Customer Development Past Present Future Steve Blank 111909

The Customer Development Model Past, Present, Future Lean Startup Circle - San Francisco 19 November 2009 Steve Blank Stanford School of Engineering / UC Berkeley, Haas Business School www.steveblank.com

Agenda • How did we get here? • Where are we? • What can the Lean Startup Circle do?

In the Beginning Insight - The Chasm

No Time To Think • Eight startups 1978 -1999 – Semiconductors, video games, signals intelligence, supercomputers, Mac peripherals, enterprise software • Training instructor to CEO • Four IPO’s, one a “go home” and stay

It Started With a Question If Startups Fail from a Lack of customers not Product Development Failure Then why do we have: • process to manage product development? • no process to manage customer development?

All We Had Was 30 Years of This Concept/ Product Alpha/Beta Launch/ Seed Round Dev. Test 1st Ship Product Development Model

I Started Reading • Lead User Research - Von Hippel • OODA Loop - Boyd • Crossing the Chasm - Moore • Question-based Selling - Freese • Entrepreneurial Mindset - McGrath/MacMillan • Solution Selling - Bosworth • Innovators Dillema - Christensen • Conceptual/Strategic Selling - Heiman • Profitable Value - Lanning • Spin Selling - Rackham • Lanchester Strategy - Yano • US Marine Corps Warfighting Manual • High Tech Marketing - Davidow • Tipping Point - Gladwell Customer Customer Customer Company Discovery Validation Creation Building

It Resulted in a Few Hypotheses • Startups weren’t small versions of large companies • They were about learning/discovery, not execution • Entrepreneurs and their VC’s were executing on guesses • But the facts were outside the building

Which Turned Into A Model Product Development Concept/ Product Alpha/Beta Launch/1st Bus. Plan Dev. Test Ship + Customer Development Customer Customer Customer Company Discovery Validation Creation Building

Eric Ries Extends the Model • Took my class at U.C. Berkeley • Co-founded IMVU - 1st implementation of Customer Development - Paired it with an Agile Development Model • Observed that the sum of the two was powerful

Eric Ries: Insight - 1 Startups assumed development was “known” Concept/ Product Alpha/ Launch Seed Dev. Beta /Ship Waterfall Requirements Design Solution: known • I understood the problem Implementa1on was unknown Problem: known Veriﬁca1on • Eric observed the solution Maintenance was unknown in a startup

Eric Ries: Insight - 2 Agile matches the Customer Dev speed Concept/ Product Alpha/ Launch Seed Dev. Beta /Ship Solution: unknown • Agile was the development methodology to use when the solution was unknown

Eric Ries: Insight 3 Customer + Agile + Commodity = Lean • Solving for both unknowns is the “Lean Startup” Problem: Unknown Solution: Unknown Source: Eric Ries

Jon Feiber @ MDV Insight Not all Need Customer Development • Market Risk vs. Technical Risk? - Web is about customers & markets - Biotech is about science & invention

John Boyd - Insight The OODA “Loop” Observe Orient Decide Act Implicit Implicit Unfolding Guidance Guidance Cultural Circumstances & Control Traditions & Control Genetic Analyses & Observations Feed Forward Heritage Synthesis Feed Decision Feed Action Forward Forward (Hypothesis) (Test) New Information Previous Experience Outside Unfolding Information Interaction With Unfolding Environment Interaction Feedback With Environment Feedback Orientation shapes observation, shapes decision, shapes action, and in turn is shaped by the feedback and other phenomena coming into our observing window.

Iteration versus Execution Iteration Execution Customer Customer Customer Company Discovery Validation Creation Building The Search for a Business The Growth of a Business Product/Market Fit

Iteration versus Execution Product/Market Fit

Present

Business Model Affects Metrics and Exit Criteria

Appendix B: Business Model Checklist • The Four Steps had: – Business model flow for Enterprise Software – Business model summary for each step – Checklist for Enterprise Software • It said, “modify it to fit your business”

The Flow State Your Hypotheses Customer & Distribution & Demand Market Type Competitive Product Pricing Problem Creation Hypothesis Hypothesis Hypothesis Hypothesis Hypothesis Hypothesis Test Problem Hypothesis Friendly roblem� Customer Market First Contacts Presentation Understanding Knowledge Test Product Hypothesis First Reality Yet More 1st Advisory �Product� Customer Second Check Reality Check Board Presentation Visits Verify the Verify the Iterate or Verify the Problem Product Business Exit Verify Model

