The Beginner’s Guide to Customer Development is your starting point to avoiding the biggest startup founder mistake — ever. Not understanding your customer! To read part two, click here.
Experts often introduce a fancy new name to human behaviors and skills that are as old as humans.
So too in startup wonderland.
The whole startup community has been discussing ‘Customer Development’ and ‘Lean Startup’ like crazy in the past few years. Almost anybody who has ever dealt with startups has a basic idea of what it’s all about.
However, I have seen few entrepreneurs who do it well!
Proper Customer Development is quite demanding and exhausting. Because at it’s core, it’s about people skills. That’s why many people take the easy way and tell themselves that a few interviews with their friends are enough to know that their idea and product is great.
But that is never the case!
The results are fatal. Let me state it brutally: 9 out of 10 startups fail. And it’s not due to the harsh competition. When we looked at the reasons for startup failure at Startup Genome (now Compass), we found out that most startups die because they scale too early. These guys try to conquer the market with a product that is just… well… let’s call it ‘meh’. In other words: They build something that doesn’t really enthuse people and then try to get as many users or buyers as Facebook for it.
As you might imagine, that doesn’t work. It’s like trying to dig through a marble with an iron shovel – very exhausting and very inefficient. Sadly, many entrepreneurs just put more and more effort into it instead of realizing that they don’t have the proper tool to progress!
Customer Development is about finding a good tool (that is the product) for the stone (market) you want to dig through.
I want to add a significant twist to Customer Development. Inhale, exhale … ready to take it in?
Customer Development requires you to practice the art of interviewing and asking questions, and the art of understanding people and building trust and so rapport.
As these soft skill elements are often neglected, let’s closer look at them and make sure you as an entrepreneur learn about your potential customers and market niches in the right way.
I outline each step of Customer Development below. But feel free to watch Steve’s 5-minute explanation:
What is Customer Development?
It all started with a guy called Steve Blank who spent a huge part of his life in the high-tech industry. While working with eight different tech companies, he realized a few things about launching and developing a product.
Steve concluded: ‘market risk is the greatest risk that any new product faces!’
It’s the risk that there are not enough people who want to buy what you build.
With a sense of bedazzlement, he saw that no one cared for it. There were many approaches for estimating the technical risks of a product, but no one talked about the risk of building a shelf warmer.
Steve decided to change that and to build a method that would focus on minimizing the risk of total failure due to lack of understanding markets and customers.
The ingredients lay just in front of his eyes: as an engineer and marketing guy, he often receives customer feedback that allowed him to estimate quite well how an upcoming product would do. However, his CEO’s sat in shiny offices executed ‘their vision’ and didn’t care for what the customers would have said.
You might get away with that if you’re in the old economy and execute a business model that has been done thousand times. In that case, you might just grab it with some research and are fine. However, entrepreneurs tend to do new and unknown stuff… They can’t get the experience from others because nobody has it yet.
That is the essential idea behind Customer Development: If you think that your users have particular needs and that your product requires a certain set of features, you only believe it.
Your thoughts are only guesses. Only customers will teach you about them whether they are right or wrong. Sadly, most entrepreneurs are not very good at guessing. Entrepreneurs — especially first time starters — tend to fall in love with their ideas too quickly. AND they are too confident about their market potential.
Steve’s way to prevent this: Turn your assumptions into hypotheses and test them systematically!
Based on this principle, Steve created a step-by-step model of the early phases of a startup. It applies to most projects though. It’s a universal way of STARTING.
If you follow the path carefully, you should be able to prevent launching a non-marketable product and wasting a lot of money, time and other resources with that.
Steve outlined four steps to create a company:
- Customer Discovery: It’s the moment when you’re trying to figure out if your guesses about your customers are right.
- Customer Validation: It’s the moment when you test if your business model is scaleable and repeatable.
- Customer Creation: It’s the moment when you start to create user demand, scale your business and try to ‘Cross the Chasm’ that is to tackle the mainstream market.
- Company Building: It’s the moment where you hire managers, let them manage your business and you start working on new ideas, OR you like executing soo much that you become a manager yourself implementing a validated business model.
If one of these steps doesn’t work out, you return to the previous step. Especially step 1 and two might be repeated several times until your business model works correctly!
You’ll be introduced to the first two stages in a minute, but let me make two short remarks.
#1: Lean Startup isn’t Customer Development. And Customer Development isn’t Lean Startup.
Based on ‘Customer Development’, Eric Ries later created the ‘Lean Startup’ methodology. It’s a method for developing and launching a product fast and with a minimal amount of resources. If you want to learn more about it, check out my article on this topic.
