Customer development

Last updated

Customer development is a formal methodology for building startups and new corporate ventures. It is one of the three parts that make up a lean startup (business model design, customer development, agile engineering). [1]

Contents

The process assumes that early ventures have untested hypotheses about their business model (who are the customers, what features they want, what channel to use, revenue strategy/pricing tactics, how to get/keep/grow customers, strategic activities needed to deliver the product, internal resources needed, partners needed and costs). Customer development starts with the key idea that there are no facts inside your building so get outside to test them. The hypotheses testing emulates the scientific method – pose a business model hypothesis, design an experiment, get out of the building and test it. Take the data and derive some insight to either (1) Validate the hypothesis, (2) Invalidate the Hypothesis, or (3) Modify the hypothesis. [2] [3]

Many burgeoning startup companies devote all of their efforts to designing and refining their product and very little time “getting out of the building.” [4] [5] The customer development model encourages that more time be spent in the field identifying potential consumers and learning how to better meet their needs. [6] [7] [8] The Customer Development concept emphasizes empirical research. [3]

Customer development is the opposite of the “if we build it, they will come” [9] product development-centered strategy, which is full of risks and can ultimately be the downfall of a company. [7] [8] [9]

The customer development method was created by Steve Blank. According to Blank, startups are not simply smaller versions of larger, more developed companies. [2] [3] A startup operates in a fashion vastly different from that of a large company and employs different methods. While larger companies execute known and proven business strategies, startups must search for new business models. [2] Customer Development guides the search for a repeatable and scalable business model. [8]

History

Customer development was developed by Blank in the 1990s. While writing about his experiences as an entrepreneur in Silicon Valley for his memoir, Blank began to notice patterns in the startups he was involved with. [10] Recognizing that startups are not simply smaller versions of large companies, he observed that entrepreneurs need to have a systemized approach to guide their search for “repeatable and scalable business models.” [10]

The revelation led to his first book, The Four Steps to the Epiphany: Successful Strategies for Products that Win, which served as the course text for his first class and heralded the birth of Customer Development, which in turn spawned the Lean Startup movement. [10] [11]

Blank's second book, The Startup Owner’s Manual, is a guide to building a startup using customer development principles. [2]

The four-step process

The customer development method consists of four steps that are designed to help avoid common pitfalls and repeat successful business strategies:

Customer Development Manifesto

The Customer Development Manifesto from The Startup Owner's Manual, written by Blank and Bob Dorf: [13]

  1. There Are No Facts Inside Your Building, So Get Outside
  2. Pair Customer Development with Agile Development
  3. Failure is an Integral Part of the Search
  4. Make Continuous Iterations and Pivots
  5. No Business Plan Survives First Contact with Customers So Use a Business Model Canvas
  6. Design Experiments and Test to Validate Your Hypothesis
  7. Agree on Market Type. It Changes Everything
  8. Startup Metrics Differ from Those in Existing Companies
  9. Fast Decision-Making, Cycle Time, Speed and Tempo
  10. It's All About Passion
  11. Startup Job Titles Are Very Different from a Large Company's
  12. Preserve All Cash Until Needed. Then Spend.
  13. Communicate and Share Learning
  14. Customer Development Success Begins With Buy-In

Teachings

Blank began teaching Customer Development in his entrepreneurship classes at Stanford University and UC Berkeley. His class, the Lean Launchpad, was first taught has been adopted by more than 75 universities around the globe. In 2011, Blank's curriculum became the new standard for science commercialization in the U.S. as the National Science Foundation adopted it for their Innovation Corps. [14] [15]

Business model

From the customer development view, a business model is a representation of how organizations create, deliver and capture value. It is designed to change rapidly, reflect customer reality and iterate as new information is discovered. [16] [17] [18]

The business model is based on the mantra, “No business plan survives first contact with customers.” [17] [18] The business plan is an operating document that existing companies write to execute known business models. [17] [18] However, for a startup, there are too many unknowns to develop a successful plan. [17] [18] The static business plan necessarily changes as soon as the business comes in contact with its target market. [17] [18]

Startups are involved in searching for the right business model. [17] The business model is tested in the real world (e.g., through a Minimum Viable Product) to gather customer input and make necessary changes. [18] When a successful, repeatable business model is discovered, the company enters the product execution and business plan phase. [18]

Business model canvas

Alexander Osterwalder and Yves Pigneur designed the Business Model Canvas. [16] [19] The Canvas is a tool to help entrepreneurs structure and plan their business models. [16] It is designed to change rapidly, highlight alternatives, promote a customer focus and encourage testing. [16] [19] It can also be used to set up Customer Development hypotheses and to visually track iterations. [16] [19]

