Customer development is one of six foundational skills/services I leverage in my work in investment analysis. I also do customer development projects stand-alone or bundled with other services:
- Opportunity recognition
- Venture design
- Team building
- Customer development (this service)
- Product development
- Product growth
Customer development is the process of searching for and verifying a repeatable and scalable business model.
This is different from opportunity recognition, which is identifying new problems that are worth solving. And it's also different from venture design, which is explaining a new path through the idea maze and why this path will succeed when others have failed.
The output of opportunity recognition and venture design projects are hypotheses that are not yet proven. Customer development, on the other hand, uses the scientific method to take those same hypotheses and test and iterate until they are true.
The approach to customer development I use is based on the approach of Steve Blank and the lean startup methodology.
Customer discovery takes the business model hypotheses developed during venture design and creates a plan to test customer reactions to those hypotheses and turn them into facts.
The key questions to answer in customer discovery are:
- Have we identified a problem a customer wants to see solved?
- Does our product solve this customer problem or need?
- Do we have a viable and profitable business model?
- Have we learned enough to start selling?
The process emulates the scientific method: pose a business model hypothesis, devise an experiment, then test it. Take the resulting data and either validate the hypothesis, invalidate the hypothesis, or change the hypothesis.
Phase 1: Outline the Experiments
Phase 1 of customer discovery takes the output of venture design and uses the Amazon product approach of working backwards to write a press release first.
Once this internal press release is compelling, a one page summary brief is prepared for each category below, including the experiments that will prove or disprove each hypothesis.
Market size hypotheses: What is the total addressable market (TAM)? What is the served addressable market (SAM)? What's the target market?
Product hypotheses: What's the product vision for what the company could become? What specifically is the product and why will people use or buy it? What is the minimum viable product (MVP)?
Customer hypotheses: Who are your customers and what are their needs? This means testing and refining your understanding of customer problems and creating and validating customer personas, a day in the life story of your customer before and after your product, and a customer influence map.
Demand creation hypotheses: How will the product get from the company to customers? What type of market is it? How will you get customers? And how will you keep them? Who is the competition? Why is your product better?
Revenue and pricing hypotheses: How will we charge? What will the price be? How many will we sell? If all goes well, is this a business worth doing?
Phase 2: Test the Problem
In Phase 2, we test all hypotheses related to the problem. Do we really understand it? Do enough people care so that this might become a big business? Will they tell their friends so this can happen quickly?
The first tests we do include paper prototypes, mock-ups, simple landing pages and short surveys. The goal is to learn as fast and cheap as possible–without actually building the product.
The first goal is to make sure customers care about the problem. The second goal is to increase traffic to the tests and measure responses to make sure enough people care to make the problem worth solving. The final goal is to test our understanding of who our customers and competitors really are.
After we get a complete understanding of the customer and need, we need to update our hypotheses and draft press release and expose our solution to potential customers for the first time.
Phase 3: Test the Solution
Phase 3 is about testing all our hypotheses related to our solution. It's also when we first introduce customers to our value proposition and MVP for feedback.
At this stage, the customer development process must link with a product development process because we are now iterating on actual product (even though it may be an MVP) with customers.
Measure engagement, referrals, retention and especially velocity to activation. Success is wild enthusiasm, spending time with the product again and again, and bringing friends in droves.
After we understand how customers are reacting to our proposed product solution, we need to update our hypotheses again and get ready to pivot or proceed.
Phase 4: Proceed or Pivot
In Phase 4, we evaluate the results of our experiments. In order to proceed, we need to show:
- We have product-market fit, meaning there is a large group of customers that want to solve this problem and that they view our product as a good solution they want to buy.
- We know who our customers are and how to reach them cost effectively
- We have demonstrated we can make money and grow the company
If we cannot show this, we have to go back and make changes to our hypotheses before going any further.
Customer validation tests whether our business model is repeatable and scalable. If not, we need to return to customer discovery.
The key questions to answer in customer validation are:
- Can our business scale? If we spend a dollar on customer acquisition will it yield more than a dollar’s worth of incremental revenue or growth?
- Do we have a repeatable and scalable sales roadmap? Do we know the right customers to target, and what to say to them to consistently deliver sales?
- Is our sales funnel predictable? Do the same tactics consistently deliver a sufficient, profitable flow of customers through our funnel?
Once we have tested and iterated to the point where we have strong answers to these questions, it's time to go to the next stage and begin scaling the business.
Customer creation is the stage when our business is ready to scale. This is the time for execution, and when it's time to implement a product growth process.
If you'd like to know more about how I can help your organization, please send me a message. I would love to talk.