Ace Customer Development — The Greater Half of Product Management

Steve Blank, widely known for creating the customer development method (in the mid-1990s) that started ‘the lean start-up’ movement, was astounded when he noticed that even though Silicon Valley has the most technology risk per square inch, still more than 90% of the startups that get founded there, fail not because they don’t have sound technology but because they don’t have enough interested customers!

And despite this fact, there has been a disproportionately higher emphasis on product development. Over the years, Customer development has become an essential tool for startups & new product development teams within corporates to approach products in a way that is iterative, real, frugal & urgent.

What is customer development?

Customer Development is a four-step framework to discover and validate that you have identified the market for your product, built the right product features that solve customers’ needs, tested the correct methods for acquiring and converting customers, and deployed the right resources to scale the business.

Customer development (“Test your assumptions”) provides the framework to test among others, two basic hypotheses: value hypotheses (whether a product or service really delivers value to customers once they are using it. Typical hypotheses — Do customers recognize that they have a problem they want to solve? If there was a solution, will they buy it?) and growth hypotheses (whether or how new customers will discover our products or services?)

This process is used to discover and validate the following business-related information:

• A product solves a problem for an identifiable group of users (Customer Discovery)
• The market is saleable and large enough that a viable business might be built (Customer Validation)
• The business is scalable through a repeatable sales and marketing roadmap (Company Creation)
• Company departments and operational processes are created to support scale (Company Building)

First ASAP activity, Startups & New Product Development Teams must do customer development before (or in early stages) of product development.

Customer Development methods become more difficult to implement, the “further along” a business has been established.

If, for example, you must report revenue growth to your investors next month, it may be a difficult proposition to stop what you’re doing to question your fundamental business assumptions. Even though taking “time-out” to go through a set of processes that might explain why your growth is slower than projected might be exactly what you need, your board is likely not going to appreciate it.

Second ASAP activity, These startups/NPD teams must find early adopters who would use the product to solve their problems and provide valuable feedback for product development.

Early adopters are the ones that seek out new technology to solve their (or their companies’) problems, not just for the sake of owning the newest technology. They don’t rely on references from others to make buying decisions. While they are influenced by other early adopters, their main concern is solving a known problem. Early adopters are there to help us in customer development. They provide the necessary feedback because they want to be the 1st to get the opportunity of having a product. Getting early adopters is essential to jumpstart product adoption.

Customer Discovery — establishing that we’re after a high-value problem — is at the heart of customer development.

1. Documenting CPS hypotheses: You likely know what you don’t know. You certainly know you need to test for those things. But you also need to test what you know you know. Those pesky “facts” you like to share about your business are likely the most significant assumptions you hold onto and are the most difficult to face head-on – document and test ‘em.

2. Brainstorming business model hypothesis: You have three more major sets of hypotheses to document:

• Your business – document your assumptions concerning the business model, partners, relationships, and dependencies captured in your ecosystem diagram.
• Your product – document the feature requirements you believe are necessary to complete your final MVP.
• Your funnel – document your assumptions about how you will acquire and convert your customers.

The product ecosystem refers to the different entities that surround the product such as users, customers, technical partners, distribution partners, investors, etc. For each of these entities, we find out the value they receive from being part of the ecosystem. We also define how the currency and the actual product will flow among these entities.

3. Conducting interviews with our target group: The objective of the first round of interviews is to test and confirm a core value proposition, matching your product idea with a market segment that suffers from the problem you are solving.

The objective of the second round of interviews is to hone in on the core product functionality that is your customers’ must-have while testing business model assumptions and learning the characteristics of your market segment that will allow you to reach out and acquire them efficiently. This 3-step customer discovery process leads to either of these outcomes:

• We have identified the right customer, who suffers the specific problem we are addressing, and who is interested in our particular solution to the problem. Once we have “discovered” our proper market segment, we are ready to start measuring product fit and to tackle our next set of assumptions.
• One or more of our three basic C-P-S assumptions is wrong: Revising our customer-problem-solution assumptions may entail the following adjustments – small changes to our product idea; tweaking who our buyer might be; changes to the market segment we’re pursuing; finding the exact problem we’re addressing; determining our proposed solution.

4. Assessing Product-Market fit? starts well CPS hypotheses are already validated and many people are identified who are willing to work as early adopters or evangelists for a product. Problem solution if it is a long exercise in which we tried to actually build a product and get in front of our early adopters as soon as possible.

• Avoid entering into feature creep
• Try to learn the value of your solution before asking your early adopters how much are they willing to pay for it?
• Circle back regularly with your early adopters, including in-person meetings. Show them or discuss your product evolution, and continue to explore the problems they are facing. Are the problems different somehow? Are they any less or more pressing? Is something else bothering them more?

Product Market Fit is established when a product shows strong demand by passionate users representing a sizable market.