Customer Discovery Summary The Summary Phase Goals Deliverables 0. Get Buy-In Investors/founders agree on Customer Development, key hires, and values. Buy-In, Core Values 1. State Hypotheses Set product specs, develop detailed hypotheses of product, first customers, channels and Hypothesis Briefs pricing, demand, market, and competition. A. Product Hypotheses Get agreement on product features, benefits, and release schedules. Product Brief B. Customer Hypotheses Describe customers, their problems, and why they will use the product. Customer Brief C. Channel & Pricing Hypotheses Develop a channel strategy and pricing model. Channel and Pricing Brief D. Demand Creation Hypotheses Identify demand creation strategy, influencers, and trends. Demand Creation Brief E. Market Type Hypotheses Describe what market you are in (new, existing, resegmented). Market Type Brief F. Competitive Hypotheses Develop competitive analysis that fits your Market Type. Competitive Brief 2. Test & Qualify Hypotheses Test hypotheses from phase 1. Understand customers’ “day in the life” Validate A. First Customer Contacts Create customer list and schedule the first customer contacts. Customer List B. Problem Presentation Develop presentation of problems, current solutions, product solution. Problem Presentation C. In-Depth Customer Understand how customers work, their problems and who else influences their decisions. Customer Brief Understanding D. Market Knowledge Understand the market: meet w/analysts & media, trade shows, research. Positioning Brief 3. Test & Qualify Prod Concept Test product concept. Do customers’ needs match the product? Hypotheses A. First Reality Check Review customer/product feedback & test phase 1 customer problem assumptions. Revise Product Customer Briefs B. Product Presentation Create product presentation on how product solves customers’ problems. Product Presentation C. More Customer Visits Expand customer list to include five new potential customers. Customer List D. Second Reality Check Review product feature feedback and test. Updated Feature List E. First Advisory Board Members Spot and recruit first advisory board members. Advisors on Board 4. Verify Found the right market? Have a profitable business? Validate A. Problem Verification Verify that you have identified a problem that a customer wants solved. Problem Statement B. Product Verification Verify that the product solves customers’ needs and its ROI. Product Requirement Doc C. Business Model Verification Verify that you have a profitable business model. Updated Revenue/Sales Plan D. Iterate or Exit Decide whether you have learned enough to go sell. Business/Prod Plan

The Workbook Customer Validation V e r i f ication: Sales Customer Discovery Hypothesis: The Customer Worksheet 1-b Worksheet 4-b Customer & Demand Market Type Competitive Verify the Iterate or Product Problem Distribution & Creation Hypothesis Verify the Verify the Verify the Hypothesis Pricing Hypothesis Product Sales Channel Exit Hypothesis Hypothesis Hypothesis Business Roadmap Roadmap Model Goal of phase 1b: Develop a hypothesis of who the customer is and what problems they have that will drive them to use your product, before you leave the building. Goal of phase 4b: You’ve gone all around the Customer Validation circle. You assembled your sales materials, found visionary prospects and tried to sell and close 3 A u t h o r : Business Execution, Business Visionary to 5 customers. In this phase you summarize everything you learned from selling. Approval: Founding Team and Executive Staff Presenter: Founding Technical Team Author: Sales Closer, Business Execution Time/Effort: 3-5 days of authoring by VP Business Execution or Business Approval: A l l Visionary, day presentation/ strategy meeting with founding team and Presenter: Sales Closer executive staff Time/Effort: 1-3 days of authoring by VP Business Execution or Business Visionary, day presentation/strategy meeting with founding team and 1. Define the different types of “customer” 2. W ho will be the actual day-to-day user of the product? executive staff 3. W ho are the influencers and recommenders? 4. W ho is the “Economic Buyer?” (I.e. whose budget paid for it?) 1. P r o s p ecting 5. Do you think the Economic Buyer has an existing budget for this product or do they need to get 2. H o w easy was it to get an appointment? one approved? 3. Did customers understand what you wanted to sell? 6 . W ho are the “Decision Makers?” 7 . W ho else needs to approve the purchase? 4 . Presenting 5. Did you understand the real pain the buyers had? 8 . C u s tomer Visionaries understand they have a pain and can visualize that there is a solution. Where do you 6. H o w did your solution match their needs? think you will find them? 7. Did you understand the impact on others in the company? 9. In what title or function? 8. Did you need a demo or prototype to sell? 10. In what company type? 9. W h e r e the sales materials adequate? 11. In what industry Segment? 12. R eminder: a visionary is a paying customer 10. Customer Organizational Issues 11. Did you identify the right decision makers? 13. Where in an organization you think your first customers are? 12. Did you understand the other key players in the organization? 14. What departments 13. Did you lose deals because others in the organization objected? 15. What are their titles? 16. How do they differ from later customers? (Hint: Lots in a new market, little in an existing 1 4 . Pricing market.) 15. Did you lose deals over pricing? 16. Do you have the right pricing model? 17. What problem does the customer have? 17. What is the Average Selling Price? 18. What do you think the biggest pain is in how they work? 18. Over the next 3 years how many units will a customer buy? 19. I s it the same on all levels of the company? 20. I f they could wave a magic wand and change anything what would it be? 19. What is the lifetime value of each customer? 21. Since your product doesn’t exist, what do people do today to solve their problem? 20. Was their any objection to your pricing? (If not, your product may be priced too low—you should D o n’t do it ?Do it badly? Don’t recognize the need? always get a modicum of grumbling.) 21. Besides the absolute price of the product, do you have the right pricing model? 22. Where on the “problem recognition scale” is each type of customer (users, recommenders, economic buyers) 22. R O I Model • L a t e nt Need (you recognize that the buyer needs your product but they don’t…yet) 23. Do you understand the ROI for a customer? Revenues? Costs- reduction or containment? • A c tive Need – the Buyer is in pain (they recognizes a need but doesn’t know how to solve it) Displaced costs? Avoided costs? Productivity improvements? Time-savings? Intangible? • H a s a vision of a solution (the buyer has a vision of how to solve their problem) 24. Is the ROI demonstrable or provable? 23. What is the organizational impact of this pain? 25. Distribution Model 24. Individual? • Are your assumptions about distribution channel correct? 25. Departmental? 26. What will the cost of the distribution channel be? 1 . C orporate?