Steve was Eric’s teacher and actively supported the new approach. That’s one of the reasons the concepts of ‘Customer Development’ and ‘Lean Startup’ often get mixed.
#2: Don’t trust step by step checklist approaches
Please be aware that each beginner’s guide can only have a certain level of detail. Creating a great product simply isn’t something that can be done by following exactly the same steps.
“Startups and companies are not created by accountants.”
Entrepreneurship and starting something is about being creative, gaining experience, making uncertain decisions. It’s not about just doing things that another guy tells you.
Though I agree that principles of entrepreneurial success can and should be fleshed out by using scientific methods (this is the mission of several amazing people and businesses, for example Compass), it will never be simple ‘business administration’.
That would be boring anyway, wouldn’t it?
But that’s enough with introductory remarks, let’s dig into the matter!
The Steps of Customer Development
The following guide is based on Steve Blank’s and Bob Dorf’s book ‘The Startup Owner’s Manual’. If you want more information on any aspect, I highly recommend you to get it.
It features an incredible level of detail and covers the process in 450 Pages (though it’s very densely written!).
Here might be your first sneak peak into it 🙂
#1 Step: Customer Discovery
The first step is all about uncovering the guesses that our business model is based on and about testing if these guesses are right. The only proper way to do that is to ‘get out of the building and to talk to actual people!’
Why Steve and other experts stress this so much is that most first-time startups are afraid to pick up the phone or approach people on the street or in a cafe and ask them something.
We have been told that these are sneaky sales methods. That this annoys people. And to some degree it’s true. It’s annoying. BUT starters need to do a lot of annoying things to get their idea off the ground.
Talking to people helps you to understand their needs and behaviors. That is why ‘talking to users’ is not never about presenting your idea. It’s about learning and understanding them better.
According to Steve, this first step has two distinct phases:
- You find a problem and test if it is important for your customer. Ask yourself: Are there enough people who have this problem?
- You test if the solution you envisioned is solving the customer’s problems. You show them your solution (can be a simple mockup or presentation) and measure how they react.
If people confirm that your understanding of the problem and your solution are right, you proceed. If not, you MUST adapt. This is called a ‘pivot’ in the Lean Startup bingo. Don’t worry, pivoting is not a ‘failure’ or a bad thing. As Steve likes to say, ‘no business plan survives first contact with customers’.
The important thing is that you correct your guesses, learn and move on. Be aware that this is the hardest part of all!
Getting a NO from people can feel like being punched in the face over and over again if you take your customer’s feedback too personally. This often happens when you fall in love with your idea. It’s so hard because you need this love and conviction for something to start it, but hearing that it sucks can be hurtful. We cover how to overcome this a little later. Stay with me.
#Customer Discovery Checklist
To move through that phase, you should do the following things:
- Find a problem you want to solve. I have written an extra guide on this topic.
- Write down your guesses about the following areas:
- Market Size
- Value proposition (what do you want your company to become? What is your long-term vision? What is your product and why will people use or buy it? How will a finished version look like? etc.)
- Customers and the problems they want to solve (who will be the end users? Who will make the buying decision? Who might influence these guys to buy the product – celebrities, leaders, experts? Who might veto buying your product?)
- Distribution and pricing (How will you reach your customers? Which channels will be suitable for advertising? How much will your customers pay for your product?)
- Market type (Are you entering a new or an existing market? Will you ‘resegment’ an existing market with a niche or low cost product? Are you creating a ‘clone market’ that already exists elsewhere?)
- Customer Relationships (How will you be able to get your customers to purchase? How can you keep them? How can you ‘grow’ them to generate more revenue from them or make them create more customers for you?)
- I recommend to use the lean canvas for this. It’s a structured template about the most critical areas of your business.
- Already identify team members that are crucial to your business model.
- Build a list of 50 potential customers to learn about your guesses.
- If you’re not familiar with the problem you want to solve, talk to them about it until you have the best possible understanding!
- As soon as you think that you understand the problem you want to solve, prepare a “problem presentation” that you can show to your users. It’s a description of their problem from your perspective.
- Use your interviews and your presentation to find out if the problem you see is really important for your customers and if you’ve gotten it right.
- Talk to industry experts and visit conferences to understand your market. See who has power and who your competitors might be. Learn about how you need and can be different to them. Tip: At a conference always approach the technical guy and ask them anything about the product. They will tell you. Don’t talk to a company’s business guy because he has his own hidden agenda.
