Meanwhile, the Customer Development model embraces the way startups actually work, with moving backward playing a natural and valuable role in learning and discovery. Startups will cycle through each step of the Customer Development process until they achieve “escape velocity”—enough measurable progress in finding the business model as defined by board and team—to propel forward to the next step.
…what could customers tell us except that we were right?
Eric Ries recalls his pre-IMVU days at There.com: “The company sort of wanted customer feedback but not really. From our perspective, what could customers tell us except that we were right? The marketing team held focus groups, but looking back, they were orchestrated to get the answers we wanted to hear.” The Customer Development model assumes it will take several iterations of each of the four steps to get it right. The philosophy of “It’s not only OK to screw it up—plan to learn from it” is the core of the process.
Note that each of the four steps has a stop sign at its exit. That’s simply a reminder to think through whether enough has been learned to charge ahead to the next step. It’s a place to stop and summarize all the learning and, of course, to candidly assess whether the company has reached “escape velocity.”
Let’s take a closer look at each of the four steps of the Customer Development model.
Step 1: Customer Discovery
Customer discovery translates a founder’s vision for the company into hypotheses about each component of the business model and creates a set of experiments to test each hypothesis. To do this, founders leave guesswork behind and get out of the building to test customer reaction to each hypothesis, gain insights from their feedback, and adjust the business model. Of all the lessons of Customer Development, the importance of getting out of the building and into conversations with your customers is the most critical. Only by moving away from the comforts of your conference room to truly engage with and listen to your customers can you learn in depth about their problems, product features they believe will solve those problems, and the process in their company for recommending, approving and purchasing products. You’ll need these details to build a successful product, articulate your product’s unique differences and propose a compelling reason why your customers should buy it.
Customer discovery is not about collecting feature lists from prospective customers or running lots of focus groups. In a startup, the founders define the product vision and then use customer discovery to find customers and a market for that vision. (Read that last sentence again. The initial product specification comes from the founders’ vision, not the sum of a set of focus groups.)
In a startup, the founders define the product vision and then use customer discovery to find customers and a market for that vision.
Customer discovery includes two outside-the-building phases. The first tests customer perception of the problem and the customer’s need to solve it. Is it important enough that the right product will drive significant numbers of customers to buy or engage with the product? The second phase shows customers the product for the first time, assuring that the product (usually a minimum viable product at this point) elegantly solves the problem or fills the need well enough to persuade lots of customers to buy. When customers enthusiastically confirm the importance of both the problem and the solution, customer discovery is complete.
Pivots may happen in the customer discovery phase. Failure will happen. It is a normal part of the startup process. Misunderstanding or just getting wrong key assumptions about your business model happen often: who your customers are, what problems they needed to solve, what features would solve them, how much customers would pay to solve them, etc. Pivots are a response to these mistakes. A pivot is a major change to one of the nine business model hypotheses based on learning from customer feedback. Pivots happen often in the Customer Development process. A pivot is not a failure. In fact, embracing the fact that startups regularly fail and pivot along the way is perhaps one of the greatest insights in this book.
A pivot is not a failure.
Another key element of customer discovery is that the founder is free to ignore all of it. At times (particularly in a new market) a founder’s vision of what can be is clearer than the vision of potential customers. But this corner case requires the founder to be able to articulate the “why,” not just ignore it.
The IMVU team shipped a buggy, minimalist product quickly and deployed a whopping marketing budget of $5 a day, using Google AdWords to attract roughly 100 new daily users to the site. They vigilantly observed, monitored and assessed every user’s on-site behavior. Heavy (paying) users were then assaulted with questions in online chats, surveys, phone calls from founders and more. Perhaps the ugliest (or most flattering) comment: “It seems to crash my computer every time I use it,” said one user who kept coming back for more! But four months after funding, a (clearly minimal) new product was born, using feedback reflecting the power of customer discovery.
Step 2: Customer Validation
Customer validation proves that the business tested and iterated in customer discovery has a repeatable, scalable business model that can deliver the volume of customers required to build a profitable company. During validation, the company tests its ability to scale (i.e., product, customer acquisition, pricing and channel activities) against a larger number of customers with another round of tests, that are larger in scale and more rigorous and quantitative. During this step, a startup also develops a sales roadmap for the sales and marketing teams (to be hired later) or validates the online demand creation plan. Simply put, does adding $1 in sales and marketing resources generate $2 + of revenue (or users, views, clicks, or whatever the metric may be)? The resulting roadmap will be field-tested here by selling the product to early customers.
How? Depending on the business model, validation is measured by “test sales” that get customers to hand over their money (or become actively engaged with the product). In a single-sided market (one where the user is the payer), a steady stream of customer purchases validates the concept far more solidly than lots of polite words. There’s no surrogate for people paying for a product. In a “two-sided” or ad-supported business model, a customer base of hundreds of thousands that’s growing exponentially usually implies that the company can find a set of advertisers willing to pay to reach those users.
In essence, the first two steps in the Customer Development model—customer discovery and customer validation—refine, corroborate, and test a startup’s business model. Completing these first two steps verifies the product’s core features, the market’s existence, locates