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Lean Software Startup: Customer Development (lecture)


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Lecture at the University of Turku
Topic: Customer development - an introduction
20th January, 2016

Customer development is a form of market research for startups.

Published in: Business
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Lean Software Startup: Customer Development (lecture)

  1. 1. CUSTOMER DEVELOPMENTAN INTRODUCTION MA27 Lean Software Startup Joni Salminen PhD, marketing Jan 20th, 2016
  2. 2. STRUCTURE 1. What is customer development? 2. Why is it needed? 3. Principles of customer development 4. Barriers of customer development 5. Customer development and this course
  3. 3. WHAT IS CUSTOMER DEVELOPMENT? A method of validating demand for a (software) product by developing hypotheses (”guesses”) and then testing them objectively ”outside the building”. The goal is to build a scalable startup by finding a repeatable sales model. The conceptual framework is developed by Steven Blank, and it’s most often applied to enterprise software startups.
  7. 7. CUSTOMER DEVELOPMENT = RESEARCH Usually takes the form of semi-structured interviews (=method). You want to avoid both false positives - i.e., getting the impression your idea is good although it sucks; and false negatives which is to conclude the idea is bad although in reality it's not (=objectivity). You want to create pull instead of push. For that, you need to first find the right product and market (=research purpose). (Meta-assumption: Market risk is higher than technology risk.)
  8. 8. RQS FOR CUSTOMER DEVELOPMENT • Is the problem you think of real? (problem validation) • Does it make sense to solve the problem in terms of business opportunity? (i.e., do enough people have this problem? Are they willing to pay for solution?) (problem validation) • Is your product a good solution for the problem? What are the alternative solutions? (i.e., what is direct and indirect competition?) (problem validation) • Is the customer you think of the right one for you? (Is he experiencing the problem you think? Is he willing to pay for a solution?) (customer validation)
  10. 10. IN SOFTWARE STARTUPS, MARKETING AND CODE ARE PARALLEL PROCESSES Customer development Product development A tech team needs to find a good marketer that can translate customer needs into technical requirements (or do it themselves). PROGRESS
  11. 11. IS YOUR IDEA ANY GOOD? VITAMINS VS. PAIN KILLERS • Vitamin: a product that no-one hates, but does not love either. Such a product will most likely fail, because people don’t want to pay for it. • Pain killer: a must-have product the customer cannot live without (and is willing to pay for). If your product would disappear tomorrow, the customer would be really sad. Takeaways: • Most startup ideas are nice-to-have. They will fail because of that. • Willingness to pay is a must. Without revenue, it’s not a business but a hobby (or non-profit).
  12. 12. TWO WAYS TO COME UP WITH A STARTUP IDEA • Deductive: spot a mega-trend or a lucrative market from ”helicopter view”. (VCs care about this, since they think of market size and big changes.) • Inductive: spot a everyday problem of a customer and solve it. (Then later on you will find out how scalable business it is.)
  13. 13. WE ARE ALL BOUND TO OUR ENVIRONMENT Turku Finland Europe World Hence, our ability to come up with good business ideas is limited.
  14. 14. EXPERIENCE MATTERS As you gain more experience of a specific industry – often referred to as domain-specific expertise – you are able to recognize opportunities you never thought of. That is why many students learn about business development, work in the industry, and only then create their own businesses. (Keep all this stuff in mind, even if you don’t plan to start a company right now.)
  15. 15. PIVOTS AND PATH DEPENDENCE • The end result is often different from what was initially thought of. • However, the initial idea influences how the project will evolve. • This is called path dependence Consequently, startup parameters matter. Although a good team can constantly improve, by choosing a bad idea it is worse off compared to another good team choosing a good idea.
  16. 16. THE DANGER OF RUNWAY time chance of success …even if you bootstrap, life gets in the way!
  18. 18. 1. DON’T FOCUS ON YOUR PRODUCT Don't ask about your product, ask about their problem. Wrong question: "We have this product A - would you use it?". Right question: "Do you ever have this problem B?" [that you think the product A will solve] “Abstract your problem by a level. For example, if you want to know whether someone will use a healthy lunch delivery service, ask about ‘lunch’” (Cindy Alvarez)
  19. 19. 2. LISTEN, DON’T PITCH Pitching is for other times - you DON'T need to sell your product to this person, you only need to hear about his or her life. “Shut up for 60 seconds. This is a LONG, LONG time and it feels awkward. It also forces the person to go beyond the short (and probably useless) answer and go into detail.” (Cindy Alvarez)
  20. 20. 3. ECHO Repeat what he or she says - oftentimes people think they understand what the other person is saying, but they don't. Only by repeating with your own words and getting them to nod "That's right" you can make sure you got it right.
  21. 21. 4. TAKE NOTES Take notes or better yet, record the interviews. You don't want to forget what was said, but without notes you will. Sometimes looking back at your notes or listening to audio recordings, you’ll realize new angles.
  22. 22. 5. ”WOULD’VE, SHOULD’VE, COULD’VE… BUT NEVER DID” Don't ask "would you" questions, ask "did you" questions. People are unable to predict their behavior, but they can fairly well tell what they have done.
  23. 23. 6. AVOID LOADED QUESTIONS Avoid loaded questions. False: "Is this design good?“ or “We spent a lot of time doing this mockup. What do you think about it?” Correct: "What do you think of this design? (…) How would you improve it?"