- After you have gained an understanding of the problem and the market, pool your knowledge with your product development team. Revise your product idea. Make it a suitable solution for the problem you found.
- Develop for the few, not for the many. No startup can afford to create a product that satisfies the ‘mainstream customer’ from the beginning.
- Find your “early evangelists”. People that will be ready to buy a basic version of the solution from unknown startups. Take the criteria that Steve provides us with an orientation:
- These people have a business problem.
- They are aware that they have this problem.
- They have searched for a solution.
- They have put together a “Do-it-yourself” solution.
- They have access to the budget required to purchase a solution.
- They are willing to pay even for an early version.
- Test the value of your solution. Give users an idea of what you want to build by preparing a “solution presentation”. It should explain both the problem and the solution from a user’s perspective.
- Show it to potential customers. You might take the people you already talked to (if they want)
- Find out if your users think that your product is a great solution. If they don’t, adapt it! Change your lean canvas on a regular basis.
- Make a list of functional and non-functional requirements that your product must have to be marketable. Don’t include all the stuff that customers request, keep it as basic as possible!
- Create an MVP. It’s a minimal set of features that would provide value for your users. Don’t work with feature lists so much. Write a ‘user story’ instead. It’s a short narrative about the things that your product can do and why it matters.
- Create user profiles for each customer group. Adapt them as you learn more.
- Draw a day in the life of your customer (before and after your product).
- ‘Become the customer’: Participate in their culture, consume the media that they like. Try to understand how they learn about new ways to spend their time.
- Draw the organization chart of your users and buyers. You’ll have a hard time when your potential user’s won’t be able to convince the decision makers!
- If you’re building an online product, create a beta version when you’re in an advanced state as described in Lean Startup.
- See how sticky your solution is. How often come user back, how long they stay and how many refer it to their friends/colleagues.
- Even if your problem and your solution sound great to your customers, check out if they will be ready to pay a reasonable price!
- If you can’t sell your product profitably, you won’t be able to build a company.
- Sell before you build (or let build).
#Customer Discovery Outcome
At the end of this phase, you should be able to answer three questions:
- Market opportunity question: Is there a significant enough demand for our solution?
- Customer question: Who are our customers and how do we reach them?
- Business model question: Can we make money and grow the company?
Based on the answers, you either pivot or proceed.
Assess your insights carefully. It should be based on DATA. Be aware those iterations are normal! According to Steve, you will move back from this point at least once because your answers don’t look so good yet.
You’re not working for another boss. The government or what so ever … it’s so easy to forget that you’re your own boss. You’re working on your thing. This is amazing.
Embrace it by being aware of it.
You won’t be in any position to self-pity yourself! No need to cry. No need to feel stressed — theoretically speaking. I know reality is different, BUT your state of mind shouldn’t be different.
YOUR START, like everything else in life, should be JOY. Don’t lose this state of mind.
#2 Step: Customer Validation
This phase is about finding a repeatable process how to sell your solution.
‘Selling’ does not mean ‘executing’ at this point. Remember, you still don’t have a proven business model yet! You won’t just try to get as many customers as possible.
Instead your first sales efforts will constitute as ‘tests’. The goal is to try many different things until you have found a repeatable process.
Don’t hire a sales team just yet. It won’t work because the founders are the ones who decide about product development and because professional sales guys have been trained to close deals and not to listen.
Always remember that classic clip from Glengarry Glen Ross…
#Customer Validation Checklist
To get through this stage, you should do the following things:
Step #1: ‘Get ready to sell’.
- Prepare for your first customer acquisition meetings. Do not just start by trying some stuff, but create structured programs for trying different acquisition approaches.
- Appoint a ‘chief data analyst’ who coordinates your programs. He or she must be able to keep track of your important metrics and make things happen if things aren’t happening as planned.
- Craft a positioning statement that introduces your company, your product and the reason why your customers should care about them. Why is your product different and worth buying? Make it short, understandable and compelling.
- Create some marketing material that makes people curious (however, it shouldn’t be so detailed that they can decide not to buy!). Make a ‘collateral’ plan that states all materials needed for your sales process.
- Don’t create any stuff you don’t need. The materials include:
- a website
- simple presentations/1-pager
- data sheets
- price lists
- business cards
- email templates
- Refine your plan for acquiring customers. Create the tools and content that ‘acquire’ customers (lead them to your site/app) and the ones that ‘activate’ your customer (get them to buy/sign up).