The business model canvas is made up of nine blocks:

Osterwalder and Blank have integrated both business model design and customer development hypotheses into the business model canvas. Each of the nine blocks corresponds to one or more Customer Development hypotheses. [2] [20] When a hypothesis is found to be incorrect, entrepreneurs can apply Customer Development strategies to turn the mistake into a Pivot. [2] [16] [20] As a Pivot, a failed hypothesis becomes a learning strategy, and the business model can be rewritten. [2] [16] [20]

Minimum viable product

The minimum viable product (MVP) is “that version of a new product which allows a team to collect the maximum amount of validated learning about customer with the least effort.” [5] [21] The startup releases the most minimal, core product to start testing early and minimize the total development process time. [5] [21]

The MVP allows entrepreneurs to gather feedback from early adopters to prevent pitfalls and avoid building unwanted products. [5] [21] The MVP also lets customers point out missing features and necessary changes. [5] [21]

To successfully use the MVP strategy, entrepreneurs must be committed to iteration. [19] [21] Customer feedback will bring the product or service through several changes before it is finalized. [19] [21]

Hypotheses

Hypotheses are critical assumptions about how a business will work, and include assumptions about target market, pricing, and competitors. [5] [18] Together, hypotheses make up the business model for a startup. [5] [18]

Testing hypotheses means that the founder has to “get out of the building” and answer three questions about the business:

  1. Do we really understand the customer's problem or need?
  2. Do enough people outside of the company care about the problem to deliver huge business?
  3. Will people care enough to tell their friends, which will help grow the business quickly? [5] [22]

Hypotheses can be tested in several ways. Creating an MVP is one way to quickly test mockups and ideas in the real world, especially with Web and mobile startups. [5] [21]

Hypotheses change as a result of testing and customer feedback. [5] [17] [18] The changed hypotheses are incorporated into new iterations of the startup business model. [5] [17] [18]

Pivot

The pivot is “a structural course correction to test a new fundamental hypothesis about a product, strategy [or] engine of growth.” [23] It is the process of changing a part or parts of the business model to reflect reality. [20] [24]

The customer development process assumes that most of the initial assumptions of the business model will be wrong. [20] [24] Pivoting involves recognizing that the original business model is not working, then deciding what changes to make and taking action on those changes. This process is easier to visualize when the business model is drawn out. [20] [24]

While iterating involves small changes like altering a product price, pivoting involves substantial changes like identifying a better target market. The process involves four steps:

  1. Observe: Observing that the business model isn't working.
  2. Orient: Orienting to the new facts.
  3. Decide: Deciding what to change in the business model.
  4. Act: Acting decisively to make the change. [20]

There are several examples of successful companies that pivoted early on, including Groupon, which famously pivoted from a failed social advocacy campaign into a billion dollar daily deal site, and Fab.com, which pivoted from a social network to a daily deal design site. Instagram pivoted from a mobile microblogging platform into a photo application. [24] [25] [26]

Related Research Articles

A startup or start-up is a company or project undertaken by an entrepreneur to seek, develop, and validate a scalable business model. While entrepreneurship includes all new businesses, including self-employment and businesses that do not intend to go public, startups are new businesses that intend to grow large beyond the solo founder. At the beginning, startups face high uncertainty and have high rates of failure, but a minority of them do go on to become successful and influential.

<span class="mw-page-title-main">Business model</span> Rationale of how an organization operates

A business model describes how an organization creates, delivers, and captures value, in economic, social, cultural or other contexts. For a business, it describes the specific way in which it conducts itself, spends, and earns money in a way that generates profit. The process of business model construction and modification is also called business model innovation and forms a part of business strategy.

In business and engineering, product development or new product development covers the complete process of bringing a new product to market, renewing an existing product and introducing a product in a new market. A central aspect of NPD is product design, along with various business considerations. New product development is described broadly as the transformation of a market opportunity into a product available for sale. The products developed by an organisation provide the means for it to generate income. For many technology-intensive firms their approach is based on exploiting technological innovation in a rapidly changing market.

In software development, agile practices include requirements, discovery and solutions improvement through the collaborative effort of self-organizing and cross-functional teams with their customer(s)/end user(s). Popularized in the 2001 Manifesto for Agile Software Development, these values and principles were derived from, and underpin, a broad range of software development frameworks, including Scrum and Kanban.

