The other day we discussed the value of having a defined customer development process for all new businesses so that the solution they develop will hit the mark more often. In this post, I will share some of the key takeaways from Steve Blank’s book, The 4 Steps of the Epiphany, which launched the entire lean startup approach for new ventures and outlines the four steps involved in conducting customer development.
Rather than blindly executing a plan, a new venture needs to uncover the flaws in its proposed solution and business plan and correct them before they become costly. Rapid iteration, gathering customer feedback, and testing your hypotheses and assumptions are essential for any new business, as the goal of the lean startup approach is to make businesses fail less.
As we discussed in a previous post on evidence-based entrepreneurship, too many new ventures concentrate on developing a solution before they learn about their customers’ needs. It’s important to remember that, unlike large companies that know their market and how to capitalize on it, your new business does not have a track record of success to draw from. As a new business, you need to start by proving that your business idea is viable.
Step 1 – Customer Discovery
The first step is to define the hypotheses and assumptions around your business idea:
Product
Customer
Problem
Distribution
Pricing
Demand Creation Strategy
Market Type
Competition
When the new venture is more product-based, many businesses develop several minimum viable products (MVP) to show to prospective customers to get their feedback as part of the customer discovery process. I always try to remind my clients that an MVP is by no means a sellable product and that MVPs serve just as a way to demonstrate various functions of the potential product. MVPs are non-functioning mockups that serve to give the prospective customer segment a better idea of what the final solution may look like.
Next, you need to leave the office and test your hypotheses and assumptions to get a reality check. The objective of this step is to:
Present the problem hypotheses to potential customers to see if they recognize that the problem is real and that your assumptions are grounded in reality.
Test for customer understanding of your proposed solution. Can they recognize the value and would it be worth finding a solution?
Test your knowledge of the market.
Remember that your goal during the customer discovery step is not to sell a solution but simply to test your concepts and features by verifying that:
The customers’ problems are real and recognized.
The product or service solves the problems.
It will result in a profitable economic model.
All the feedback gained during the customer discovery process needs to be used to update the business model canvas. With a clearer understanding of the customer segment, you can move to the customer validation step.
Step 2 – Customer Validation
The goal of the customer validation step is to see if the new venture is ready to go to market or if it needs more work. The key elements in the customer validation step are to:
Show a working beta version of the product to real consumers to see how they respond.
Gather feedback from customers to make improvements.
Test preliminary collateral material needed to facilitate future sales.
Develop channel partners to help market and sell the Minimum Lovable Product once it is developed.
Learn how to position the product and company.
Verify that customers are willing to pay for the solution.
During the customer validation step, you are developing a Minimum Marketable Product that you can sell to a small set of Innovators and Early Adopter customers, as defined by Geoffrey Moore in his book Crossing the Chasm and by professor Everett Rodgers in his book the Diffusion of Innovation, two seminal books on technology adoption life cycle. Innovators and early adopters are more technical than the Early and Late Majority Adopters. They are more tolerant of buggy solutions and relish the opportunity to influence the final offering. Moreover, these innovators and early adopters have above-average social status and can influence others since they are often opinion leaders.
To be clear, while the minimum marketable product is designed to create a movement by addressing the smallest viable market, its primary focus is learning and finding a repeatable and scalable sales process; however, you are not giving away the product. During the customer validation step, you are selling a minimum marketable product that has limited features and functionality. Your objective in this step is to verify that you have learned enough to move to the Customer Creation step and to see if your solution solved the customer’s problems. The customer validation step allows the business to see what went right and what went wrong and to discover the best channels for making sales.
Step 3 – Customer Creation
Every startup has to choose its strategy based on its market type. Every business is different, so each requires a unique strategy and not just follow an already established business. To find your market type, ask yourself if you are facing a new or existing market.
Existing Market:
An existing market is one where you already know who your customers and competitors are. The benefit of entering an existing market is that you won’t have to spend a lot of time researching your customer base. However, the downside is that you will be entering a contested market or red ocean and will have established competitors. In an existing market, your primary objective will be entering the market by outperforming those competitors.
New Market:
The next type of market is the new market. For a new market, you need to create a customer base by finding users who need your product. It’s not easy to create a brand-new market. However, on the positive side, there are no competitors yet since it is an uncontested market.
Re-Segmenting:
A third option is to re-segment an existing market. You can re-segment an existing market by offering a niche product or a cheaper version of a product that already exists by one-downing the competition. Re-segmenting can open up a whole new customer base of people who either couldn’t afford the product before or were dissatisfied with the options previously available.
Once you understand your market type, it is time to select your customer segments and refine your positioning messages based on the customers and what they value about your solution.
Step 4 – Company Building
During the company building step, you are transitioning from a more learning and discovery-oriented effort to a more formal business as you release your minimum lovable product (V1.0 Release) for the masses. During the company building step, the goal is to scale the business, and that means defining the core values and mission of the business to help guide the new team members you will be hiring.
When you have a new business, you are often launching with a completely new and untested vision. Without a clear vision, you need to make some important decisions about what the right path looks like and how to stay the course. The sooner you establish that vision, the more successful your business will be. To get started, define a set of core values. Your core values define your company’s ethics or ideals so you can use them to guide you and your team members when making decisions, building relationships, and solving problems.
No matter what your core values are, the most important thing is that they are genuine and authentic values that your company can stand behind for years to come.
In addition to your core values, you will need a mission statement. Your mission statement should be a set of principles that can guide your actions over the long term, but they will also be helpful in the early days of your new venture when you’re going through that tumultuous period of getting your business off the ground.
When you define the key principles that make up your mission, you should answer questions like, what motivates your staff to come to work every day, what is the company’s “Why,” how you define good work, and what are your goals for growth and profit?
Today, new businesses need to also consider the social impact of their business. Addressing social impact is becoming a competitive advantage for many smaller businesses. Millennials (Gen Y) and Zoomers (Gen Z) consumers are particularly aware of the social foundation of the companies they shop with, and there are many examples of businesses that have gained traction by leveraging that awareness in their brand messaging. Therefore, as part of your customer discovery, you need to articulate how your core values and mission address social impact.
Once you have this information, it’s important to remember that as a new venture, you can’t afford to be slow and unresponsive, you must act quickly because your environment is constantly changing. Your advantage over an established business is that they can’t respond as quickly as you can. Larger businesses operate with stiff hierarchies. Decisions require convincing several layers of management to allocate precious resources to adopt a solution. They often fail to adapt quickly because their internal policies cause delays in productivity. Your development process makes the difference between success and failure. You can’t afford to follow the product development process employed by established companies.
It’s also dangerous to believe that you can simply design and launch a great product, and the world will show up at your door. Instead of assuming that you can attract customers based solely on the fact that you have a good idea, it’s important to remember that product development is an internal process influenced by your findings from market research. This process takes the focus off your products and places it on the people who can make them a success, your customers.
Your new business must focus on customer development first rather than the product development process. You should start by building your customer base and then tweaking your product to suit the needs of those customers, even if your final product doesn’t look anything like the original vision you started out with. The point is that, ultimately, you’ve created something people actually need and can use.
The customer development process will look different for every new business depending on your product mission statement and core values. However, it all depends on the type of market you operate in and the feedback you receive from your potential customers.
How can you implement the four-step customer development process in your new venture?
