State Your Business Model Hypotheses
Customer Discovery, Phase Two:
“Get Out of the Building” to Test the Problem: “Do People Care?”
Customer Discovery, Phase Three:
“Get Out of the Building” and Test the Product Solution
Customer Discovery, Phase Four:
Verify the Business Model and Pivot or Proceed
Overview of the Customer Discovery Process
CHAPTER 3 An Introduction to Customer Discovery
No startup business plan survives first contact with customers.
—Steve Blank
A journey of a thousand miles begins with a single step.
—Lao Tzu
IRIDIUM WAS ONE OF THE BIGGEST STARTUP gambles ever made—a bold and audacious $5.2 billion bet. Founded by Motorola and a global partnership of 18 companies in 1991, Iridium planned to build a mobile telephone system that would work “anywhere on Earth,” from ships in the middle of the ocean to the jungles of Africa to remote mountain peaks where no cell towers existed.
How? With an out-of-this-world business plan. First, the company bought a fleet of 15 rockets from Russia, the U.S. and China. Next, it launched an armada of 72 private satellites into orbit, where they acted like 500-mile-high cell towers providing phone coverage to any spot on Earth. Seven years after Iridium’s founding, its satellites were in place. But nine months after the first call was made in 1998, the company was in Chapter 11 bankruptcy. When Iridium crashed back to Earth, it ranked as one of the largest startup failures on record. What went wrong?
When Iridium was founded in 1991, worldwide cell-phone coverage was sparse, unreliable and expensive. Cell-phone handsets were the size of lunch boxes. Iridium put together a business plan that made assumptions about customers, their problems and the product needed to solve those problems. Other assumptions about sales channel, partnerships, and revenue model all added up to a set of financial forecasts that Iridium would soon be printing money.
One of the largest startup failures on record as they executed their business plan.
But in the seven-plus years it took Iridium to go from concept to launch, innovation in mobile- and cell-phone networks moved at blinding speed. By the time Iridium launched, there were far fewer places on the planet where cell-phone service was unavailable. Traditional cell-phone companies provided coverage in the most valuable parts of the world. Prices for cell service shrunk as fast as phone handsets did. In contrast, Iridium’s satellite phone was bigger than a brick and weighed about as much. Worse, Iridium’s cell phone couldn’t make calls from cars or buildings, since it required line-of-sight “connection” to the satellites. Instead of 50 cents per minute for a regular cell call, Iridium’s calls cost $7 a minute, plus $3,000 for the handset itself.
Iridium’s potential market shrunk nearly every day. Instead of a massive worldwide market of potential users, it had drawn only a small group willing to pay its prices and put up with the product’s many limitations. But Iridium’s business model assumptions and plans were firmly fixed as if it was still 1991. The company spent $5 billion building a business over eight years without ever focusing on four key questions:
Have we identified a problem a customer wants to see solved?
Does our product solve this customer problem or need?
If so, do we have a viable and profitable business model?
Have we learned enough to go out and sell?
Answering these questions is the purpose of the first step in the customer discovery process. This chapter explains how to go about it.
(Twenty years later, Iridium emerged from bankruptcy. In 2000, an investor group bought $6 billion worth of its assets for $25 million. After a long climb back, the company celebrated its 500,000th customer in September 2011.)
Customers don’t behave like your business plan.
The Customer Discovery Philosophy
A startup begins with the vision of its founders: a vision of a new product or service that solves a customer’s problems or needs and of how it will reach its many customers. Customer discovery lowers the odds of spending zillions and getting zeros in return as the Iridium team did. So the No. 1 goal of customer discovery amounts to this: turning the founders’ initial hypotheses about their market and customers into facts.
Get Out of the Building
Facts exist only outside the building, where customers live, so the most important aspect of customer discovery is getting out of the building, in front of customers. And not for a few days or a week, but repeatedly, over weeks if not months. This critical task can’t be assigned to junior staffers and must be driven by founders. Only after the founders have performed this step will they know whether they have a valid vision or just a hallucination.
Sounds simple, doesn’t it? But for anyone who has worked in established companies, the customer discovery process is disorienting. All the rules about new-product management in large companies are turned upside down. It’s instructive to enumerate all things you are not going to do:
understand the needs and wants of all customers
make a list of all the features customers want before they buy your product
hand Product Development a features list of the sum of all customer requests
hand Product Development a detailed marketing-requirements document
run focus groups and test customers’ reactions to your product to see if they will buy
What you are going to do is develop your product for the few, not the many. Moreover, you’re going to start building your product even before you know whether you have any customers for it.
On a startup’s first day, there’s limited—if any—customer input.
For an experienced marketing or product management executive, these ideas are not only disorienting and counterintuitive but heretical. Why aren’t the needs of all potential customers important? What is it about a first product from a new company that’s different from follow-on products in a large company? What is it about a startup’s first customers that make the rules so different?
Search for the Problem/Solution Fit
The customer discovery process searches for problem/solution fit: “have we found a problem lots of people want us to solve (or a need they want us to fill)” and “does our solution (a product, a website, or an app) solve the problem in a compelling way?” At its core, the essence of customer discovery is to determine whether your startup’s value proposition matches the customer segment