to be successful (that is, to sell our product in volume), here's what…
For each factor, the dependency analysis specifies what needs to happen (let's say the widespread adoption of telepathy), when it needs to happen (telepathy must be common among consumers under age 25 by 2010), and what it means for you if it doesn't happen (your product needs to use the Internet instead). Also write down how you can measure whether…
In the product delivery schedule, you ask the product team to specify not only the date of the first release (the minimum feature set), but the delivery and feature schedule for follow-on products or multiple releases of the…
you'll need to make clear to the product team why you need their cooperation and best estimates. These are important because the Customer Development team will be out trying to convince a small group of early customers to buy based on the product spec long before you can physically deliver the product. To do so they will have to paint a picture for customers of what the product will ultimately look like several releases into the future. It's because these customers are…
Asking for dates in this phase may result in an anxious Product Development team. Reassure them this first pass at a schedule is not set in stone. It will be used throughout Customer Discovery to test…
Product Hypotheses: Total Cost Of…
The total cost of ownership (TCO) adoption analysis estimates the total cost to customers of buying and using your product. For business products, do customers need to buy a new computer to run your software? Do they need training to use the product? What other physical or organizational changes need to happen? What will be the cost of deployment across a whole company? For consumer products, it measures the cost of “adopting” the product to fit their needs. Do customers need to change their lifestyle? Do they…
While the Customer Development team prepares this estimate, the Product Development team should provide feedback about…
B. State Your Hypotheses: Customer Hypotheses
The process of assembling the customer briefs is the same as for the product brief, except this time the Customer Development team is writing down its initial assumptions.
Again, let's consider each part of the customer and problem briefs in turn.
Customer Hypotheses: Types of Customers
every sale has a set of decision-makers who get their fingers into the process. So the first question to ask is, “Are there different types of customers we should approach when we sell our product?”
Later, when you are ready to develop your first “sales roadmap” in the Customer Validation step, knowing all the players in detail will be essential. Right now, it's sufficient to realize the word “customer” is more complicated than a single individual.
Some of the customer types I have encountered include (see Figure 3.3
Figure 3.3 Customer Types
These are the day-to-day users of the product, the ones who will push the buttons, touch the product, play with it, use it, love it and hate it. You need a deep understanding of the end users’ needs, but it's important to realize in some cases the end user may have the least influence in the sales process.
Next up the sales chain are all the people who think they have a stake in a product coming into their company or home. This category could include the key techno-whiz in IT or the 10-year-old whose likes and dislikes influence the family's choices of consumer products.
Further up the decision chain is the economic buyer, the one who has the budget for the purchase and must approve the expenditure. (Don't you bet you are going to want to know who that is?) In a consumer purchase it can be a teen with a weekly music budget or a spouse with a vacation budget.
The decision-maker is the person who has the ultimate say about a product purchase regardless of the other users, influencers, recommenders and economic buyers.
Depending on your product, the decision-maker could be a suburban soccer mom/dad or a Fortune 500 CEO.
one more group must be mentioned. You won't be looking for them, but they will see you coming. I call this group the saboteurs. In every large company, for example, there are individuals and organizations that are wedded to the status quo. If your product threatens a department's stability, headcount, or budget, don't expect this group to welcome you with open arms. Therefore you need to be able to predict who might be most threatened by your product, understand their influence in the organization, and ultimately put together a sales strategy that at worst neutralizes their influence and at best turns them into allies.
For a consumer product, it may be a member of the family who has gotten comfortable with the old car and is uncomfortable about driving something new and different.
The first step in formulating your customer brief is to write down and diagram who you think will be your day-to-day users, influencers, recommenders, economic buyer, and decision-maker, including, in the case of sales to companies, their titles and where in the organization they are found. It's also worth noting if you think the economic buyer has a current budget for your product or one like it, or whether you will have to persuade the customer to get funds to buy your product.
Customer Hypotheses: Types of Customers for Consumer Products
Some consumer products (clothing, fashion, entertainment products, etc.) don't address a “problem,” or need. In fact, U.S. consumers spend over 40 percent of their income on discretionary purchases, i.e. luxuries.
What's different is recognizing that since a real problem or need does not exist, for consumers to purchase a luxury, they must give themselves a justification for the purchase. In the Customer Creation step your marketing programs will promise consumers their unneeded spending will be worth it.
Describe how you can convince these customers that your product can deliver an emotional payoff.
Customer Hypotheses: Customer Problems
It's much easier to sell when you can build the story about your product's features and benefits around a solution to a problem you know the customer already has. Then you look less like a crass entrepreneur and more like someone who cares coming in with a potentially valuable solution.
Understanding your customers’ problems involves understanding their pain—that is, how customers experience the problem, and why (and how much) it matters to them.
Let's go back to the problem of the long line of people trying to cash their paychecks at the bank. It's obvious there's a problem, but let's try to think about the problem from the bank's point of view (the bank being your customer).
To the bank president, the pain might be the bank lost $500,000 last year in customer deposits when frustrated customers took their business elsewhere. To the branch manager, the biggest pain is her inability to cash customer paychecks efficiently. And to the bank tellers, the biggest pain is dealing with customers who are frustrated and angry by the time they get to the teller window.
“If you could wave a magic wand and change anything at all, what would it be?” You can guess the bank president would ask for a solution that could be put in place quickly and cost less than the bank is losing in customer deposits. The branch manager would want a way to process checks faster on paydays that would work with the software already in place and not force a change in the bank's day-to-day processes. The tellers would want customers who don't growl at them and please, no new buttons, terminals, and systems.
Finally, writing down the answer to “If they could wave a magic wand and change anything at all, what would it be?” gives you a tremendous leg up on how to present your new product.
