The Customer Development Model

Past, Present, Future

Steve BlankStanford School of Engineering /

UC Berkeley, Haas Business School

www.steveblank.com

Lean Startup Circle - San Francisco19 November 2009

Agenda

• How did we get here?• Where are we?• What can the Lean Startup Circle do?

Past

In the BeginningInsight - The Chasm

No Time To Think

• Eight startups 1978 -1999– Semiconductors, video games, signals

intelligence, supercomputers, Macperipherals, enterprise software

• Training instructor to CEO• Four IPO’s, one a “go home” and stay

It Started With a Question

If Startups Fail from a Lack of customersnot Product Development Failure

Then why do we have:• process to manage product development?

• no process to manage customer development?

All We Had Was 30 Years of This

Concept/Seed Round

ProductDev.

Alpha/BetaTest

Launch/1st Ship

Product Development Model

I Started Reading• Lead User Research - Von Hippel• Crossing the Chasm - Moore• Entrepreneurial Mindset - McGrath/MacMillan• Innovators Dillema - Christensen• Profitable Value - Lanning• Lanchester Strategy - Yano• High Tech Marketing - Davidow

• OODA Loop - Boyd• Question-based Selling - Freese• Solution Selling - Bosworth• Conceptual/Strategic Selling - Heiman• Spin Selling - Rackham• US Marine Corps Warfighting Manual• Tipping Point - Gladwell

CompanyBuilding

CustomerDiscovery

CustomerValidation

CustomerCreation

It Resulted in a Few Hypotheses

• Startups weren’t small versions of large companies• They were about learning/discovery, not execution• Entrepreneurs and their VC’s were executing on

guesses• But the facts were outside the building

Which Turned Into A Model

Concept/Bus. Plan

ProductDev.

Alpha/BetaTest

Launch/1stShip

Product Development

Customer Development

CompanyBuilding

CustomerDiscovery

CustomerValidation

CustomerCreation

+

Eric Ries Extends the Model

• Took my class at U.C. Berkeley• Co-founded IMVU

- 1st implementation of Customer Development- Paired it with an Agile Development Model

• Observed that the sum of the two was powerful

Eric Ries: Insight - 1Startups assumed development was “known”

Solution: known

Waterfall

Requirements

Design

Implementa1on

Verifica1on

Maintenance

Problem: known

Concept/Seed

ProductDev.

Alpha/Beta

Launch/Ship

• I understood the problem was unknown• Eric observed the solution was unknown in a startup

Eric Ries: Insight - 2Agile matches the Customer Dev speed

Concept/Seed

ProductDev.

Alpha/Beta

Launch/Ship

• Agile was the development methodology to use when the solution was unknown

Solution: unknown

Eric Ries: Insight 3Customer + Agile + Commodity = Lean

Problem: Unknown Solution: UnknownSource: Eric Ries

• Solving for both unknowns is the “Lean Startup”

Jon Feiber @ MDV InsightNot all Need Customer Development

• Market Risk vs. Technical Risk?- Web is about customers & markets- Biotech is about science & invention

John Boyd - InsightThe OODA “Loop”

Orientation shapes observation, shapes decision, shapes action, and in turn is shaped by the feedbackand other phenomena coming into our observing window.

FeedForward

CulturalTraditions

GeneticHeritage

NewInformation Previous

Experience

Analyses &Synthesis

Feedback

Feedback

Orient

Decision(Hypothesis)

FeedForward

ImplicitGuidance& Control

Decide

Action(Test)

UnfoldingInteraction

WithEnvironment

Act

FeedForwardObservations

ImplicitGuidance& Control

UnfoldingInteraction

WithEnvironment

OutsideInformation

UnfoldingCircumstances

Observe

Iteration versus Execution

CustomerDiscovery

CustomerValidation

Iteration

The Search for a Business

CompanyBuilding

CustomerCreation

Execution

The Growth of a Business

Product/Market Fit

Iteration versus Execution

Product/Market Fit

Present

Business ModelAffects Metrics and Exit Criteria

Appendix B: Business ModelChecklist

• The Four Steps had:– Business model flow for Enterprise Software– Business model summary for each step– Checklist for Enterprise Software

• It said, “modify it to fit your business”

