The Customer Development Approach to Start-Ups

22-January-2013
22-January-2013 14:24
in Start Up Business Advice
by Colin Smith

Far too many wannabe entrepreneurs focus too much of their time and effort developing their product or service before launching it on an unsuspecting world.  You may find that a strange statement from somebody who spends a large proportion of their time helping small business develop their business ideas in the form of written plans.  However, it would be unprofessional of me to say anything other than that the commonly held idea that an exquisitely crafted business plan is the beginning and end of all planning activity for a start up and that success then is just a matter of execution is extremely dangerous.  To believe that a business plan can be finished and now represents the culmination of everything that you know and believe about the business is just plain misguided.  Your business plan will not survive first contact with customers and until you have thoroughly tested the assumptions in your business plan, it remains simply a useful exercise in creative writing.   

It is an often ignored, fundamental truth in business that most start ups will not fail because of a lack of a product.  They fail because they lack customers and a profitable business model.  Such is the rush to get their product or service to market that entrepreneurs often bypass the crucial step of testing their hypotheses about the idea.  What happens all too often is that the first orders are delivered or the first few clients are served and the entrepreneur sees that some, if not all, of their initial hypotheses were wrong.  For example, one of the targeted customer segments may not show any interest in the product at that price or marketing and distribution costs might end up being significantly higher than anticipated.  The young company is now saddled with an ineffective sales strategy based upon attempts to generate sustained demand from customers whose needs are poorly understood and embodied in the products or services of the fledling business.  As the company flails in search of a market for it's product or service, they are burning through the company's most valuable asset - cash.

There is another way.  There is what Steve Blank has called the customer development approach to start ups.  His four step process is how we would encourage any client to approach the development of their business.

Step 1: Customer Discovery

 This is essentially the creation of a set of "experiments" to test the hypotheses you have about each component of your business model.  This can only happens you engage in conversations with actual customers.  The purpose of engaging with customers is not to generate an endless "wish list" of product features thay might want, but rather to test customers perception of the problem that your product or service solves and to expose them to this product to show them how well it solves that problem.  Once customers have enthusiastically confirmed the importance of both the problem and the solution, customer discovery is complete.

During the course of this phase of customer discovery, it is not unusual for companies to decide that they need to change their product or service or business model to reflect new assumptions which have now replaced the previous untested assumptions the initial business model was based upon.  Eric Ries calls this a "pivot" in his book "The Lean Startup".  A Pivot is not a sign of failure.  The mission of the company at this stage of the business is to find a profitable and scalable business model and these "pivots" are an essential and inevitable part of that search.  As we looked at in a previous post, adaptability is a critical quality for successful start ups.

Step 2: Customer Validation

This is the process of proving that the business that has been tested and iterated in the previous stage has a profitable and scalable business model.  During the customer validation stage, the business is exposed to a much larger group of customers than was the case in the previous step.  The goal is to determine the level of purchase intent among customers.  Results are carefully measured and weighed up before serious investment is made into the business.  Ultimately, there is no substitutue for a steady stream of purchases in customer validation.  The erroneous belief that prospective customers will value your product or service as you believe they ought to value it causes all kinds of problems for business owners and investors, especially in businesses with a lengthy sales cycle.  Only when a sufficiently large group of customers and a repeatable sales process that yields a profitable business model have emerged and are validated can the business really launch into all out execution mode.

Step 3: Customer Creation 

After we've discovered customers and validated that they can be served profitably, the next task is to create more.  Initial customers are often early adopters or innovators.  This step is the process of getting the good news about your product or service to the early and late majority that make up by far the largest part of any market according to the theories of the diffusion of innovation.  It's at this point, the tap gets turned on in terms of spending money on sales and marketing.

Step 4: Company Building

Only after we have gone through these first three stages is it time to spend money on the company infrastructure.  Whatever is needed to scale the company up to the size you wish it to be comes in this stage.  It's usually stuff like building warehouses or buying that expensive customised software.  The important thing to understand that the company should never scale up before they work to sufficiently scale up the number of customers.    

In recommending a more flexible approach to business development than simply writing and then rigidly implementing a business plan without verifying the assumptions behind it in the real world, we are not saying that the writing of business plans is not a useful practice.  The exercise forces you to think through all parts of your business and the financial modelling forces you to weigh up what is required to operate a profitable business.  The truth remains, however, that there are no facts inside of your office.  At Continuous Business Planning, we believe that a written business plan is just the starting point of a start ups primary activity: the search for a profitable, scalable business model.  If you want to discuss the customer development approach further or need help applying it to your start up, feel free to contact us today.

 

 

   

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