As you learn more you can begin to categorize your customers as having: A latent need (the customers have a problem or they have a problem and understand they have a problem) An active need (the customers recognize a problem—they are in pain—and are actively searching for a solution, but they haven't done any serious work to solve the problem) A vision (the customers have an idea what a solution to the problem would look like, may even have cobbled together a homegrown solution, and, in the best case, are prepared to pay for a better solution) Now that you are firmly ensconced in thinking through your customers’ problems, look at the problem from one other perspective: Are you solving a mission-critical company problem or satisfying a must-have consumer need? Is your product have-to-have? Is it nice-to-have?
might be a mission-critical issue if the bank's profits are only $5,000,000 a year, or if the problem is occurring at every branch in the country, so the number of customers lost is multiplied across hundreds of branches.
The same is true for our consumer example. Does the family already have two cars in fine operating condition? Or has one broken down and the other is on its last legs? While the former is an impulse purchase, the latter is a “must-have” need.
As I suggested earlier, one test of a have-to-have product is that the customers have built or have been trying to build a solution themselves. Bad news? No, it's the best news a startup could find.
Now all you need to do is convince them that if they build it themselves they are in the software development and maintenance business, and that's what your company does for a living.
Customer Hypotheses: A Day in your Customer's Life
One of the most satisfying exercises for a true entrepreneur executing Customer Development is to discover how a customer “works.” The next part of the customer problem brief expresses this understanding in the form of “a day in the life of a customer.”
Unless you've been a bank teller, these questions should leave you feeling somewhat at a loss.
Unless you have come from your target industry, this part of your customer problem brief may include little more than lots of question marks.
In Customer Development, the answers turn out to be easy; asking the right questions is difficult. You will go out and talk to customers with the goal of filling in all the blank spots on the customer/problem brief.
For a consumer product, the same exercise applies. How do consumers solve their problems today? How would they solve their problems having your product? Would they be happier? Smarter? Feel better? Do you understand how and what will motivate these customers to buy?
Customer Hypotheses: Organizational Map and Customer Influence Map
This part of the brief has you first listing all the people you can think of who could influence a customer's buying decisions. Your goal is to build a tentative organizational map showing all the potential influencers who surround the user of the product. If it's a large company the diagram may be complex and have lots of unknowns right now. If it's a sale to a consumer, the diagram might appear to be deceptively simple but with the same thought—it's clear consumers have a web of influencers as well.
Customer Hypotheses: ROI (Return On Investment) Justification
For purchases both corporate and consumer, customers need to feel the purchase was “worth it,” that they got “a good deal.” For a company this is called return on investment, or ROI. (For a consumer this can be “status” or some other justification of their wants and desires.) ROI represents customers’ expectation from their investment measured against goals such as time, money, or resources as well as status for consumers.
From listening to your customer, you figure the bank is losing $500,000 in gross customer revenue per year. The profit on every customer is 4 percent. Therefore, at every branch $20,000 in profit leaves with those lost customers. (When you first construct your brief, numbers like these are just your guesses. As you get customer feedback, you can plug in more accurate amounts.)
Figure 3.4 ROI Calculation for ABC Bank
Now, most customers never directly ask a startup about ROI because they assume no outside vendor would be familiar enough with their internal operations to develop valid ROI metrics. Suppose you were the exception.
To do that you have to decide what to measure in calculating ROI. Increased revenues? Cost reduction, or cost containment? Displaced costs? Avoided costs? Intangibles?
Your earlyvangelists will end up using your ROI metrics to help sell your product inside their own company! It's with that end in mind that you include an ROI justification in the customer/problem brief.
Customer Hypotheses: Minimum Feature Set
The last part of your customer/problem brief is one the Product Development team will be surprised to see. You want to understand the smallest feature set customers will pay for in the first release.
your mantra becomes, “Less is more, to get an earlier first release.” Rather than asking customers explicitly about feature X, Y or Z, one approach to defining the minimum features set is to ask, “What is the smallest or least complicated problem the customer will pay us to solve?”
C. State Your Hypotheses: Channel and Pricing Hypotheses
Figure 3.5 Distribution Channel Alternatives
Two final thoughts about pricing. The first is the notion of “lifetime value” of a customer; how much can you sell to a customer not just from the first sale, but over the life of the sales relationship?
The second idea is one I use with customers all the time in this phase. I ask them, “If the product were free, how many would you actually deploy or use?” The goal is to take pricing away as an issue and see whether the product itself gets customers excited. If it does, I follow up with: “OK, it's not free. In fact, imagine I charged you $1 million. Would you buy it?” While this may sound like a facetious dialog, I use it all the time. Why? Because more than half the time customers will say something like, “Steve, you're out of your mind. This product isn't worth more than $250,000.” I've just gotten customers to tell me how much they are willing to pay. Wow.
D. State Your Hypotheses: Demand Creation Hypotheses
This brief reflects your hypotheses about how customers will hear about your company and product once you are ready to sell.
Demand Creation Hypotheses: Creating Customer Demand
In this brief you will start to answer the questions: How will you create demand to drive them into the channel you have chosen? Through advertising? Public relations? Retail store promotions? Spam? Website? Word of mouth? Seminars? Telemarketing? Partners? This is somewhat of a trick question, as each distribution channel has a natural cost of demand creation.
You also need to understand how your customers hear about new companies and products. Do they go to trade shows? Do others in their company go? What magazines do they read? Which ones do they trust? What do their bosses read? Who are the best salespeople they know? Who would they hire to call on them?