The Metrics • Goals to be accomplished to exit steps • Quantitative – Talk to 50+ customers in Discovery – Close 5 orders in Validation • Qualitative – Develop product & company positioning – Choose Market Type

Dave McClure - Insight Metrics for Web Marketing SEO Campaigns, SEM PR Contests Biz Dev Social Networks Blogs Aﬃliates Apps & Direct, Tel, Widgets Email TV Domains ACQUISITION Emails & Alerts Blogs, RSS, News Feeds o n Re te n ti Ads, Lead Gen, Rev Biz Dev System Events & Subscriptions, Time-‐based enu ECommerce Features e $$ Website.com From Dave McClure http://500hats.typepad.com/ $

Maples Investments - Insight Funding the Lean Startup Model • Mike Maples was a business school case • Started a venture firm – 1st VC adoption of Customer Development – Introduced Mike to my Stanford Teach Asst – Ann Miura-Ko now Mike’s partner

Business Model Iteration The Pivot Strategic Business Model Iteration Customer Agile Product Development Development Tactical Source: Ann Miura-Ko Maples Investments

Market Type Affects Spending and Sales Curve

Type of Market Changes Everything Existing Market Resegmented New Market Market • Market • Sales • Customers – Market Size – Sales Model • Needs – Cost of Entry – Margins • Adoption – Sales Cycle – Launch Type – Chasm Width – Competitive • Finance Barriers • Ongoing Capital – Positioning • Time to Profitability

Definitions: Types of Markets Existing Market Resegmented New Market Market • Existing Market - Faster/Better = High end • Resegmented Market - Niche = marketing/branding driven - Cheaper = low end • New Market - Cheaper/good enough can create a new class of product/customer - Innovative/never existed before

New Market = Hockey Stick Sales Curve

Existing Market = Linear Sales Growth

Future

What Can the Lean Startup Circle Contribute? • Enumerate Business Models - I.e. Dave Cohen/Techstar’s list http://www.coloradostartups.com/2009/11/07/internet-business-models-of-the-techstars/ • For each Business Model develop: - Business Model Flow - Summary - Checklist - Metics

Book Available on Amazon and Cafepress www.amazon.com/Four-Steps-Epiphany-Steven-Blank/dp/0976470705 www.cafepress.com/kandsranch Blogs Steve Blank www.steveblank.com Lean Startups http://startuplessonslearned.com/

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Customer Development Past Present Future Steve Blank 111909

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Customer Development Past Present Future Steve Blank 111909 Presentation Transcript