Test Problem Hypothesis

DemandCreation

Hypothesis

Market TypeHypothesis

ProductHypothesis

Customer &Problem

Hypothesis

Distribution &Pricing

Hypothesis

CompetitiveHypothesis

State Your Hypotheses

MarketKnowledge

FriendlyFirst Contacts

撤roblem�Presentation

CustomerUnderstanding

First RealityCheck

�Product�Presentation

Yet MoreCustomer

Visits

Test Product Hypothesis

Iterate orExit

Verify theProblem Verify the

ProductVerify theBusiness

ModelVerify

1st AdvisoryBoard Second

Reality Check

The Flow

Customer Discovery Summary Phase Goals Deliverables 0. Get Buy-In Investors/founders agree on Customer Development, key hires, and values. Buy-In, Core Values 1. State Hypotheses Set product specs, develop detailed hypotheses of product, first customers, channels and

pricing, demand, market, and competition. Hypothesis Briefs

A. Product Hypotheses Get agreement on product features, benefits, and release schedules. Product Brief B. Customer Hypotheses Describe customers, their problems, and why they will use the product. Customer Brief C. Channel & Pricing Hypotheses Develop a channel strategy and pricing model. Channel and Pricing Brief

D. Demand Creation Hypotheses Identify demand creation strategy, influencers, and trends. Demand Creation Brief

E. Market Type Hypotheses Describe what market you are in (new, existing, resegmented). Market Type Brief F. Competitive Hypotheses Develop competitive analysis that fits your Market Type. Competitive Brief 2. Test & Qualify Hypotheses Test hypotheses from phase 1. Understand customers’ “day in the life” Validate A. First Customer Contacts Create customer list and schedule the first customer contacts. Customer List B. Problem Presentation Develop presentation of problems, current solutions, product solution. Problem Presentation C. In-Depth Customer

Understanding Understand how customers work, their problems and who else influences their decisions. Customer Brief

D. Market Knowledge Understand the market: meet w/analysts & media, trade shows, research. Positioning Brief 3. Test & Qualify Prod Concept Test product concept. Do customers’ needs match the product? Hypotheses A. First Reality Check Review customer/product feedback & test phase 1 customer problem assumptions. Revise Product

Customer Briefs

B. Product Presentation Create product presentation on how product solves customers’ problems. Product Presentation C. More Customer Visits Expand customer list to include five new potential customers. Customer List D. Second Reality Check Review product feature feedback and test. Updated Feature List E. First Advisory Board Members Spot and recruit first advisory board members. Advisors on Board

4. Verify Found the right market? Have a profitable business? Validate A. Problem Verification Verify that you have identified a problem that a customer wants solved. Problem Statement B. Product Verification Verify that the product solves customers’ needs and its ROI. Product Requirement Doc C. Business Model Verification Verify that you have a profitable business model. Updated Revenue/Sales

Plan

D. Iterate or Exit Decide whether you have learned enough to go sell. Business/Prod Plan

The Summary

Customer Discovery Hypothesis: The Customer Worksheet 1-b

Goal of phase 1b: Develop a hypothesis of who the customer is and what problems they have that will drive them to use your product, before you leave the building. Author : Business Execution, Business Visionary Approval: Founding Team and Executive Staff Presenter: Founding Technical Team

Time/Effort: 3-5 days of authoring by VP Business Execution or Business Visionary, day presentation/ strategy meeting with founding team and executive staff

1. Define the different types of “customer” 2 . W ho will be the actual day-to-day user of the product? 3 . W ho are the influencers and recommenders? 4 . W ho is the “Economic Buyer?” (I.e. whose budget paid for it?) 5. Do you think the Economic Buyer has an existing budget for this product or do they need to get

one approved? 6 . W ho are the “Decision Makers?” 7 . W ho else needs to approve the purchase? 8 . C u s tomer Visionaries understand they have a pain and can visualize that there is a solution. Where do you

think you will find them? 9. In what title or function? 10. In what company type? 11. In what industry Segment? 12. R eminder: a visionary is a paying customer 13. Where in an organization you think your first customers are? 14. What departments 15. What are their titles? 16. How do they differ from later customers? (Hint: Lots in a new market, little in an existing

market.) 17. What problem does the customer have? 18. What do you think the biggest pain is in how they work? 19. I s it the same on all levels of the company? 20. I f they could wave a magic wand and change anything what would it be? 21. Since your product doesn’t exist, what do people do today to solve their problem? Don’t do it ?Do it badly? Don’t recognize the need? 22. Where on the “problem recognition scale” is each type of customer (users, recommenders, economic

buyers) • L a t e nt Need (you recognize that the buyer needs your product but they don’t…yet) • A c tive Need – the Buyer is in pain (they recognizes a need but doesn’t know how to solve it) • H a s a vision of a solution (the buyer has a vision of how to solve their problem) 23. What is the organizational impact of this pain? 24. Individual? 25. Departmental? 1 . C orporate?