Demand Creation Hypotheses: Influencers
In this brief you need to identify the influencers who can affect your customer's opinions. Your brief includes the list of outside influencers: analysts, bloggers, journalists, and so on. Who are the visionaries in social media or the blogger, press/analyst community customers read and listen to? That they respect? This list will also become your roadmap for assembling an advisory…
E. State Your Hypotheses: Market Type…
However, unlike decisions about product features, the Market Type is a “late-binding-decision.” This means you can defer this final decision until Customer…
the Customer Development team should record its initial Market Type and brainstorm with the…
In this brief, you will seek a provisional answer to a single question: Is your company entering an existing market, resegmenting an…
However, most companies have the luxury to choose which Market Type to use. So how to choose? A few simple questions begin the process: Is there an established and well-defined market with large numbers of customers? Does your product have better “something” (performance, features, service) than the existing competitors? If so, you are in an existing market. Is there an established and well-defined market with large numbers of customers and your product costs less than the incumbents’? You are in a resegmented market. Is there an established and well-defined market with…
For now, go through each of the market types and pick the one that best…
Table 3.1 Market Type Existing Market Resegmented Market New Market Customers Existing Existing New/New usage Customer Needs Performance Cost Perceived need Simplicity & convenience Performance Better/faster Good enough at the low end Good enough for new niche Low in “traditional attributes”, improved by new customer metrics Competition Existing incumbents Existing incumbents Non-consumption/other startups Risks Existing…
If you believe you are entering an existing market, good questions to address in your brief include: Who are the competitors and who is driving the market? What is the market share of each of the competitors? What are the total marketing and sales dollars the market share leaders will be spending to compete with you? Do you understand the cost of entry against incumbent competitors? (See the Customer Creation step in Chapter 5) Since you are going to compete on performance, what performance attributes have customers told you are important? How do competitors define performance? What percentage of this market do you want to capture in years one through three? How do the competitors define the market? Are there existing standards? If so, whose agenda is driving the standards? Do you want your company to embrace these standards, extend them, or replace them? (If you want to extend or replace them,…
One way to capture your thinking on an existing Market Type is to construct a competitive diagram. Usually a company picks two or more key product attributes and attacks competitors along axes corresponding to these attributes, such as feature/…
Market Type Hypotheses: Resegmenting An…
An alternative to going head to head with the market leaders in an existing market may be to resegment an existing market. Here your positioning will rest on either a) the claim of being the “…
good questions to address in this brief include: What existing markets are your customers coming from? What are the unique characteristics of those customers? What compelling needs of those customers are unmet by existing suppliers? What compelling features of your product will get customers of existing companies to abandon their current supplier? Why couldn't existing companies offer the same thing? How long will it take you to educate potential customers and grow a market of sufficient size? What size is that? How will you educate the market…
For this type of startup, you need to draw both the competitive diagram (because, unlike startups in a wholly new market, you have competitors) and the market map (because you are in effect…
The map shows at a glance why the company is unique. A standing joke is that every new market has its own descriptive TLA (three-letter acronym). Draw the market map with your company in the center.
Figure 3.7 Example of a Market Map
Draw the existing markets from which you expect to get your customers (remember a market is a set of companies with common attributes.)
Market Type Hypotheses: Entering a New Market
If you believe you are entering a new market, good questions to address in your brief include: What are the markets adjacent to the one you are creating? What markets will potential customers come from? What compelling need will make customers use/buy your product? What compelling feature will make them use/buy your product? How long will it take you to educate potential customers to grow a market of sufficient size? What size is that? How will you educate the market? How will you create demand? Given no customers yet exist, what are realistic year one-through-three sales forecasts? How much financing will it take to soldier on while you educate and grow the market? What will stop a well-heeled competitor from taking the market from you once you've developed it? (There is a reason the phrase “the pioneers are the ones with the arrows in their back” was coined.) Is it possible to define your product as either resegmenting a market or as entering an existing one?
F. State Your Hypotheses: Competitive Hypotheses
When the share of the largest player in a market is around 30 percent or less, there is no single dominant company. You have a shot at entering this market. When one company owns over 80 percent share (think Microsoft), that player is the owner of the market and a monopolist. The only possible move you have is resegmenting this market. (See Chapter 5 for more details.)
Maybe your product allows customers to do something they could never do before. If you believe that, what makes you think customers will care?
What do you like most about each competitor's product? What do your customers like most about their products? If you could change one thing in a competitor's product, what would it be?
A natural tendency of startups is to compare themselves to other startups around them. That's looking at the wrong problem. In the first few years, other startups do not put each other out of business. While it is true startups compete with each other for funding and technical resources, the difference between winning and losing startups is that winners understand why customers buy. The losers never do.
Consequently, in the Customer Development model, a competitive analysis starts with why customers will buy your product. Then it expands into a broader look at the entire market, which includes competitors, both established companies and other startups.
This brief completes your first and last large-scale…
Phase 2: Test And Qualify Your…
In this phase the Customer Development team begins to test and qualify the hypotheses assembled in Phase 1. I use the phrase “test and qualify assumptions,” because very rarely…
Since all you have inside the company are opinions—the facts are with your customers—the founding team leaves the building and comes back only when…
In this phase you will make or acquire: First customer contacts The customer problem presentation In-depth customer…
your first set of customer meetings isn't to learn whether customers love your product. It's to learn whether your assumptions about the problems customers have are correct. If those assumptions are wrong, it doesn't…
A. Test and Qualify Your Hypotheses: First…
Regardless of whether you are selling to large corporations or consumers at home, your friendly first contacts are the people who will start your education about customers and their…
Start by making a list of 50 potential customers you can test your ideas on. Fifty names sounds like a lot of leads, but as you'll soon see, you'll go through them quickly. Where do you get these names? From your social networks, friends, investors, founders, lawyers, recruiters, trade magazines,…
For these visits, even if you're selling to businesses your customers’ titles and their level in their organization are irrelevant. And if you're selling to consumers, whether they currently have the slightest interest in your product is also…
At the same time you're building a contact list, you begin to develop an innovators list. Innovators are the companies, departments in a company, or individuals in your field who are smart, well-respected and usually out in front of a subject. For consumer products, they may be the “gadget freak” everyone asks for advice or the group of people others look to spot a trend. You'll use this…
Keep in mind the goal of this initial flurry of calling is not only to meet with people whose names you collect but also to use these customer contacts to network your way up “the food-chain of expertise.” Always keep…
The first step in this phase is the hardest—contacting potential customers who don't know you and convincing them to give you some of their time. But this step gets a lot easier if you do two things: (1) get a referral and (2)…
In a business, since secretaries exist to block your calls, you want to reference someone else, if possible: “Bob at BigBank Inc. said I should talk to you.” Recall you got your list by asking everyone you know who…
First, create an introductory email. Include a one-paragraph description of your company, a general description of what you are doing, and a statement of what's in it for your contact to spend time with you. No, you aren't going to send cold email; the people who gave you the leads are. Forward…
Then follow up with a phone call. Before you pick up the phone and talk to someone you don't know, it's a good idea…
create a reference story that explains why you are calling. This story emphasizes the problems you are trying to solve, why it's important to solve…
Start with an introduction: “Hi this is Bob at NewBankingProduct Inc., and as you remember I was referred to you by [insert helpful reference name here].” Now give them a reason to see you: “We are starting a company to solve the long teller line problem, and we are building our new Instanteller software, but I don't want to sell you anything. I just want twenty minutes of your time to understand how you and your company solve your own teller problem.” What's in it for your contact? “I thought you might give me…
To make this work, you and your co-founders need to make 10 (yes, 10) phone calls a day. Keep calling until you have your schedule booked with three customer visits a day. Get used to being turned down, but always ask, “If you're too busy, who should I talk to?” It's helpful to keep hit-rate statistics (were any reference stories better than others, were any lead source better, were you more successful calling on managers, directors, vice presidents?) And by the way, while this works for calling on companies, the same holds true for consumer products.
