The Customer Development Model
In this article, we will be exploring the customer development model with an example of furniture businesses that Steve Blank had adopted in his book, ‘ The Four Steps to The Epiphany’. When investors and venture capitalists were funding furniture dot-coms, Rob Forbes, the founder of Design Within Reach, approached Steve Blank to assist him in funding his furniture business. Rob aimed to have a convenient catalogue business to access well-designed furniture that was always only found in designer showrooms. However, he discovered that one of the problems in the furniture industry for design professionals and businesses like hotels and restaurants was that high-quality design furniture took four months to ship, which customers weren’t happy about. With a small amount of money, Rob built a catalog of furniture he already had in stock and was ready to ship. He kept finetuning the catalog by listening to customers and furniture designers according to their needs and looking for unique furniture.
Rob wanted to raise venture capital funding to take the business to the next level. Steve Blank helped him meet the best venture capitalists. Based on Rob’s presentation to the venture capitalists, he demonstrated a USD 17.5 billion B2B market for high quality and well-designed furniture. He further showed that the furniture distribution system was outdated and broken to be restructured as furniture producers faced a complicated system of dealers and regional showrooms, preventing them from directly accessing their customers. As a result, consumers had to incur up to 40% unwanted markups by waiting for their furniture to be shipped in four months. It was obvious that Rob had discovered a real problem, developed a product which solved it and had customers confirm that he had found the right solution to their problem by buying furniture from him. However, the venture capitalists responded negatively to him as he had no website and didn’t have an e-commerce furniture business like other high-profile companies such as Furniture.com and Living.com. Rob kept patiently explaining that his business was customer-oriented based on what his customers told him they wanted. He believed the foremost opportunity was to provide high-quality furniture to a select audience and quickly provide that furniture to the audience. A select audience vs a wide audience to who most e-commerce websites were catering and high-quality furniture vs commodity furniture were the main differences between success and significant failure.
Eventually, Rob’s family and friends financially helped him, and his business was a USD 180 million public company. It had retail stores and an e-commerce website which became popular. What happened to Furniture.com? It went bankrupt! So, what did Rob Forbes do to make the company a winner while other high-profile companies like Furniture.com became a failure?
The four steps to the epiphany
Most startups don’t follow a process in discovering their markets, finding their first customers, validating their assumptions and building their business. Rob Forbes did this with his business by making a customer development model. The customer development model is built to solve the ten problems in the product development model, which we explored in the previous article. The strict adherence to the model and its flexibility are its strengths. The customer development model can be divided into four steps:
- Customer discovery.
- Customer validation.
- Customer creation.
- Company building.
The above steps join forces and support the product development activities of a startup. It should be noted that each of the steps provides a specific value. Such as, customer discovery tests whether a startup’s business model is accurate by explicitly focusing on whether the product solves customer problems and needs. Customer validation builds a sales model which can be copied, customer creation makes and guides end-user demand and company building transforms the company from one designed for learning and discovery to a finely tuned company for execution. It is important to note that the customer development model varies according to the market types and how the startup will utilize its sales, marketing and financial resources.
Finding a market and customers in the customer development model will undoubtedly make you fail several times. This is different to the product development model because in that model, going back and trying to correct your failures is wrong. In the customer development model, making several mistakes is okay until you learn and discover the market type and customers best suited for your startup. The customer validation step is the main point in discovering if you have a product that customers are interested in buying and if you have a plan on how to sell it. If you don’t have enough customers willing to buy your product, the model takes you back to the customer discovery step to rediscover what customers want and what products they will pay for. A good outcome of this step is that it ensures that a startup has a low cash burn rate until it confirms its business model by discovering paying customers.
Thus, considerable money is useless in customer discovery and validation as it can only tell you if you have found a market and nothing more. As the customer development model considers that most startups will go through these first two steps at least twice, it enables an excellent company to calculate and save money. The startup does not create its sales, marketing, and financial teams until it is evident that it has a business worth pursuing. Once proven through a tested sales map and genuine purchase orders that the company is worth building, the startup can explore the last two steps of the model to finance. We will now go through the steps one by one for a detailed understanding of the customer development model.
Step 1 – customer discovery
Customer discovery aims to discover the customers for your product and whether the problem you believe you’re solving through the product is essential to those customers. In a more proper meaning, customer discovery is discovering if the problem, product and customers in your business plan are accurate. For this purpose, you need to get out of your comfort zone and learn and discover the customers’ problems, whether your product solves these problems and who the customer and users of the product are. This means who has the power to make the customer’s purchasing power and who will use your product daily. It’s important to note that the aim of the customer development model is not to list down the product features from potential customers, nor is it to conduct many focus groups.
Step 2 – consumer validation
The goal of consumer validation is to build a consistent sales plan for the sales and marketing teams. The sales plan has proven and tested sales processes through successfully selling the product to early customers. This step demonstrates that you have discovered a bunch of customers and a market that positively reacts to the product.
