The Customer Development

Methodology

Steve Blank
[email protected]
1
 Goals of This Presentation
 A new model for startups
 Introduce the Customer Development model
 Translate this knowledge into a better Company

Customer Development in the High-Tech Enterprise September 2008

2
 Product Development Model

Concept/ Product Alpha/Beta Launch/

Seed Round Dev. Test 1st Ship

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 What’s Wrong With This?

Product Development

Concept/ Product Alpha/Beta Launch/

Seed Round Dev. Test 1st Ship

- Create Marcom - Hire PR Agency - Create Demand

Marketing Materials - Early Buzz - Launch Event
- Create Positioning - “Branding”

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 What’s Wrong With This?

Product Development

Concept/ Product Alpha/Beta Launch/

Seed Round Dev. Test 1st Ship

- Create Marcom - Hire PR Agency - Create Demand

Marketing Materials - Early Buzz - Launch Event
- Create Positioning - “Branding”

• Hire Sales VP • Build Sales

Sales Organization
• Hire 1st Sales Staff

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 What’s Wrong With This?

Product Development

Concept/ Product Alpha/Beta Launch/

Seed Round Dev. Test 1st Ship

- Create Marcom - Hire PR Agency - Create Demand

Marketing Materials - Early Buzz - Launch Event
- Create Positioning - “Branding”

• Hire Sales VP • Build Sales

Sales Organization
• Hire 1st Sales Staff

Business
Development • Hire First • Do deals for FCS
Bus Dev

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 Build It And They Will Come

 Only true for life and death products

 i.e. Biotech Cancer Cure
 Issues are development risks and distribution,
not customer acceptance
 Not true for most other products
 Software, Consumer, Web
 Issues are customer acceptance and market
adoption

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 Chasing The FCS Date
 Sales & Marketing costs are front loaded
 focused on execution vs. learning & discovery
 First Customer Ship becomes the goal
 Execution & hiring predicated on business plan hypothesis
 Heavy spending hit if product launch is wrong
 Financial projections, assumes all startups are the same
=
You don’t know if you’re wrong until you’re out of
business/money

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 If
Startups Fail from a Lack of customers
not Product Development Failure

Then Why Do we have:

 process to manage product development

 no process to manage customer development

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 An Inexpensive Fix

Focus on Customers and Markets

from Day One

How?

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 Build a Customer Development Process

Product Development

Concept/ Product Alpha/Beta Launch/

Seed Round Dev. Test 1st Ship

Customer Development

? ? ? ?

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Customer Development is as important
as Product Development

Product Development

Concept/ Product Alpha/Beta Launch/

Bus. Plan Dev. Test 1st Ship

Customer Development

Customer Customer Customer Company

Discovery Validation Creation Building

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 Customer Development: Big Ideas

 Parallel process to Product Development

 Measurable Checkpoints

 Not tied to FCS, but to customer milestones

 Notion of Market Types to represent reality

 Emphasis is on learning & discovery before execution

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 Customer Development Heuristics

 There are no facts inside your building, so get

outside
 Develop for the Few, not the Many
 Earlyvangelists make your company
 And are smarter than you

 Focus Groups are for big companies, not startups

 The goal for release 1 is the minimum feature set
for earlyvangelists

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 Customer Discovery: Step 1

Customer Customer Customer Company

Discovery Validation Creation Building

 Stop selling, start listening

 There are no facts inside your building, so get outside

 Test your hypotheses

 Two are fundamental: problem and product concept

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 Customer Discovery: Exit Criteria

 What are your customers top problems?