As a rule of thumb, your 50 follow-up phone calls should yield five-10 scheduled visits. You will use these visits to test your customer/problem hypotheses—who your customers are and why they will use your product.
Before you go out to visit customers, though, carefully plan how you're going to break the ice and elicit the information you need. The place to start is with the development of what I call a “problem presentation.”
B. Test and Qualify Your Hypotheses: The Customer Problem Presentation
In contrast to a product presentation, a problem presentation isn't designed to convince customers. Instead, you develop it to elicit information from customers. The presentation summarizes your hypotheses about customers’ problems, along with some potential solutions, so you can test whether your assumptions are correct. This presentation is your icebreaker when you meet customers.
Figure 3.8 Customer Problem Presentation
after describing your assumed list of problems in column 1, pause and ask the customers what they think the problems are, whether you are missing any problems, and how they would rank-order the problems.
If they agree with you about the problems, get them to explain why they think it is important to solve them (there is nothing better than playing validated customer needs back to them).
Casually ask, “How much does this problem cost you (in terms of lost revenue, lost customers, lost time, frustration, etc.) today? You'll use this number later in the Customer Validation step when you develop an ROI presentation.
With agreement on the problems and their cost, you can display column 2, the solutions available today.
What you are looking for is an understanding of how customers solve this problem today, or how they think others solve it (for example, more tellers, faster software, bigger server). If the problem is painful or important enough, you will usually get a set of interesting answers. While you're at it, another critical piece of information is, who shares these problems?
Finally, for both corporate and consumer products, display your company's solution (not a set of features, but only the big idea) in column 3. Pause and watch the customers’ reactions. Do they understand what the words mean? Is the solution evident enough that they say, “Aha, if you could do that, all my problems would be solved?” Alternatively, do they say, “What do you mean?” Then do they have to listen to you explain for 20 minutes and still not understand? Ask how your solution compares to the current solutions you just discussed. Once again, the point is not to give a sales pitch. You want their reaction, and a discussion.
My favorite summary of this discussion is to ask two questions I alluded to earlier: “What is the biggest pain in how you work (or in RoboVac's case—how you clean)? If you could wave a magic wand and change anything in what you do, what would it be?” I call these the “IPO questions.” Understand the answers to these questions and your startup is going public.
Of course, what you learn from these discussions depends on what sticks with you when you walk out the door. After you meet with a series of customers, their responses tend to blur together. Therefore, it's helpful to take your hypothesis briefs with you when you make these visits. Look at all the information you want to gather. Then, before each call, shorten the list to “What are the three things I need to learn before I leave?” Make sure you get at least those three questions covered. Over time, as you get confirmation on the key issues, begin to ask different questions.
C. Test and Qualify Your Hypotheses: In-Depth Customer Understanding
“If you had a product like this [describe yours in conceptual terms], what percentage of your time could be spent using the product? How mission critical is it? Would it solve the pain you mentioned earlier? What would be the barriers to adopting a product like this?” Since some day you are going to have to create demand to reach these customers, use this opportunity to find out how they learn about new products. Who are the visionaries in the press/analyst community they read? That they respect?
Finally, you never want to pass up an opportunity to spot talent. Can these customers be helpful in the future? For the next round of conversations? For an advisory board? As a paying customer? To refer you to others?
Here's an example: I once worked in a startup building a new type of supercomputer. One of the markets we had picked was the arcane field of production geology. Since I knew nothing about the field, I realized before I could even hire a domain expert to manage this market, I needed to get educated in depth. I traveled to all the petroleum geology trade shows and conferences, I spoke to customer after customer to understand their needs. I spent days in the Houston petroleum engineering library. Just when I thought I knew enough to fake it as a technical expert in this area, I convinced Chevron's La Habra research center to allow me to offer their research group a two-hour course on the use of graphics supercomputers in petroleum applications. I promised it wouldn't be a sales pitch, just an update on what advances were occurring in computing that were relevant to petroleum geologists. In front of an audience of 30 or so, I spoke about the state of the art in computational reservoir simulation and what could be accomplished on the new class of machines that were coming from companies like ours. During the question-and-answer session my heart was in my throat, since my depth of knowledge, like any good marketer, was no more than one level away from being a complete idiot. At the end of the talk, the head of the research facility approached me and said, “That was a great presentation. We're glad your company hired real petroleum engineers to come speak to us. We hate it when the…
When I start a company, I buy a lot of lunches. I typically have some vague notion of what companies are in adjacent markets or are part of the infrastructure or ecosystem of my business. Through my own contacts, and through introductions, I take my peers out to lunch. In exchange, I want information—not competitive information, but answers to questions such as: What are the industry trends? What are key unresolved customer needs? Who are the key players in this market? What should I read? Who should I know? What should I ask? What customers should I call on? Why will these people meet with you? Most won't out of the goodness of their hearts; they will meet because you will offer a trade. In exchange for information, you will share a little about the problem you are solving and the product that will solve it.