- Create an ‘acquisition plan’ that tells you how your upcoming customer acquisition program will work:
- who in your team will be responsible for it?
- what will these guys do?
- how much budget can your company spend for the first round of testing?
- what is the timetable for the things that must be prepared before launch?
- what are measurable goals for each activity?
- do you have to put up with several parties (are your users different from your payers)?
- Prepare to collect as many data points as possible. Your tests will be a waste of time if you can’t measure the results correctly.
- Create an ‘activation plan’. This is what you want to test any action that could lead to more customer activation (e.g. signups, referral, upsells…). To do that in a structured manner, draw a plan that contains the following things:
- The concrete measure (there are numerous possibilities on your homepage and elsewhere, e.g. sending a follow-up email or putting a social media button on your landing page).
- A first test for each measure (e.g. you might check if a big social media button on your homepage performs better than a small social media button).
- The second test for each measure (e.g. you might check if a social media button on the top of the page performs better than one at the lower end).
- Each test will need to tell you if the measure has been a success at all (e.g. you expect 100 shares or 10% more signups in those 3 days after you implemented your social media button).
- Optimize the content on your homepage: present the info that your customer needs in order to make a decision, adapt it to the style and language of your audience, include widgets that allow your customers to get engaged with your product, include clear calls to action…
- If none of the founders have any sales skills, you might hire a coach or get a mentor who is ‘closer’ who can sell. One of the starters should read sales and marketing blogs. Get my favorites here.
- Create a fully-fledged ‘MVP’ that is a functional prototype of your product with a minimum feature set (we’ll learn more about MVPs later). Don’t forget that you must be able to collect as much behavioral data with it as possible.
- Create a ‘roadmap’ that tells you how your product will reach customers. Are other parties like manufacturers, distributors and retailers involved? How much percent of the price will each party take as a fee?
- If you’re an online company: Define measurable metrics that will allow you to understand the behaviour of your users! Don’t overdo it. A few metrics will be enough. Mostly ONE metric is sufficient — if it’s the right one 😉 The right one depends on the type of your business. Create a dashboard that shows these parameters. In my upcoming case studies, you will see what single key metric Buffer, AirBnb and Slack used.
- Get a formal advisory board. You might create a ‘roadmap’ of all the people you need.
- Don’t launch until everything is properly prepared. Your goal is to acquire and keep customers – you won’t manage that if you promise stuff that doesn’t work.
Step #2: Sell!
- You should try to get the validation that counts most: signups and orders! That means that you’ll best test your guesses of your business model.
- If your company sells via web channels, you will test the acquisition and activation plans you defined and try to optimize your most important metrics. Do this by continually testing and improving your homepage, marketing channels, etc…. The most common tests are A/B tests and Usability tests.
- If your company sells via ‘physical’ channels (phone, appointments, etc.), you will try to sell your products to the people you identified as “early evangelists”. Use the profile you developed earlier and create a list of target people. Even if you prepared well, be ready to be rejected by 95% of your prospects. That’s okay. That’s part of the process.
Step #3: Product positioning and company positioning.
At this point, you should understand your customers so well than you can create a positioning based on real facts.
- In order to refine your knowledge, you might do a series of ‘audit interviews’ that ask people whom they perceive your company and its competitors. You might run them with customers, potential customers you didn’t get yet, industry experts, competitors… Check out if they know your company, if they consider it credible and what differences between you and your competitors they perceive.
- You might do the same interviews with your team. It will be surprising how many different views there are!
- Create a one-page document that will inform all your sales and marketing materials later. Match it to the type of market you want to tackle. In an existing or resegmented market, you should describe what makes your product different, in a new or clone market, you should refer to the problem your product solves.
- Do the same with your company positioning.
- Approach industry analysts and influencers (people with well-known blogs, authors, regular conference speakers, etc.). Choose them carefully because it’s quite embarrassing if you approach the wrong people. See if your positioning appeals to them. If not, find out why and improve description and positioning.
Step #4: Pivot or proceed?
- At this point, you will review all the relevant information to decide if it’s time to move on and scale your business.
- Gather your data and look for anomalies that might pose a problem for your company.
- Go through your business model hypotheses and assess if each one has been validated properly.
- Check if your financial model really makes sense. Do you understand your customer acquisition costs, operating costs and revenue streams? Will you be able to build a profitable company based on these numbers?
#Customer Validation Outcome
At the end of this phase, you should have satisfying answers to the following questions:
- Can the business scale? (Can you get more and more customers?)
- Do you have a repeatable sales roadmap?