 How much will they pay to solve them
 Does your product concept solve them?
 Do customers agree?
 How much will they pay?
 Draw a day-in-the-life of a customer
 before & after your product
 Draw the org chart of users & buyers

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 Sidebar

How to Think About

Opportunities

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 “Venture-Scale” Businesses
 Create or add value to a customer
 Solve a significant problem/want or need, for
which someone is willing to pay a premium
 A good fit with the founder(s) and team at
the time
 Can grow large (≥$100 million)
 Attractive returns for investor

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 Ideas
 Technology Driven
 Is it buildable now? How much R, how much D?
 Does it depend on anything else?
 Are there IP issues?
 Customer Driven
 Is there an articulated customer need?
 How do you know?
 How big a market and when?
 Are others trying to solve it? If so, why you?
 Does it solve an existing customer problem?
 Opportunity Driven
 Is there an opportunity no one sees but you do?
 How do you know it’s a vision not a hallucination?

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 Facts Vs. Hypothesis

 Opportunity Assessment
is?
How big is the problem/need/desire?
s



he
How much of it can I take?
t
 Sales
po

H y
Distribution Channel
Marketing or
t



a
Engineeringc
F

Customer Development in the High-Tech Enterprise September 2008

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End of Sidebar

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 Customer Validation: Step 2

Customer Customer Customer Company

Discovery Validation Creation Building

• Develop a repeatable sales process

• Only earlyvangelists are crazy enough to buy

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 Customer Validation: Exit Criteria

 Do you have a proven sales roadmap?

 Org chart? Influence map?

 Do you understand the sales cycle?

 ASP, LTV, ROI, etc.

 Do you have a set of orders ($’s) validating

the roadmap?

 Does the financial model make sense?

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 Sidebar

Customer Development
Engineering
And Agile Development Methodologies

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 Traditional Agile (XP) Tactics

 Planning game
 programmers estimate effort of implementing cust stories
 customer decides about scope and timing of releases
 Short releases
 new release every 2-3 months
 Simple design
 emphasis on simplest design
 Testing
 development test driven. Unit tests before code
 Refactoring
 restructuring and changes to simplify
 Pair Programming
 2 people at 1 computer

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 Unit of progress: Advance to Next Stage

Waterfall

Problem: known

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 Unit of progress: Advance to Next Stage

Waterfall

Problem: known Solution: known

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 Unit of progress: Advance to Next Stage

Waterfall

Problem: known Solution: known

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 Agile Development
• “Our highest priority is to satisfy the customer through early and
continuous delivery of valuable software.” http://agilemanifesto.org/
• Embrace Change
– Build what you need today
– Process-oriented development so change is painless
• Prefer flexibility to perfection
– Ship early and often
– Test-driven to find and prevent bugs
– Continuous improvement vs. ship-and-maintain

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Unit of progress: Working Software,
Features
Agile (XP)

“Product Owner” or
in-house customer

Problem: known

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Unit of progress: Working Software,
Features
Agile (XP)

“Product Owner” or
in-house customer

Problem: known Solution: unknown

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Unit of progress: Working Software,
Features
Agile (XP)

“Product Owner” or
in-house customer

Problem: known Solution: unknown

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Unit of progress: Learning about Customers

Customer Development Engineering

Customer Customer Customer Scale

Discovery Validation Creation Company

Problem: unknown

Hypotheses, experiments, insights

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Unit of progress: Learning about Customers

Customer Development Engineering

Customer Customer Customer Scale

Discovery Validation Creation Company

Problem: unknown Solution: unknown

Hypotheses, experiments, insights

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Unit of progress: Learning about Customers

Customer Development Engineering

Customer Customer Customer Scale

Discovery Validation Creation Company

Problem: unknown Solution: unknown

Hypotheses, experiments, insights

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Unit of progress: Learning about Customers

Customer Development Engineering

Customer Customer Customer Scale

Discovery Validation Creation Company

Data, feedback, insights

Problem: unknown Solution: unknown

Hypotheses, experiments, insights

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Unit of progress: Learning about Customers

Customer Development Engineering

Incremental, quick, minimum features, revenue/customer validation

Customer Customer Customer Scale

Discovery Validation Creation Company

Data, feedback, insights

Problem: unknown Solution: unknown

Hypotheses, experiments, insights

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 Customer Development
Engineering Tactics
 Split-test (A/B) experimentation
 Extremely rapid deployment
 Continuous deployment, if possible
 At IMVU, 20-30 times per day on average
 Just-in-time architecture and infrastructure
 Incremental investment for incremental benefit
 Software “immune system” to prevent defects
 Five why's
 Use defects to drive infrastructure investments

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 Five Why's

 Any defect that affects a stakeholder is a learning

opportunity
 We’re not done until we’ve addressed the root
cause…
 … including, why didn’t any of our prevention
tactics catch it?