Just as you did with your problem presentation to potential customers, don't present, don't sell; just listen and learn. Spend the time to take a few of the friendliest customers to lunch and ask them who they see as potential competitors, both internally and externally. Who do they think has similar products? Who else is an innovator in this space? Has this solution been tried elsewhere in their company? Is anyone else inside their company trying to build this product? It's amazing how much you can learn from the people who eventually will buy your product.
Ask the same questions of peers in adjacent markets. After practicing on them, try to make contact with the key industry influencers and recommenders you listed in Phase 1. Ask them the same set of questions. Next, start gathering quantitative data about your market. More than likely Wall Street analysts issue reports on your market or adjacent markets. Get copies of all these reports. More important, read them. You need to understand what the analysts believe are the trends, the players, business models, and key metrics. Finally, industry conferences and trade shows are invaluable and essential. Never say, “I'm too busy to attend.” Attend at least two key conferences or tradeshows (you picked the important ones in Phase 1). Not only will you get to take home some great trinkets for your kids, but conferences and trade shows are prime areas for talent-spotting and trend-spotting. Ask your usual questions about trends and players, but this time you want to accomplish a few things you can't anywhere else. You want to get demos of competitive and adjacent products. You want to get your hands on them, get competitors’ literature, talk to their salespeople, and generally immerse yourself in the business you are entering.
Phase 3: Test And Qualify The Product Concept
In Phase 3 you move to testing the product hypotheses on potential customers in your potential market—once again, not to sell them, but to get their feedback. This phase has five parts: Meet with Product Development for a reality check Create the product presentation Make more customer visits Meet with Product Development for a second reality check Identify first advisory board members
A. Test and Qualify the Product Concept: First Company Reality Check
In the reality check the Customer Development team shares what was learned in the field and reviews customer feedback on the assumptions made in Phase 1. Then the Customer Development and Product teams jointly adjust their assumptions, product spec's, or both. Before the meeting, the Customer Development team gathers all the customer data and builds a workflow map of the prototypical customer. At the meeting, the spokesperson for the team diagrams and describes how customers do their jobs and who they interact with. This is your reality check on your customer hypotheses. Keep diagramming and drawing until you can explain how customers’ businesses and lives work today, including how they spend their time and money. Compare this description to your initial hypotheses. (While corporate customers may have a more formal organization to diagram, a consumer will have more external influencers to track.) Once the customer workflow and interactions are fully described, you can get into the real news. What problems did customers say they have? How painful were these problems? Where on the “problem scale” were the customers you interviewed? How are they solving these problems today? Draw the customer workflow with and without your product. Was the difference dramatic? Did customers say they would pay for that difference? In general, what did you learn about customers’ problems? What were the biggest surprises? What were the biggest disappointments? Once the Customer Development team…
Before changing the product, you need to keep looking for a market where it might fit. If, and only if, you cannot find any market for the product do you discuss changing the feature list. This rigor of no new features until you've exhausted the search of market space counters a natural tendency of people who talk to customers: You tend to collect a list of features that if added, will get one additional customer to buy. Soon you have a 10-page feature list just to sell 10 customers. The goal is to have a single paragraph feature list that can sell to thousands of customers.
Remember, in a startup the Customer Development team is not supposed to add features; it is supposed to find out the minimum feature set for the first release, based on input from visionary customers.
visionary customers, particularly in corporations, will be buying into your entire vision, not just your first product release. They will need to hear what your company plans to deliver over the next 18 months. The agreement between the Product and Customer Development groups must be that: All features past the first version are up for grabs Features spec'd in the first release are subject to change/deletion to get the product out; Product Development will provide a one-page 18-month or 3-release product schedule Finally, as a group, review your other phase 1 hypotheses. (Now you can see why you took the trouble to write them down.) Given all the feedback from customers, which of the four Market Types are you in? Why are you different? What will be your basis for competing? Do your pricing and delivery channel assumptions hold up? What did you learn about influencers? B. Test and Qualify the Product Concept: Product Presentation
Once your Product and Customer Development teams agree on your revised assumptions, the next step is to assemble your first product presentation. This product presentation is emphatically not the presentation the company used for fundraising or recruiting. Nor is it the…
The goal of this presentation is to test your revised assumptions about the product itself. This goal has two parts: To reconfirm your product will solve a serious customer problem…
Accordingly, develop a solution-oriented presentation that describes the product in terms of solving the customer's problem. If it's too early for a real product demo, the product presentation should cover the five (no more!) key product features. Include a…
Finally, detail the future of the product at least 18 months out, broken down into features by release. As before, rehearse how you will give this presentation to customers. Keep in mind you are still not selling in this phase. Instead, you are trying to discover whether you have a salable product. You are gathering enough information so when you do…
C. Test and Qualify the Product Concept: Yet More…
In addition, your earlier visits should have netted you more names to call on. Accordingly, expand your original set of customer contacts to include a second set with at least five new potential customers for enterprise…
Just as in Phase 1, to get enough visits, make a list of 50 potential customers. However, in this phase you want to test your assumptions about the titles of the people who will make the purchasing decision. In our banking example, they would include bank CIOs and vice presidents of branch operations. Try to target the appropriate titles and roles as if you were selling. Once you…
Now get out of the building and talk to customers. You will get more information if you start by reminding your audience what problem your product is designed to solve. Describe why your company believes it is important to solve this problem. Pause here and see if you get agreement on the value of solving the problem. You should, since your…
Ask about the features you've described. Do they match the customers’ needs? What features must you have on day one? What features could wait until later? What features are simply missing? What is a “complete product” in the customer's mind? What other features are needed to move the product into the mainstream? Are third-party products or services needed to make your offering a mainstream product?