<span class="mw-page-title-main">Steve Blank</span> American businessman

Steve Blank is an American entrepreneur, educator, author and speaker based in Pescadero, California.

<span class="mw-page-title-main">Hypothesis</span> Proposed explanation for an observation, phenomenon, or scientific problem

A hypothesis is a proposed explanation for a phenomenon. For a hypothesis to be a scientific hypothesis, the scientific method requires that one can test it. Scientists generally base scientific hypotheses on previous observations that cannot satisfactorily be explained with the available scientific theories. Even though the words "hypothesis" and "theory" are often used interchangeably, a scientific hypothesis is not the same as a scientific theory. A working hypothesis is a provisionally accepted hypothesis proposed for further research in a process beginning with an educated guess or thought.

A minimum viable product (MVP) is a version of a product with just enough features to be usable by early customers who can then provide feedback for future product development.

Lean startup is a methodology for developing businesses and products that aims to shorten product development cycles and rapidly discover if a proposed business model is viable; this is achieved by adopting a combination of business-hypothesis-driven experimentation, iterative product releases, and validated learning. Lean startup emphasizes customer feedback over intuition and flexibility over planning. This methodology enables recovery from failures more often than traditional ways of product development.

Partner development is a customer-centric approach to business development. It draws from the customer development framework popularized by Steve Blank.

<span class="mw-page-title-main">Eric Ries</span> American entrepreneur

Eric Ries is an American entrepreneur, blogger, and author of The Lean Startup, a book on the lean startup movement. He is also the author of The Startup Way, a book on modern entrepreneurial management.

<i>The Lean Startup</i> Book by Eric Ries

The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses is a book by Eric Ries describing his proposed lean startup strategy for startup companies.

Disciplined agile delivery (DAD) is the software development portion of the Disciplined Agile Toolkit. DAD enables teams to make simplified process decisions around incremental and iterative solution delivery. DAD builds on the many practices espoused by advocates of agile software development, including scrum, agile modeling, lean software development, and others.

Front End Innovation is the starting point where opportunities are identified and concepts are developed prior to entering the formal product development process. Innovation on the Front End is where exciting breakthroughs are created through a process that allows for creativity and value creation in a systematic manner different from the formal development process.

Product-market fit, also known as product/market fit, is the degree to which a product satisfies a strong market demand.

<span class="mw-page-title-main">Alexander Osterwalder</span> Swiss business theorist

Alexander Osterwalder is a Swiss business theorist, author, speaker, consultant, and entrepreneur, known for his work on business modeling and the development of the Business Model Canvas.

<span class="mw-page-title-main">Business Model Canvas</span> Strategic management template

The Business Model Canvas is a strategic management template used for developing new business models and documenting existing ones. It offers a visual chart with elements describing a firm's or product's value proposition, infrastructure, customers, and finances, assisting businesses to align their activities by illustrating potential trade-offs.

<span class="mw-page-title-main">Design sprint</span> Hackathon-like rapid prototyping and testing

A design sprint is a time-constrained, five-phase process that uses design thinking with the aim of reducing the risk when bringing a new product, service or a feature to the market. The process aims to help teams to clearly define goals, validate assumptions and decide on a product roadmap before starting development. It seeks to address strategic issues using interdisciplinary expertise, rapid prototyping, and usability testing. This design process is similar to Sprints in an Agile development cycle.

Lean LaunchPad is an entrepreneurship methodology created by Steve Blank to test and develop business models based on querying and learning from customers. It is said to be based on the scientific method and combines experiential learning with “The three building blocks of a successful lean startup”: Alexander Osterwalder's "Business Model Canvas", Steve Blank's "Customer Development Model", and Agile Engineering.

<span class="mw-page-title-main">Mach 37</span> American venture capital organization assisting startups

MACH37 is an American startup accelerator that was established in 2013 as a division of the Virginia-based Center for Innovative Technology (CIT) with funding from the Commonwealth of Virginia. In 2017 CIT partnered with VentureScope, a strategic innovation consultancy and venture firm, to revamp MACH37's operating model and curriculum. Following a successful partnership between CIT and VentureScope, MACH37 became fully owned and operated by VentureScope in 2020. MACH37 focuses primarily on honing and strengthening startups' product-market fit through extensive customer discovery and market research, expanding emerging companies' professional networks, fostering founder wellbeing, and providing emerging companies in the cybersecurity industry with access to investment capital and an immediate customer base. In an October 2020 article Forbes named MACH37 'the Granddaddy' of top cyber accelerators giving a nod to the fact that MACH37 was one of the first accelerators in the world dedicated to cyber and cyber adjacent technologies, and it has lasted far longer than many of its peer accelerators while strengthening over time. The name 'MACH37' is a reference to the escape velocity of Earth's atmosphere. VentureScope applies Lean Startup methodology at MACH37 as an efficient and successful approach to assist startups to rapidly adapt their search for a successful business model and test their hypotheses about customer needs and market demands.