- Did you actually create some orders with that roadmap?
- Is the sales funnel predictable?
It’s really important to make a careful assessment of the numbers and the feedback you have. Moving back into Customer Validation or even into Customer Discovery might seem incredibly exhausting. However, if you bet against the odds, everything you did so far will be in vain.
However, if your company is so great that you can cross this point with confidence: Congrats!
You’ve come much further than most ventures ever do. From now on, your company will gradually lose its startup character as I define it. You will stop to search for a repeatable business model and execute proven stuff instead. Stuff that you’ve proven yourself! Isn’t this amazing?
StartupGeist is not meant to accompany you through these phases. You won’t need it. There is tons of literature on execution out there. It’s the stuff you learn at universities and business schools. Therefore, I will only sketch the next two steps very quickly. If you want to learn more about them, get Steve’s book ‘The Four Steps to the Epiphany’.
AH …. AND investors and so much more “helpers” will be knocking at your door and supporting you.
You’ll be astonished how many want to help you at this point. Of course. Do you also smell the “I can get rich off their backs” right now?
Don’t get confused by all the help you get. Welcome to our bullshit economy. Real supporters, fans, mentors, investors … stand by you in your darkest moments. Very few do …. so don’t give a s*hit who stands next to you in your lightest moments.
#3 Step: Customer Creation
This step is about “crossing the chasm” between “early adopters” and mainstream audience. You will move away from focusing on your ‘early evangelists’ and try to conquer a mainstream audience by putting more money into your validated growth channels.
#4 step: Company Building
The last step is about building a real ‘company’. You will build a mission-oriented company culture, hire the right sales apparatus for your type of company, create management structures…
This is really business school territory, so let’s skip it. I want to help you find that goddamned product/market fit, so let’s get back to doing the first steps right!
I’d like to concentrate on one of the most crucial Customer Development activities: Interviews.
Let me repeat a paragraph from the beginning:
Customer Development requires you to practice the art of interviewing and asking questions, and the art of understanding people and building trust and so rapport.
It might seem pretty easy to talk about your product, but interviewing has some pitfalls… and getting people for an interview can be pretty hard!
Up next in the second part of the Beginner’s Guide to Customer Development. You’ll get some guides that will make interviewing people and ask the right questions at the right moment easier for you.
#EntrepreneurHack: Remember the following …
- As a first-time starter, do yourself a favor and assume that you don’t know anything. Even assume that you don’t know what you don’t know.
- Never forget to have F.U.N. You’re not working for someone else. You are about to create your destiny. It can feel overwhelming, and it mostly is. BUT you are part of the very few who START.
- Especially in moments of LIGHT, your emotions might lead you to do irrational things, be careful whom you share your ‘LIGHT’ with!
- Find a collection of the most important articles, videos and case studies on Customer Development here.
- Steve Blank: The four Steps to the Epiphany – An absolute classic by Steve Blank, the guy who invented the whole thing. Get it if you want to learn more details about the four-step process model of Customer Development.
- Steve Blank and Bob Dorf: The Startup Owner’s Manual – an unbelievably rich step-by-step guide for the whole Customer Development process. It contains more details on almost any aspect of the guide at hand, so I highly recommend it if you want a text that is even more concrete and actionable.
- Alexander Osterwalder: Business Model Generation – If you don’t get the whole ‘business model’ concept, this is the book to read. Comprehensive and quite fun.
- Geoffrey Moore: Crossing the Chasm – Describing the different market groups of the tech market, Crossing the Chasm will help you a lot to understand your audience and find the right people to target.
- StartupGeist builds on the shoulders of giants. Find a gallery of each person here:
- Events to attend
- The Lean Startup Conference – founded by Eric Ries, the Lean Startup Conference is the ‘official’ conference of the lean startup community. It takes place once a year in San Francisco.
- Lean Machine Workshops: three-day workshops that will help you define your hypotheses and to create an MVP. They take place in many cities around the world, just keep an eye out!
- Startup Weekends: similar to Lean Machine, Startup Weekends allow you to go through the first steps of starting a company in 54 hours. An ideal opportunity for trying Customer Development in practice!
- Lean Startup Meetups: a place to get together with other entrepreneurs and exchange about startup methodologies. Like Lean Machine workshops, they can be found in many cities around the world.
- Other conferences and local events: conferences often have some keynotes and workshops that are related to Customer Development. Similarly, you might find some beginner’s workshops in your local area. Traveling to conferences is great and will give you a big push, but tapping into your local community is a constant source of inspiration.