After hearing your product description, how do they think your product is different? Do they think you are creating a new market? Or do they think the product is a better version of an existing product (and, if so, better in what way)? Or do they shrug and say, “It's somewhere in the middle, comparable to others, but it doesn't change the rules of the game”?
When I found visionary customers who were truly interested in our products at E.piphany, an enterprise software company, I would ask several questions to test the pricing boundaries. They included the IPO questions I mentioned earlier, the first of which was, “Would you deploy our software enterprise-wide if it were free?” I used this question to test the seriousness of a potential customer. If the…
When I found customers who would go through visualizing the pain of actually rolling out our product, I would ask them how they would deploy it, how many users would use it, what groups would get it first, what criteria would they use to measure its success, and so on. By the end of this visualization exercise…
Then I asked, “Would you pay $1 million for our software?” The answer was usually instructive. Suppose customers said, “Steve, we couldn't see paying more than $250,000 for the first set of applications.” In their minds they had already bought the product and now the bill just came due. The first number out of their mouths…
Once I got a first number, I always asked, “How much more would you expect to pay for professional services (the customization and installation)?” Most of the time they would say that cost was included in their budget number, but every once in a while someone would add more dollars. If they were still interested in brainstorming, I would push and see whether they would spend those dollars every year on our…
After a few of these customer exercises I understood the average selling price of E.piphany software could be $250,000 and the lifetime value of a customer could be close to a million dollars. (I…
From there, ask customers how you would reach them via marketing: “If you were interested in a product like this, how would you find out about it? How do you find out about other new products like this? Do you ask others for their opinions before buying? If so, who? Do you or your staff go to trade shows? What industry-specific magazines or journals do you read? What business publications?” If it's a…
Be sure to get to the “who has the money” question. There's nothing more frustrating than having a series of great customer meetings for months only to find out way late in the sales cycle that no department wants to cough up the dough for a product. Ask questions like “By the way, is there a current budget for a product like this? Which department or individual would have the budget for this product?” The information you get will be critical as you put together a sales roadmap.
Leaving this phase means you not only understand customers’ problem in depth but have a solid grip on their level of interest in your product. If you believe you will be using any form of indirect sales channel, there is one more group you need to present the product to before you get to go home: your channel partners.
What do your channel partners need to hear or see from early customers? What do they have to have before they will give you access to their channel, and then volume orders? Is it articles in the business press, product reviews, and customers calling and asking for the product? Or is it financial inducements such as shelf-stocking fees or a guaranteed returns policy? Note that channel partners won't magically know how to position or price your products. For products in an existing market, it's easy to tell them, “It's like that other one you sell, but faster.”
A good way to understand how you might work with these partners is to see how other companies do. Are there other companies similar to yours? If so, it's time to have lunch again. Take other executives to lunch and ask about margins and discounts. The worst that could happen is that they won't tell you.
Your goal is to start a dialog and learn about their business. How do companies like yours establish a relationship with them? How do they hear their customers asking for a product like yours? How does your potential partner make money? (By project? By hour? By reselling software? By profit on reselling?) How does their business model compare to others in their business? What is the minimum dollar size of a transaction interesting to them?
D. Test and Qualify the Product Concept: Second Company Reality Check
Now that you have tested the product in front of customers, you can probably sort the reactions into four main categories: The customers unequivocally love our product; no changes are needed Customers like our product, but we've heard consistently they want this or that additional feature at first customer ship The customers can understand our product after a long explanation, but no one was jumping over the table to get us to sell it to them The customers don't see a need for our product
E. Test and Qualify the Product Concept: First Advisory Board Members
as you begin to talk to customers, you'll realize that out of the morass of meetings you've been having, one or two voices stood out from the crowd. In this phase, you informally engage these people by asking them for advice, taking them to lunch and seeing if they are interested in helping you and your company. Later, in Customer Validation, you'll formalize the advisory board process.
Phase 4: Verify
A. Verify the Problem
Make the statement clear, concise, and precise. Be sure to ask the hard question: Are you confident you've nailed a customer problem people will pay you to solve? If yes, proceed. If not, go around the loop again.
B. Verify the Product
The short test for exiting Customer Discovery is to gather your executive team in a conference room. Raise your left hand and in a loud voice yell out the top three customer problems. Then raise your right hand and yell out the top three product features. Look at the faces of your team and see if the shock of the two hands not matching is evident. If so, you lack product/market fit and need to get back in front of customers; if not, go to the next step.
C. Verify the Business Model
The outcome of this testing process consists of two documents: an updated sales and revenue plan, and a sound business and product plan.
D. Iterate or Exit
This is either the beginning of the end or, more likely, the end of the beginning. You have put a stake in the ground with a series of hypotheses, you've gone out and tested assumptions, potential customers have validated your product, and you have a base of potential visionary sales prospects. And you've captured all your learning in writing.
Exhausting as the Customer Discovery process is, you may need to iterate it multiple times. Do you understand the market and have customers who cannot wait to buy? If not, take everything you learned in Phases 1 through 3, modify your presentations based on feedback, go back to Phase 1 and do it again. Try out several markets and users.
CHAPTER 4: Customer Validation
“When my VP of Sales told me that,” Chip said, “I got on the phone and spoke to the account personally. I asked them your question—would they deploy the product in their department or company if the price were zero? I'm still stunned by the answer. They said the product wasn't mission critical enough for their company to justify the disruption.”
My not-so-difficult advice was that Chip would have to tell his board exactly what was going on. But before he did, he needed to understand the sales situation in its entirety, then come up with a plan for fixing it. Then he was going to present both the problem and suggested fix to his board. (You never want a board to have to tell you how to run your company. When that happens, it's time to update your resume.)