<span class="mw-page-title-main">Second product syndrome</span> Business concept

Second product syndrome is a business concept introduced by Steve Jobs in the documentary The Pixar Story. Steve Jobs describes the concept as when the company comes up with a very successful first product, it becomes more ambitious and boastful. The company then decides to go ahead with the second product without actually investigating and understanding the reason behind their first product's success. Therefore, the second product often ends up as a failure.

References

  1. ↑ Alvarez, Cindy (2017-08-30). Lean Customer Development: Building Products Your Customers Will Buy. "O'Reilly Media, Inc.". ISBN   978-1-4920-2375-3.
  2. 1 2 3 4 5 6 7 Roush, Wade. "Steve Blank Hands A New Owner's Manual to Startup Founders". Xconomy.
  3. 1 2 3 Nivi (5 November 2008). "Customer Development: How to develop your customers like you develop your product". Venture Hacks.
  4. ↑ Blank, Steve. "Steve Blank: The Key to Startup Success? 'Get Out of the Building'". Inc. Video.
  5. 1 2 3 4 5 6 7 8 9 10 11 Blank, Steve (May 2013). "Why the Lean Start-Up Changes Everything". Harvard Business Review.
  6. ↑ StackSocial (15 October 2012). "A free must-read e-book for all entrepreneurs".
  7. 1 2 3 Ries, Eric (November 8, 2008). "What is customer development?".
  8. 1 2 3 4 Cooper, Brant. "WHAT IS CUSTOMER DEVELOPMENT?". Archived from the original on 2017-02-11. Retrieved 2016-10-07.
  9. 1 2 Alvarez, Cindy (June 2014). Lean Customer Development. O'Reilly.
  10. 1 2 3 matt. "Steve Blank – 1 of 5". Founderly. Archived from the original on 2014-07-31. Retrieved 2016-10-07.
  11. ↑ Lohr, Steve (April 24, 2010). "The Rise of the Fleet-Footed Start-Up". The New York Times.
  12. ↑ Blank, Steve (Feb 11, 2010). "Debe ser un problema de marketing". Archived from the original on October 5, 2016. Retrieved October 7, 2016.
  13. ↑ Blank, Steve (2012). "Customer Development Manifesto" (PDF). Archived from the original (PDF) on 2017-08-29. Retrieved 2018-05-22.
  14. ↑ Tice, Carol (June 13, 2011). "Lean LaunchPad: A Crash Course in Startup Success". Entrepreneur.
  15. ↑ Blank, Steve (6 September 2012). "The Lean Launchpad online".
  16. 1 2 3 4 5 6 7 8 Blank, Steve (October 25, 2010). "Entrepreneurship as a Science – The Business Model/Customer Development Stack".
  17. 1 2 3 4 5 6 7 8 Blank, Steve (Nov 26, 2012). "Part I: Validate Your Business Model Start With a Business Model, Not a Business Plan". The Wall Street Journal.
  18. 1 2 3 4 5 6 7 8 9 10 11 Blank, Steve (Nov 29, 2012). "Part II: Validate Your Business Model". The Wall Street Journal.
  19. 1 2 3 4 5 Osterwalder, Alexander (Nov 26, 2012). "Burn Your Business Plan – Before It Burns You". The Wall Street Journal.
  20. 1 2 3 4 5 6 7 Blank, Steve (April 12, 2010). "Why Startups are Agile and Opportunistic – Pivoting the Business Model".
  21. 1 2 3 4 5 6 7 Ries, Eric (August 3, 2009). "Minimum Viable Product: a guide".
  22. ↑ "Steve Blank: Why You Must Test Your Hypotheses". YouTube . Nov 12, 2012.
  23. ↑ "Principles". The Lean Startup.
  24. 1 2 3 4 Gallegos, Demetria (Apr 25, 2012). "Live Chat: When to Pivot, When to Persevere With Your Business Idea". The Wall Street Journal.
  25. ↑ "Definition of pivot". Financial Times. Archived from the original on 2016-10-05. Retrieved 2016-10-07.
  26. ↑ Andersen, Derek (Apr 15, 2012). "Steve Blank Teaches Entrepreneurs How To Fail Less". Techcrunch.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.