Customer Development is the process to organize the search for the business model.
Theoretically, when startups’ products and channels are bits, they can gather and act on information 100 times faster than companies delivering physical goods via physical sales channels (10 times the number of iterative learning cycles, each using only 10 percent of the cash.) In fact, companies like Facebook, Google, Groupon, and Zynga grew faster in a decade than most industrial corporations grew in the 20thcentury. That’s why we call it the Second Industrial Revolution.
The Four Steps: A New Path
The core of Customer Development is blissfully simple: Products developed by founders who get out in front of customers early and often, win. Products handed off to sales and marketing organizations that are only tangentially involved in the new-product development process will lose. There are no facts inside your building, so get the heck outside. Getting out of the building means acquiring a deep understanding of customer needs and combining that knowledge with incremental and iterative product development. The mix of Customer Development and Agile engineering dramatically increases the odds of new product and company success, while reducing the need for upfront cash and eliminating wasted time, energy, money and effort.
There are no facts inside your building, so get the heck outside.
Customer Development recognizes the startup’s mission as a relentless search to refine its vision and idea, and to make changes in every aspect of the business invalidated during the search process. An entrepreneur seeks to test a series of unproven hypotheses (guesses) about a startup’s business model: who the customers are, what the product features should be, and how this scales into a hugely successful company. Customer Development recognizes a startup is a temporary organization built to search for the answers to what makes a repeatable and scalable business model. Customer Development is the process to organize that search.
I Getting Started
The Path to Disaster:
A Startup Is Not a Small Version of a Big Company
The Path to the Epiphany:
The Customer Development Model
The Customer Development Manifesto
CHAPTER 1 The Path to Disaster: A Startup Is Not a Small Version of a Big Company
The definition of insanity is doing the same thing over and over and expecting different results.
—Albert Einstein
WHILE THIS STORY IS OLD, ITS LESSONS are timeless. In the heyday of the dot-com bubble at the end of the 20th century, Webvan stood out as one of the most electrifying new startups, with an idea that would potentially touch every household in America. Raising one of the largest financial war chests ever seen (more than $800 million), the company aimed to revolutionize the $450 billion retail grocery business with online ordering and same-day door-to-door grocery delivery. Webvan believed this was one of the first “killer applications” for the Internet. Customers could just point, click, and order. Webvan’s CEO told Forbes magazine that Webvan would “set the rules for the largest consumer sector in the economy.”
Beyond amassing megabucks, the Webvan entrepreneurs seemed to do everything right. Backed by experienced venture-capital investors, the company raced to build vast automated warehouses and bought fleets of delivery trucks while building an easy-to-use website. Webvan hired a seasoned CEO from the consulting industry. What’s more, most initial customers actually liked the service. But barely 24 months after the initial public offering, Webvan was bankrupt and out of business. What happened?
…barely 24 months after the initial public offering, Webvan was bankrupt.
This was not a failure of execution. Webvan did everything its board and investors asked. In particular, the company fervently followed the traditional new-product introduction model commonly used by most new ventures and embraced the mantras of the time: “first mover advantage” and “get big fast.” Webvan’s failure to ask “where are the customers?” illuminates how this tried-and-true model led one of the best-funded startups of all time down the path to disaster.
The Traditional New-Product Introduction Model
In the 20th century, every company bringing a new product to market used some form of product management model (Figure 1.1). Emerging early in the century, this product-centric model described a process that evolved in manufacturing industries. The consumer packaged-goods industry adopted it in the 1950s, and it spread to the technology business in the last quarter of the century. There it became an integral part of the startup culture.
Figure 1.1 New Product Introduction Diagram
At first glance, the new-product introduction model outlined in the diagram at right appears to be helpful and benign. It illustrates the process of getting a new product into the hands of waiting customers. A new product moves from development to customer testing (alpha/beta test), and using feedback from this initial testing, the product engineers fix technical errors in the product until the product launch date and first customer ship.
The new-product introduction model is a good fit for an existing company where the customers are known, the product features can be spec’ed upfront, the market is well-defined, and the basis of competition is understood.
As for startups, a scant few fit these criteria. Few even know who their customers are. Yet many persist in using the new-product introduction model not only to manage product development but as a roadmap for finding customers and setting the timing for the startup’s sales, launch and revenue plans. Investors use the new-product introduction diagram to set and plan funding. All parties involved in the startup use a roadmap leading toward a very different location, yet they’re surprised to end up lost.
What’s wrong with the old model, and how did it contribute to the billion-dollar Webvan implosion?
Concept and Seed Stage
At the concept and seed stage, founders capture their passion and vision for the company, sometimes on the back of a napkin, and turn them into a set of key ideas, which becomes the outline for the business plan.
Next, issues surrounding the product are defined. What is the product or service concept? What are the product features and benefits? Can it be built? Is further technical research needed? Who will the customers be, and where will they be found? Statistical and market research and a few customer interviews fuel the evaluation and business plan.
This step also brings forth a first guess at how the product will ultimately reach the customer, including discussions of competitive differences, distribution channels, and costs. An initial positioning chart explains the company and its benefits to venture capitalists or corporate higher-ups. The business plan now gets market-size, competitive and financial sections, with an appendix containing Excel spreadsheets forecasting revenue and expenses. Creative writing, passion and shoe leather combine in the concept and seed phase in hopes of convincing