The “good” news was that as an agile and experienced business executive, Chip quickly understood what had gone wrong. He came to grips with the fact that after eight months InLook still did not have a clue about how to sell Snapshot. Worse, there was no process in place to learn how to sell, just a hope that smart salespeople would “find their way.” Chip realized the company would have to start from scratch and develop a sales roadmap. He presented his plan to the board, fired the VP of Sales and seven of the sales and marketing staff, and dramatically slashed the company's burn rate. He kept his best salesperson and support engineer as well as the marketing VP. Then Chip went home, kissed his family
Chip had discovered InLook lacked what every startup needs: a method that allows it to develop a predictable sales process and validate its business model.
After Customer Discovery, startups must next ask and answer basic questions such as: Are we sure we have product/market fit? Do we understand the sales process? Is the sales process repeatable? Can we prove it's repeatable? (What's the proof? Full-price orders for a sale in sufficient quantity.) Can we get these orders with the current product and release spec? Have we correctly positioned the product and the company? Do we have a workable sales and distribution channel? Are we confident we can scale a profitable business? Contrary to what happened at InLook (and what happens in countless startups), the Customer Development model insists these questions be asked and answered long before the sales organization begins to grow. Getting them answered is the basic goal of Customer Validation.
the goal of this step is not to be confused with “selling.” The reality is you care less about generating revenue at this point than you do about finding a scalable and repeatable sales process and business model. Building a roadmap to sales success, rather than building a sales organization, is the heart of Customer Validation.
Validating the Sales Process
A sales pipeline is the traditional sales funnel. Wide at the top with raw leads coming into it, it narrows at each stage as the leads get qualified and turn into suspects, then prospects, then probable closes, until finally an order comes out of the narrow end of the funnel. Nearly all companies with a mature sales force have their own version of this sales funnel.
What they don't recognize is that it is impossible to build a sales pipeline without first having developed a sales roadmap.
A sales roadmap answers the basic questions involved in selling your product: Are we sure we have product/market fit? Who influences a sale? Who recommends a sale? Who is the decision-maker? Who is the economic buyer? Who is the saboteur? Where is the budget for purchasing the type of product you're selling? How many sales calls are needed per sale? How long does an average sale take from beginning to end? What is the selling strategy? Is this a solution sale? If so what are “key customer problems”? What is the profile of the optimal visionary buyer, the earlyvangelist every startup needs?
You cannot learn and discover while you are executing.
The Customer Validation Team
The InLook story illustrates one of the classic mistakes startup founders and CEOs typically make: delegating the Customer Validation process solely to the VP of Sales.
At a minimum, the company's founders and CEO need to be out in front of customers at least through the first iteration of the Customer Validation step. They are the people who, with help from the product team, can find their visionary peers, excite them about a product, and get them ready to buy. In enterprise or BtoB sales, if the founding team does not include someone with the skill to close an account, the company can hire a “sales closer,” a salesperson with the skills to close a deal.
Early Sales Are to Earlyvangelists, Not Mainstream Customers
Therefore, when you walk through the door, they immediately grasp the problem you are solving is one they have, and they can see the elegance and value of your solution. Little or no education is needed. In other cases their motivation might be that they are driven by competitive advantage and will take a risk on a new paradigm to get it.
Earlyvangelists “get it.” However, they usually don't or won't get it from a “suit,” a traditional salesperson. Earlyvangelists want to see and hear the founders and the technical team.
The earlyvangelists you need to talk to are the people I described in Customer Discovery—the ones who are in operating roles, have a problem, have been looking for a solution, have tried to solve the problem and have a budget.
Overview of the Customer Validation Process
You will attempt to sell customers an unfinished and unproven product, without a professional sales organization. Failures are as important as successes in this phase; the goal is to answer all the sales roadmap questions. At the end of this phase, you have preliminary meetings with channel or professional service partners.
With a couple of orders under your belt, you have enough customer information to move to Phase 3, in which you take your first cut at an initial positioning of the product and of the company. Here is where you articulate your profound belief about your product and its place in the market.
Phase 1: Get Ready to Sell
In particular, in this phase you will: Articulate a value proposition Prepare sales materials and a preliminary collateral plan Develop a preliminary distribution channel plan Develop a preliminary sales roadmap Hire a sales closer Align your executives Formalize your advisory board
A. Get Ready to Sell: Articulate a Value Proposition
From the customer perspective, what does your company stand for, what does your product do, and why should they care? You probably had an idea when you started the company, but now you have some real experience interacting with customers, and can revisit your vision in light of what you have learned. Can you reduce your business to a single, clear, compelling message that says why your company is different and your product is worth buying? That's the goal of a value proposition (sometimes called a unique selling proposition).
More relevant for this step, it gets the company's story down to an “elevator pitch,” one powerful enough to raise a customer's heart rate. This value proposition will appear in all your sales materials from here on out.
InLook's value proposition was, “Helping chief financial officers manage profitability.” Short and to the point, it played right to the audience InLook was going after.
One of the first tests of your value proposition should be, is it emotionally compelling? Do customers’ heart rates go up after they hear it? Do they lean forward to hear more?
Second, does your value proposition make or reinforce an economic case? Does it have economic impact? Does it sound like your product gives a corporate customer a competitive advantage or improves some critical area in their company? If it's a consumer product, does it save a consumer time or money, or change their prestige or identity?
Finally, does the value proposition pass the reality test? Claims like “lose 30 pounds as fat just melts away,” “sales will increase 200 percent” or “cut costs by 50 percent” strain credibility. Moreover, the claim isn't the only thing that must pass this test. Is your company a credible supplier for the product you're describing?
