Customer Development

Customer Development

Customer Development is a four-step framework for building new businesses, using iterative learning processes to discover the right customers, validate the product, grow the acquisition and conversion of market segments, and operationalize the business at scale.

(ANTI-) PRINCIPLES

Customer Development was developed by UC Berkeley Professor Steve Blank in the mid-2000s, and introduced in The Four Steps to the Epiphany. The book, which Blank describes as a collection of lecture notes, is not an airport business book. It is an extremely detailed template for a specific kind of business, namely a B2B tech startup. He provides precise reasoning for each templated item. Blank doesn’t lay out a set of principles per se, but offers instead a set of anti-principles derived from the core tenet: don’t build small companies to look like big companies. (At least not at the outset.) Here’s my take on Blank’s description of the old (wrong) way of building a startup:

What this means is that customer input is not needed or desired. Specific customers are targeted and sold to, even if they don’t have the need the product addresses. Hundreds of thousands of dollars fly out the door each month as the product is built, during which time all non-developers prepare for the big launch. The marketing strategy is “market will beat path to door.” The sales strategy is “superior search engine optimization.”

Failure is a failure to execute. In other words, the methods were right, the people were wrong, so they must be replaced and try again.

The Customer Development model suggests another way. Blank goes into great detail regarding his four steps, the four phases for each step, and the multiple tasks required for each phase.

FIGURE 1

CUSTOMER DISCOVERY

Customer discovery describes interacting with potential customers to learn who the right customer is, what their real problems and needs are, and whether the solution/idea seems to fit.

The customer discovery steps are:

1. Document your assumptions, or as Blank says, “state your hypotheses” across the entire business model.
2. Test the assumptions by interacting with potential customers in various ways.
3. Iterate on your product idea based on learning and present this new idea to potential early adoptersIn a nutshell, early adopters are passionate, early users of... More.
4. Restate all the hypotheses you documented in phase 1 and run through them again with potential customers.

CUSTOMER VALIDATION

Customer validation describes interacting with potential customers to turn them into customers—in other words, getting them to buy.

The customer validation steps are:

1. Put into place the messaging, people, and processes based on the blueprint created during discovery.
2. Form the customer advisory board.
3. Develop messaging and positioning and test with the market.
4. Refine and verify the repeatability of the blueprint.

CUSTOMER CREATION

Customer creation describes how to scale customer acquisition and conversion into customers.

The customer creation steps are:

1. Define marketing and selling strategy and objectives.
2. Ramp up communications and marketing programs to properly position the company within the market.
3. Launch the company and product.
4. Ramp up demand creation strategy to match sales objectives.

COMPANY BUILDING

Company building describes the structure, management, and culture required to be a big company.

The company building steps are:

1. Scale acquisition of mainstream customers.
2. Build a culture that delivers on the company’s mission.
3. Create and scale functional departments.
4. Build fast decision-making into departments.

I will not go into detail about the specific components. The details are readily available and if truth be told, vary from business to business. You need not apply them in precisely the proscribed way. With the continued proliferation of digital technology, a lot of the scaling advice is outdated. The proliferation of Agile digital transformations, as well as the gargantuan successes of tech giants like Google, Facebook, and Amazon, are forcing organizations to look differently at not only how to scale, but how they look at scale. This situation is true for startups in particular, but even big companies are looking for new ways to structure their businesses so a more entrepreneurial way of working is a natural output. (See Spotify’s videos on its engineering organization.)

Whether you are an established firm or new startup, it’s best to concentrate on the philosophies and principles, and to develop the right tactics from there. It’s easy to get mired in a laundry list of all the things to do and forget the principles.

WHY CUSTOMER DEVELOPMENT?

Customer Development describes how to develop your awareness and acquisition of the right customers using an iterative learning approach similar to how Silicon Valley developers create new products.

When you engineer and manufacture a product, you don’t simply sit down, estimate how long it will take to build, start building from scratch, work until the done date appears on the calendar, and then you have it: a successful, fully functional, marketable, salable version of a new product. Instead, you build some, test what you’ve built, look at the results, learn what’s wrong or deficient, fix, and continue to build. You build, test, learn; build, test, learn; build, test, learn. You iterate through the creation of a working product.

This is how engineers overcome technical risk. You work this way until you overcome the various technical obstacles preventing the product from functioning as it was specified to. Or, perhaps, you reach an impasse. If the obstacles stopping your development are too severe, you kill the product. More likely, you compromise the original vision of the product by changing something fundamental to the vision that allows you to circumvent the impasse.

Customer Development is developing customers in a similar way. Despite the best efforts of internet marketing gurus, brand geniuses, and Glengarry, Glen Ross sales closers, companies that build products nobody wants, fail. Companies that don’t learn who their right customers are, and how to market and sell to them, also eventually fail. However, if you iterate through testing the specific marketing and selling tactics required to sell a new product to a specific market segmentMarket segmentation is the practice of breaking down a large... More, you are more likely to find what works faster and more efficiently.

The same is true for other aspects of your business model. Packaging, distribution, marketing channels, revenue model, messaging, delivery, pricing, sales model, and so on all must be learned before executed upon. Existing knowledge, experience, and even intuition play a role, but the blueprint doesn’t exist for a new business, unless it’s a franchise. It must be developed. That’s the purpose of customer development.

Fundamentally, Customer Development requires questioning your assumptions. It applies an engineering-like process, or the “scientific method,” to what is really not a scientific endeavor— building a business. Your process will resemble the scientific method by following these steps:

1. Observing and describing a phenomenon
2. Formulating a hypothesis to explain phenomenon
3. Using a hypothesis to predict the results of a specific action
4. Measuring predicted performance based on experiments

This process is used to discover and validate the following business-related information:

• The existence of an identifiable group of people who share a problem or need or passion that a specific product addresses (customer discovery).
• This group is reachable, will pay for solutions, and large enough such that a viable business might be built (customer validation).
• The business is scalable (customer creation).
• Company structure and operational processes can be created, sustained, and profitable at scale (company building).

An old sales adage says “maybe” is the worst answer you hear from a customer. You would rather hear “no,” because you will rededicate resources toward a possible “yes.” This principle also applies to Customer Development. The most desired outcome of implementing Customer Development is to successfully build the company you hope to build. The second most desired outcome is the realization that there is no market, or the market is insufficient upon which to build the business you desire. The iterative aspect of Customer Development is designed to eliminate the middle ground between these two outcomes.

Each of the four steps is a gate. You either press on or “persevere,” “pivot” by changing core assumptions, or realize the market has rejected your idea and so you shutter the business.