Demand Creation

Hypothesis Market Type Hypothesis

Product Hypothesis

Customer & Problem

Hypothesis Distribution &

Pricing Hypothesis

Competitive Hypothesis

Verify the Product

Verify the Channel

Roadmap

Iterate or Exit

Verify the Sales

Roadmap

Verify the Business

Model

Customer Validation V e r i f ication: Sales Worksheet 4-b

Goal of phase 4b: You’ve gone all around the Customer Validation circle. You assembled your sales materials, found visionary prospects and tried to sell and close 3 to 5 customers. In this phase you summarize everything you learned from selling. Author: Sales Closer, Business Execution Approval: A l l Presenter: Sales Closer

Time/Effort: 1-3 days of authoring by VP Business Execution or Business Visionary, day presentation/strategy meeting with founding team and executive staff

1. P r o s p ecting 2. H o w easy was it to get an appointment? 3. Did customers understand what you wanted to sell? 4 . P r e s e n t i n g 5. Did you understand the real pain the buyers had? 6. H o w did your solution match their needs? 7. Did you understand the impact on others in the company? 8. Did you need a demo or prototype to sell? 9. W h e r e the sales materials adequate? 10. Customer Organizational Issues 11. Did you identify the right decision makers? 12. Did you understand the other key players in the organization? 13. Did you lose deals because others in the organization objected? 14. Pricing 15. Did you lose deals over pricing? 16. Do you have the right pricing model? 17. What is the Average Selling Price? 18. Over the next 3 years how many units will a customer buy? 19. What is the lifetime value of each customer? 20. Was their any objection to your pricing? (If not, your product may be priced too low—you should

always get a modicum of grumbling.) 21. Besides the absolute price of the product, do you have the right pricing model? 22. R O I Model 23. Do you understand the ROI for a customer? Revenues? Costs- reduction or containment?

Displaced costs? Avoided costs? Productivity improvements? Time-savings? Intangible? 24. Is the ROI demonstrable or provable? 25. Distribution Model • Are your assumptions about distribution channel correct? 26. What will the cost of the distribution channel be?

The Workbook

The Metrics

• Goals to be accomplished to exit steps• Quantitative

– Talk to 50+ customers in Discovery– Close 5 orders in Validation

• Qualitative– Develop product & company positioning– Choose Market Type

Dave McClure - InsightMetrics for Web Marketing

Website.com

Revenue  $$$

Biz  DevAds,  Lead  Gen,Subscriptions,ECommerce

Retention

Emails  &Alerts

System  Events  &Time-­‐basedFeatures

Blogs,  RSS,News  Feeds

ACQUISITION

SEOSEM

Apps  &Widgets

Affiliates

Email

PR Biz  DevCampaigns,Contests

Direct,  Tel,TV

SocialNetworks

Blogs

Domains

From Dave McClurehttp://500hats.typepad.com/

Maples Investments - InsightFunding the Lean Startup Model

• Mike Maples was a business school case• Started a venture firm

– 1st VC adoption of Customer Development– Introduced Mike to my Stanford Teach Asst– Ann Miura-Ko now Mike’s partner

Business Model IterationThe Pivot

CustomerDevelopment

Agile ProductDevelopment

Tactical

BusinessModel

Iteration

Strategic

Source: Ann Miura-Ko Maples Investments

Market TypeAffects Spending and Sales Curve

Type of Market Changes Everything

• Market– Market Size– Cost of Entry– Launch Type– Competitive

Barriers– Positioning

• Sales– Sales Model– Margins– Sales Cycle– Chasm Width

New MarketResegmentedMarket

Existing Market

• Finance• Ongoing Capital• Time to Profitability

• Customers• Needs• Adoption

Definitions: Types of Markets

• 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

New MarketResegmentedMarket

Existing Market

New Market =Hockey Stick Sales Curve

Existing Market =Linear Sales Growth

Future

What Can the Lean Startup CircleContribute?

• Enumerate Business Models- I.e. Dave Cohen/Techstar’s list

http://www.coloradostartups.com/2009/11/07/internet-business-models-of-the-techstars/

• For each Business Model develop:- Business Model Flow- Summary- Checklist- Metics

Book Available on Amazon and Cafepress

BlogsSteve Blank www.steveblank.comLean Startups http://startuplessonslearned.com/

www.amazon.com/Four-Steps-Epiphany-Steven-Blank/dp/0976470705www.cafepress.com/kandsranch