 Technique is to “ask why five times” to get to the

root cause

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 Five Why's Example
 For example:
 Why did we change the software so that we don't make any
money anymore?
 Why didn’t operations get paged?
 Why didn’t the cluster immune system reject the change?
 Why didn’t automated tests go red and stop the line?
 Why wasn’t the engineer trained not to make the mistake?
 We’re not done until we’ve taken corrective action at all
five levels

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 Customer Development
Engineering
 How do you build a product development team
that can thrive in a startup environment?

 Let's start with the traditional way... Waterfall

 “The waterfall model is a sequential software
development model in which development is seen
as flowing steadily downwards through the phases
of requirements analysis, design, implementation,
testing (validation), integration, and maintenance.”

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End of Sidebar

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 Customer Creation
Step 3

Customer Customer Customer Company

Discovery Validation Creation Building

• Creation comes after proof of sales

• Creation is where you “cross the chasm”
• It is a strategy not a tactic

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 Customer Creation
Big Ideas
 Big Idea 1: Grow customers from few to many

 Big Idea 2: Four Customer Creation activities:

 Year One objectives
 Positioning
 Launch
 Demand creation

 Big Idea 3: Creation is different for each of the

three types of startups

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 New Product Conundrum

 New Product Introduction methodologies

sometimes work, yet sometimes fail
 Why?
 Is it the people that are different?
 Is it the product that are different?
 Perhaps there are different “types” of startups?

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 Three Types of Markets

Existing Market Resegmented New Market

Market

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 Three Types of Markets

Existing Market Resegmented New Market

Market

 Who Cares?
 Type of Market changes EVERYTHING
 Sales, marketing and business development
differ radically by market type
 Details next week

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 Type of Market
Changes Everything
Existing Market Resegmented New Market
Market

 Market  Sales • Customers

 Market Size  Sales Model
• Needs
 Cost of Entry
 Margins
 Sales Cycle • Adoption
 Launch Type  Chasm Width
 Competitive
Barriers • Finance
 Positioning • Ongoing Capital
• Time to Profitability

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 Definitions: Three Types of Markets
Existing Market Resegmented New Market
Market

 Existing Market
 Faster/Better = High end
 Resegmented Market
 Niche = marketing/branding driven
 Cheaper = low end
 New Market
 Cheaper/good enough can create a new class
of product/customer
 Innovative/never existed before

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 Existing Market Definition

 Are there current customers who would:

 Need the most performance possible?
 Is there a scalable business model at this point?
 Is there a defensible business model
 Are there sufficient barriers to competition from
incumbents?

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 Resegmented Market Definition (1)
Low End

 Are there customers at the low end of the market

who would:
 buy less (but good enough) performance
 if they could get it at a lower price?
 Is there a business profitable at this low-end?
 Are there sufficient barriers to competition from
incumbents?

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 Resegmented Market Definition (2)
Niche

 Are there customers in the current market who

would:
 buy if it addressed their specific needs
 if it was the same price?
 If it cost more?
 Is there a defensible business model at this point?
 Are there barriers to competition from incumbents?

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 New Market Definition

 Is there a large customer base who couldn’t do

this before?
 Because of cost, availability, skill…?
 Did they have to go to an inconvenient,
centralized location?
 Are there barriers to competition from
incumbents?

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 Hybrid Markets
 Some products fall into Hybrid Markets
 Combine characteristics of both a new
market and low-end resegmentation
 SouthWest Airlines
 Dell Computers
 Cell Phones
 Apple IPhone?