All businesses need to reach revenue at some point, so all businesses must have a Product-Market fit milestone. In a traditional business model — one in which products are sold for money — ProductMarket Fit requires three criteria to be satisfied:

• The customer is willing to pay for the product.
• The cost of acquiring the customer is less than what they pay for the product.
• There’s sufficient evidence indicating the market is large enough to support the business.
• (A thumb rule is that at least 40% of our customers see that they would be very disappointed if our product went out of the market.)

Analyzing the market type for the product can speed up customer discovery.

Any new product can confront three kinds of markets: new market, existing market, and re-segmented market (with lower costs, or niche user needs).

• A product is set to enter a new market when the technology is so dramatically new that the existing market is shattered. By definition, your product owns 100% market share. A product entering a new market doesn’t have to steal market share from any competitor. The company has to make people aware of how to use the product, what problem does it solve for them. The likely customers will not have to stop using some other product to buy ours.
• A product is said to be entering an existing market when it is primarily attempting to steal market share from major market players. The new product isn’t trying to grow the market “pie,” as much as steal a “slice.” In this market type, users will stop using a competitor’s product to use ours. They will use our product because it has compelling features and better product functionality, not because we are offering a dramatically lower price to a targeted group of price-sensitive users, or a specific set of functionality toward a group of users with unique needs.
• A product is said to be re-segmenting a market with lower costs: when a new product entering an existing market with a sustainable, dramatically lower price, not only takes market share from incumbents but expands the size of the market by selling to price-sensitive customers who otherwise do not purchase from anyone.
  Either customer will stop using a competitors’ product and use ours because of significant cost savings or they will simply start using ours because they could not afford to use our competitors’.
• A product is said to be re-segmenting a market by catering to a niche user base: when a new product entering an existing market with unique functionality targeted at a specific user class, not only takes market share from incumbents but expands the size of the market by selling to new customers brought to the market by the new functionality.
  Either customer will stop using a competitors’ product and use ours because our functionality better matches their needs, or we will acquire new users because existing products never adequately fit their needs.

Market type is governed by where our customers put us and not by how we categorize it. Launching a product in a new market requires millions of dollars in teaching people how to use our product and why they need it. Similarly, launching a product in an existing market to stand out against our competitors requires millions of dollars in sales in marketing. If we do not have a lot of money, we should always position our product to be re-segmenting the market by catering to a niche user group.

Customer Validation — building confidence to Scale — is what proves the business plan & brings product development to centerstage.

While customer discovery focused on chasing the right customer and the right problems, customer validation is about demonstrating that the key business risks have been addressed and the company can now look to scale it.

A product with the fewest number of features needed to achieve a specific objective and users are willing to “pay” in some form of a scarce resource — is the minimum viable product.

Eric Ries’ original definition is “the minimum viable product is that version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort.” We want to understand the smallest feature set customers will pay for in the first release.

The final MVP is an early version of the product that is not necessarily in its final form factor, but that is actually usable by customers to solve a real problem. We definitely want to ‘monetize’ this version.

Creating the right positioning statement can speed up customer development. Positioning is the act of placing our product within a market landscape, in our audience’s mind.

Product positioning includes the following insights: Knowing who your customers are and their needs; the name of your product and its product type or category; what the key benefit of the product is to your customer (the compelling reason to buy); the “state of being” without your product; and how your product differs or “changes the game.”

Your positioning will form the basis of your communications with all of your constituents, including customers, investors, partners, employees, etc. For your customer, the goal of positioning is to have them understand what benefit they will receive from you and why you are better than everyone else.

Last but not the least

Customer development is what kickstarted the lean startup philosophy. Lean startups are those that combine fast, iterative development methodologies with customer development principles.

You can notice the resemblance between the customer development method and the current lean startup approach. 4 steps for a lean startup: Validate core hypotheses (customer-problem-solution), Develop the minimum viable product, Achieve Product-Market fit, Produce a development and marketing roadmap for scaling.

Four forces have radically changed the startup landscape in the last decade and have allowed most startups to be lean and perform thorough customer development. First, the use of platforms enabled by open source and free software; Second, the application of agile development methodologies; Third, Ferocious customer-centric rapid iteration, as exemplified by the Customer Development process; and Fourth, use of powerful, low-cost, and easy to use analytics to test assumptions & make pivot/proceed decisions.

Throughout this article, I have emphasized that Product Management essentially contains two halves: Customer Development & Product Development which are distinct but highly interactive.

How these two halves of product management interact:

The Customer Development team works on testing the assumptions about who the customers are, the problem they hope to solve, and what the solution should be. The Customer Development process receives input from customers indirectly through Product Development reports about feature usage, but also directly from Customer Development processes and analytics.

The Product Development teams are the ones that build the solution. They receive input from customers indirectly through Customer Development, and (when available) by measuring product use directly. The Product Development process iterates on the product continuously, releasing new or different functionality directly to the customer as quickly as possible.

**The article is based on concepts covered in two books written by these two amazing people: T4S (The Four Steps to Epiphany) by Steve Blank and TLS (The Lean Startup) by Eric Ries.