Customer discovery and customer validation uphold the startup business model. By completing customer discovery and customer validation, your market will be established, your customers will be located, it tests the perceived value of your startup product, establishes your price and channel strategies, and examines your sales cycle and procedure. This is precisely what Rob Forbes did with his furniture business and what dot.com furniture did not do.
Step 3 – Customer creation
Customer creation is where the company’s initial sales start improving. Customer creation aims to establish end-user demand and ensure demand is driven into the startup’s sales channel. This step comes after consumer validation to shift the bulk of marketing spending after the startup acquires its first customers, enabling the company to control its cash burn rate and safeguard its most valuable asset. However, the customer creation process isn’t necessarily the same in all startups.
Step 4 – Company building
This is where the startup transforms from its informal, learning and discovery aligned customer development team into more formal teams with VPs of marketing, sales and business development.
Now that we’ve gone through the four steps of the customer development model, we will next explore the four kinds of startup markets.
The four kinds of startup markets
Most failed startups wonder where they went wrong or are like, “we did everything we could, but nothing happened!”. These startups should understand that their failure isn’t due to a lack of commitment or hard work but their lack of knowledge of the four kinds of startup markets. Those four startups are:
- Startups that enter an existing market.
- Startups that establish a new market.
- Startups who want to resegment an existing market as a low-cost entrant.
- Startups who wish to resegment an existing market as a niche player.
Startups should, therefore, discover what startup category they fall into. Let’s now dive into each startup.
Startups that enter an existing market
Entering an existing market is easy to understand. A startup is an existing market if its product offers higher performance than provided. Higher performance refers to a product or service which runs faster, offers something better or considerably improves on what is already existing in the market.
The best thing about entering an existing market is that the market, the competitors and its consumers are already known.
Startups that establish a new market
A new market is created when a startup establishes a large customer base that couldn’t do something before. This arises due to innovation, lower cost, creating a new class of consumers or if the new product solves availability, skill, comfort or location problems that no other product could solve.
The best part about a new market is that your product features are initially unrelated as there are no competitors. However, the customers and the market will be unclear and unknown. Suppose you’re a startup establishing a new market. In that case, your problem isn’t how to compete with other competitors on the product features but how you can convince the consumers that the features your product offers aren’t a hallucination. Establishing a new market requires you to think critically about financing regarding managing the cash burn rate in the adoption phase and how you manage and discover patient and wealthy investors.
Startups who want to resegment an existing market as a low-cost entrant
More than half of the startups fall into this category. Resegmenting a call can take place in two forms:
- Low-cost strategy.
- Niche strategy.
Low-cost resegmentation makes you consider if customers at the low end of an existing market are willing to buy good performance if they could buy it at a lower price.
Startups who want to resegment an existing market as a niche player
A niche resegmentation tries to convince customers that some new product characteristics are thorough enough to change the rules and shape of an existing market. Unlike the low-cost resegmentation, a product goes after the central part of an existing market’s profitable business.
Both types of resegmentation consider how customers think about the products in an existing market. Although market resegmentation is the most common type, it is also complicated. Having a low-end resegmentation strategy means there needs to be a long-term product plan which uses low cost as market entry to future profitability and smart growth. On the other hand, a niche resegmentation implies that the market strategy faces fixed competitors who will fiercely defend their markets. Nevertheless, both strategies require skilled and clever positioning regarding how the new product will reshape the market.
The market type and customer development model
By following the customer development model, the essence of the market type develops in each step. During the customer discovery step, any startup talks to its customers regardless of market type. Then, in the customer validation step, the differences between the four startup types come into being as sales and positioning strategies separate from each other quickly. Finally, the difference between the startup market types must be seriously considered in customer creation as the customer acquisition, and sales strategies aren’t the same in each market. In this step, most startups don’t understand their market type and go bankrupt, investing in strategies that don’t suit their market type.
It should be noted that the pace at which a company moves through the customer development model depends on the market type.
Integrating the product development model and customer development model
As mentioned earlier, the customer development model is not a substitute for the product development model. They work with each other. While the customer development model makes the sales, marketing and business development teams engage in customer-focused activities that take place externally, the product development process is based on internal product-centric activities. Although people may think there is no connection between the two models, they’re highly mistaken. Product and customer developments must be integrated and operated for a successful startup.
However, how both models operate together in a startup differs from how they cooperate in a large firm. Engineers from large firms’ jobs are to produce continuous products for an existing market. A constant product possesses several known facts, such as who the customers are, what the customers need, in which markets these customers are found and the competitors. On the other hand, most startups can only figure out who their customers are and which makers they’re in. Therefore, startups’ only fixed goal from day one is the product vision. Thus, the goal of customer development in a startup is to find a market for their specified product and not to develop a product in an unknown market. This is the main difference between a large firm and a startup. In this manner, product development and customer development should go hand in hand to ensure the specific product is produced for the market based on the features designed by engineers that were taken through customer discovery and the other steps in the customer development model.
The customer development model consists of four steps: customer discovery, customer validation, customer creation and company building. Although each step has its unique set of objectives, the whole process has one goal: to ensure that the company becomes profitable.