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 Company Building: Step 4

Customer Customer Customer Company

Discovery Validation Creation Building

• (Re)build your company’s organization &

management

• Re look at your mission

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 Company Building: Big Ideas

 Big Idea 1:
Management needs to change as the company
grows
 Founders are casualties
 Development centric 
 Mission-centric 
 Process-centric

 Big Idea 2:
Sales Growth needs to match market type
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 Company Building: Exit Criteria

 Does sales growth plan match market type?

 Does spending plan match market type?
 Does the board agree?
 Is your team right for the stage of company?
 Have you built a mission-oriented culture?

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 New Product Conundrum

 New Product Introduction methodologies

sometimes work, yet sometimes fail
 Why?
 Is it the people that are different?
 Is it the product that are different?
 Perhaps there are different “types” of startups?

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 A Plethora of Opportunities

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 Startup Checklist – 1
What Vertical Market am I In?

 Web 2.0  Semicondutors

 Enterprise Software  Electronic Design
 Enterprise Hardware Automation
 Communciaton Hdw  Cleantech
 Communication Sftw  Med Dev / Health Care
 Consumer Electronics  Life Science / Biotech
 Game Software  Personalized Medicine

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 Market Risk vs. Invention Risk

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 Startup Checklist - 2

 Market Risk?
 Technical Risk?
 Both?

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 Execution: Lots to Worry About

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 Startup Checklist - 3

 Opportunity Where does the idea come from?

 Innovation Where is the innovation?
 Customer Who is the User/Payer?
 Competition Who is the competitor/complementor?
 Sales What is the Channel to reach the customer?
 Marketing: How do you create end user demand?
 What does Biz Dev do? Deals? Partnerships? Sales?
 Business/Revenue Model(s) How do we organize to make money?
 IP/PatentsRegulatory Issues? How and how long?
 Time to Market How long does it take to get to market?
 Product Development Model How to you engineer it?
 Manufacturing What does it take to build it?
 Seed Financing How much? When?
 Follow-on Financing How much? When?
 Liquidity How much? When?

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Execution: Very Different by Vertical

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 Market Risk Reduction Strategy

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Customer Development
and the Business Plan

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 The Traditional Plan & Pitch
Since You Can’t Answer my real questions here’s the checklist

 Technology
 Team
 Product
 Opportunity
 Customer Problem
 Business Model
Better
 Customers

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 Business Plan Becomes the
Funding Slides

Business Seed or Fire

Concept Plan Series A Execute Founders

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 Why Don’t VC’s Believe
a Word You Say?

 What’s wrong with a business plan?

 Hypothesis are untested
 Execution Oriented
 Assumes hypothesis are facts
 Static
 No change upon contact with customer and market

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 What Are Early Stage
Investors Really Asking?
 Are you going to:
 Blow my initial investment?
 Or are you going to make me a ton of money?
 Are there customers?
 How many? Now? Later?
 Is there a profitable business model?
 Can it scale?

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 “Lessons Learned” Drives
Funding

Business Test Lessons

Concept Plan Hypotheses Series A
Learned

Do this first instead of fund raising

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 Credibility Increases Valuation

 Customer Development and the Business Plan

 Extract the hypotheses from the plan
 Leave the building to test the hypothesis
 Present the results as:
“Lessons Learned from our customers”
 Iterate Plan

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 The Customer Development
Presentation
 Answer the implicit questions about the viability
of the business
 Tell the Discovery & Validation story
 Lessons Learned & “Our Customers Told Us”
 Graph some important upward trend

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 Customer Development:
Summary
 Parallel process to Product Development

 Hypothesis Testing

 Measurable Checkpoints

 Not tied to FCS, but to customer milestones

 Notion of Market Types to represent reality

 Emphasis is on learning & discovery before execution

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 Further Reading
Course Text at:
www.cafepress.com/kandsranch
or
www.amazon.com

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