B. Get Ready to Sell: Prepare a Preliminary Collateral Plan
Table 4.1 Example of a Business-to-Business, Direct Sales Collateral Plan Awareness Interest Consideration Sales Earlyvangelist Buyers Corporate website Brochure General sales presentation(s) Tailor presentations to each customer Contacts Solution data sheets White paper on business issue Analyst report on business problem Price list Influential bloggers Product Presskit Tech websites Product brochure ROI demonstration Direct mail pieces Viral marketing/ e-mail tools Follow-up e-mail Product data sheets Pricing quote form Thank-you note/e-mail Technology Gatekeeper Influential Bloggers Tech presentation Tech presentation on specific customer issues Thank-you note Tech websites Tech white paper Tech white paper Analyst report on technical problem Tech overview data sheets with architecture diagrams
Websites at this stage of a startup should have clear information on the vision and problem you are solving, with enough detailed product information for the customer to want to engage in a conversation or actually make a purchase. This is a fine balance; you do not want a customer to have enough information to make a decision not to buy without you.
Sales Presentations
Your sales presentation should be an updated and combined version of the problem and product presentations used in Customer Discovery, with your value proposition added.
Keep in mind at this stage the core audience is earlyvangelists, not mainstream customers. The sales presentation to visionary customers should cover a brief outline of the problem, possible solutions to the problem, your solution to the problem, and product details. It should run no more than 30 minutes.
Product Development teams in startups sometimes confuse “demo” with a working product. All the Customer Development team needs is a slide-based “dummy-demo” to illustrate the key points. I rarely have sold to earlyvangelists successfully without having one.
It's easy to confuse “product data sheets,” which detail product features and benefits, with “solution data sheets,” which address customer problems and big-picture solutions. If you are bringing a new product to an existing market, your focus will be on the product, so you should develop product data sheets. If you are creating a new market, the problem and solution data sheets are more appropriate. And if you are redefining a market, you need both.
Especially in tight economic climates, one key piece of collateral customers ask for is a return on investment (ROI) white paper. This is a customer's fancy way of asking, “Show me how I can financially justify buying your product. Will it save me money in the long run?” Your earlyvangelist champions will usually have to make the case for your product before someone agrees to sign the check. For consumers the issue is the same. Just imagine kids trying to make the ROI issue for an Apple iPod. “I won't have to buy CDs and I'll pay for the songs out of my allowance.”
Price Lists, Contracts and Billing System
Hopefully, as you go through the Customer Validation step, some farsighted customers will ask, “How much is your product?” Even though you can give them the answer off the top of your head, you will need a price list, quote form, and contracts. Having these documents makes your small startup look like a real company.
C. Get Ready to Sell: Develop a Preliminary Distribution Channel Plan
The elements used to build your distribution channel plan are: Channel “food chain” and responsibility Channel discount and financials Channel management
Channel “Food Chain” and Responsibility
For a distribution channel it is made up of the organizations between your company and your customer. The “food chain” describes what these organizations are and their relationships to you and each other.
Regardless of the complexity of the diagram, your next step is to create a detailed description of each of the companies making up your channel's “food chain.”
Figure 4.4 Channel Responsibility Map
One mistake startups often make is assuming their channel partners invest in creating customer demand. For example, in Figure 4.4, it would be a mistake to think your book wholesaler does anything other than stock and ship books.
Channel Discounts and Financials
Figure 4.5 Channel Discounts
Each tier or level of the channel has some unique financial relationship with the publisher. For example, most regular sales to a bookstore are on a consignment basis. This means unsold books can be heading back to you. Why is this a problem? A mistake companies frequently make when they use a tiered distribution channel is to record the sale to the tier closest to them (in this case the national wholesaler) as revenue. An order from a channel partner does not mean an end customer bought the product,
Figure 4.6 Channel Financials
Channel Management
Your ability to manage your distribution channel will directly affect your ability to deliver on your revenue plan. Although every company's goal is a well-managed and carefully selected channel, failure to select the right channel or to control the channel often results in miserable sales revenue and unanticipated channel costs.
D. Get Ready to Sell: Develop a Preliminary Sales Roadmap
Better to know how to sell your product while your company is lean and small than try to figure it out as you are burning through cash sending your sales and marketing departments out.
The elements used to build your sales roadmap are: Organization and influence maps Customer access map Sales strategy Implementation plan
Organization and Influence Maps
Remember the organization and influence map briefs you created in Customer Discovery? Pull them off the wall and study your findings. By now your early hypotheses have been modified to reflect the reality you encountered as you spoke with potential customers. Use this information to develop a working model of the purchase process for your target customer.
the Influence Map set the execution strategy for sales. Call on: 1) high-level operational executives (VPs, divisional GMs, etc.) first. Use that relationship as an introduction to 2) high-level technical executive (CIO or divisional IT executive), then 3) meet the operational organizations end users (the people who will use our product), and finally, 4) use that groundswell of support to present to, educate and eliminate objections from the Corporate or Division IT staff.
Figure 4.7a Example of an Influence Map
Customer Access Map
For consumer sales, finding the right entry to early customers can be equally difficult. Rather than making random calls, think of organizations and special-interest groups you can get to inexpensively. Can you reach customers through organizations they belong to, such as the PTA, book clubs, antique car clubs? Are there Web-based groups that may be interested?
In this phase, as you begin to develop a sales strategy, here are some questions to consider: At what level do you enter the account? Do you sell high to executives? Or low to the operational staff? How many people on the organizational map need to say yes for a sale? Does each department perceive the customer problem in the same way? In what order do you need to call on these people? What is the script for each? What step can derail the entire sale? Similarly, if you were trying to reach twenty-somethings with a new consumer product the questions might be: Do you need access to a specific demographic segment? Do you sell to college students? Parents of children? Families? How many people need to say yes for a sale? Is this an individual sale or family decision? If this sale requires multiple members of a family or group to agree, in what order do you need to call on these people? What is the script for each? What step can derail the entire sale?
Implementation Plan
E. Get Ready to Sell: Hire a Sales Closer
The founding team and sales closer make up the core of the Customer Development team. It becomes their job to learn and discover enough information to build the sales and channel roadmaps.
F. Get Ready to Sell: Align Your Executives
Engineering Schedule, Product Deliverables, and Philosophy