  24. 24. 7. AVOID ”YES OR NO” Avoid yes/no questions. What would you learn from them? Nothing. Avoid yes/no questions. Whichever one the person chooses, it's probably not useful for you. (Cindy Alvarez)
  25. 25. 8. DON’T VALIDATE, DISPROVE Focus more on disproving your idea rather than validating it. In philosophy of science, this is called falsificationism. It means not claim can be proved absolutely true, but every claim can be proved wrong. Rather than wanting to prove yourself right (at the risk of making a false positive), you want to prove yourself wrong and avoid wasting time on a bad idea. Remember: most startup ideas suck (it's true - I've seen hundreds, and most will never amount to real business - be very, very critical about your idea).
  26. 26. 9. REACH FOR SATURATION Make many interviews. Many = as long as you notice there are no more new insights. In research, this is called saturation. You want to reach saturation and make sure you've identified the major patterns.
  27. 27. 10. WAIT FOR IT… Only in the very end introduce your solution. Then ask openly what he or she thinks about it: "What do you see problematic about it?" Also ask if they know someone who would like this solution. “Avoid talking about your product or your ideas until the end - but then DO give the person the opportunity to ask you some questions. This is NOT a chance for you to sell your idea, it's just an equalizer. You've been asking questions the whole time, now it's their turn.” (Cindy Alvarez)
  28. 28. FIVE BARRIERS TO CUSTOMER DEVELOPMENT 1. ”Build it and they will come” (you don’t need research) 2. Internalizing problem (you already know the potential issues) 3. Confirmation bias (you want to be right) 4. Social desirability bias (they want to please you) 5. Recall bias (they remember wrong) The point is that you want people to tell you honestly what they think, and you want to interpret it in an objective way, not being too fixed on your initial assumption (i.e., hypothesis). Be ready to change your opinion, like Gandhi advised.
  29. 29. SUNK CODE FALLACY (RIES, 2011) Tendency of people sticking to bad choices because they have costed time and effort. AVOID THIS: ”I have gone through so much effort to create this feature, so we’ll keep it.” Rather than writing perfect code, hack things to work at minimum viable level • If the product has genuine demand* (small chance), you can restart and do it properly • If the product doesn’t work business-wise (big chance), you anyway have to forego your earlier work. *Genuine demand: People are willing to PAY for the product. (In most cases, forget about indirect monetization – it is much harder.)
  30. 30. IS IT ENOUGH TO MAKE WHAT PEOPLE WANT? Mr. Paul Graham: “Make things people want.” Mr. Joni: “Make things people want… to pay for.” The first one targets users by providing a useful service with the assumption that money can be generated later on in some way. The second one goes straight after business. Both can work, but the second one is easier!
  32. 32. DELIVERABLES (SUGGESTION) Gate 1: A list of hypotheses placed on a BMC ("educated guesses") [picture / text] Gate 2: A description of customer development methods applied in your case (e.g., data collection method, a list of people to interview, interview questions) [text] Gate 3: Presentation of your results [Powerpoint]
  33. 33. FOR EXAMPLE • List of hypotheses: • H1: Customer group X experiences problem Y • H2: Customer group X is willing to pay for a solution • H3: Our solution for problem Y is feasible for customer group X • H4: Our product’s core benefit for customer group X is Z • H5: Potential marketing channels were we can profitably reach customer group X are A, B, and C, and we can apply tactics A1, B2, and C3 • H…n: […] • Method: Interviews, goal: 12 interviews • List of interviewees: • I1: A member of customer group X • I2: A member of customer group Y • I…n: […] • List of interview questions • IQ1: In your daily life, how are you doing [a thing relating to Y]? • IQ2: In your daily life, do you experience problem Y? On a scale 1-10, how big of a problem is it? • IQ3: How do you solve problem Y? • IQ4: What would be the ideal, imaginative solution for problem Y? • IQ5: How valuable would this ideal solution for problem Y be to you? (in words, in euros) • IQ…n: […]
  34. 34. EXAMPLE QUESTIONS FOR CUSTOMER DEVELOPMENT (CF. CINDY ALVAREZ) • How do you currently deal with this task/problem? (What solutions are they using?) • What do you like about your current solution/process? • Is there some other solution/process you’ve tried in the past that was better or worse? • What do you wish you could do that currently isn’t possible or practical? • If you could do [answer to the above question], how would that make your life better? • Who is involved with this solution/process? How long does it take? Where does it take place? • What is your state of mind when doing this task? How busy /hurried /stressed /bored /frustrated? [learn this by watching their facial expressions and listening to their voice] • What are you doing immediately before and after your current solution/process? • How much time or money would you be willing to invest in a solution that made your life easier?
  35. 35. FIVE QUESTIONS I’LL BE ASKING… 1. What were your hypotheses? 2. How did you decide to validate/disprove them? 3. How many informants/respondents did you have? 4. What were the results? (What did you learn? How did your initial plans change?) 5. Based on your results, what are the next steps?
  36. 36. LEARN MORE 1. If you have to read one book about this topic, read this one: Compelling-Insights-ebook 2. If you want to read another book, then it's this one: Building-Customers-ebook If you need to read a third book, then you should stop doing a startup and become a researcher (welcome :)
  37. 37. THANKS FOR LISTENING! Joni Salminen (Reach me at LinkedIn)