The Customer Development Process

This was speech #2, “Organize Your Speech” for Fox Valley Toastmasters. The theme of the evening was “Cha-Ching”

Today I would like to tell you a story, about a company with a compelling story. Their plan was to revolutionize a common, labor intensive process which everyone does on a regular basis, using online ordering and delivery. They had an experienced founder, and were quickly able to raise venture capital, eventually raising nearly four-hundred million dollars – Cha-Ching. They used to this to hire smart, hard-working engineers to design and build a web site that processed a large and complicated inventory. Orders were transmitted directly to automated warehouses – marvels of modern engineering that transferred merchandise by conveyor for packaging and delivery the same day. When the product launched, it was servicing approximately two-thousand five-hundred orders every day. Less then three years after founding, the company completed an IPO, raising another large chunk of capital – Cha-Ching.

Can you guess which company I’m talking about?

While it’s true that WebVan was processing two-thousand five-hundred orders every day, they had a business plan that required eight thousand to be profitable. Barely twenty-four months after their IPO, the company was bankrupt.

WebVan didn’t do the upfront customer research to determine whether they had a market of eight-thousand or twenty-five-hundred. Their business plan, ruthlessly executed from it’s inception, did not include checkpoints to stop and regroup if they weren’t making the number they expected. Instead, they kept on scaling.

What WebVan excelled at was product development – they set out to build a web site and technically advanced warehouses, and they did. What they may have been missing is customer development, a concept gaining a great deal of currency in the startup scene. Customer development is an idea introduced by Steve Blank in his book The Four Steps to the Epiphany.

The four steps of customer development are customer discovery, customer validation, customer creation, and company building.

Customer discovery is a scientific process, wherein you form theory about what who your customer is and what they need. Then you step away from the whiteboard, get up from the conference table, get out the building, and actually talk to people. You want to make sure you can actually find the people you plan to serve. You to want to verify that they are really having the problem that you think they are – and are aware of it (or they won’t seek a solution). You want to verify that your proposed solution is something that they might even be willing to try. The point is get some degree of confidence that you are on to something. Otherwise, find a new hypothesis and talk to more people.

Customer discovery should give you a viable hypothesis. Now you move to customer validation to really test your hypothesis. You want to make a minimum viable product. This might be something made from spit and bailing wire, or a completely manual process that you hope to automate. The point is to have something you can sell to a real paying customer – Cha-Ching. Someone who will give you money for a buggy, incomplete product because they are in so much pain without it. If you can’t find a paying customer, and a repeatable process for multiple paying customers, it might be time to pivot. Try a new MVP, or even go back to customer discovery and find a new hypothesis.

Customer validation should prove that you have a viable product that you know how to sell. Now you can move into customer creation. This is where you start to think about scaling. This is where you finally hire a PR firm, and build a plan to launch your product from the early adopters into the mass market.

With a plan for customer creation in place, you can move into company building. This is the stage where your finally start to scale. The company moves from a single customer development team, to an organization of mission driving departments. This is where you finally hire your VP of sales and VP of marketing – people who know how to staff and grow departments to execute a known plan that you didn’t have you when started this process.

What WebVan did well was product development. They set out to create a web site and fully automated warehouses – marvels of modern engineering, and they accomplished what they set out to do. But they grew too big, too fast, because they didn’t really understand their market. Customer development offers a solution. In customer discovery you form a hypothesis and test it by talking to real people. In customer validation you put your hypothesis to the test by getting real paying customers and proving that you can sell to them. From there you move into customer creation to build a plan to grow and launch the company into the mass markets, and in company building you execute that now-proven plan in order to grow and make money – Cha-Ching.

Posted Friday, September 30th, 2011 under Presentation.

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