The Product Development Model Which Leads to Disaster
We are all travelers. We all have to start from somewhere in our everyday life, and we start our day by following the same life pattern. We start by waking up, brushing our teeth and having our breakfasts while some don’t have their breakfast. Nevertheless, most of us follow the same pattern in our lives, which applies to a startup business. Although following the same wisdom seems like the cleverest way for any startup business, most companies end up in disaster in terms of product development. According to a blog on product development by DataLeaks, new products represent an average of 35% of a B2B firm’s annual sales. Still, a failure rate of 40% on average means there should be a change in how the startup views the product development model. Therefore, this article will explore how and why this happens by first understanding a product development model.
What is a product development model?
A product development model is a model which helps you make better decisions for developing your product based on four stages. This model is pivotal for any company trying to introduce a new product to the market. In the early 20th century, the product development model was used in manufacturing industries which subsequently got adopted in the consumer-packaged goods industry and was then used in the technology industry. It’s now an essential part used in any startup business from any industry.
The product development model consists of four stages:
- The concept and seed stage.
- Product development stage.
- Alpha/Beta testing stage.
- Product launch and first customer ship stage.
It should be noted that although the four stages seem to be helpful and a straightforward procedure for introducing a new product to the potential customers who desire it, most businesses fail to carry out their product development successfully. Do you know why? Businesses haven’t understood their competition and have no clue who their target market is. The product development model is only useful when introducing a new product to a well-known and well-established market that suits your product.
The ironic part about most startup businesses is that they use the product development model as a tool for finding their potential customers to time their sales launch and revenue plan. Investors are using the model to set and plan their investment funding. Different types of departments in a company use the model to launch the new product for various purposes. They get surprised when it’s a total failure. This is the wrong way of using the product development model as it’s used for many different purposes and not for one common goal, which it’s supposed to be used for! Therefore, we will explore the four stages to understand how the model is supposed to be used to launch a new product.
The concept and seed stage
Four steps are adopted in the concept and seed stage:
- Step 1 – The startup founders identify their passion and vision of the business and convert them into ideas that transform into their business plan.
- Step 2 – The product’s problems need to be identified: What is the product idea? Is it possible to build the product? Is more technical research needed to convince us that the product can succeed? What are the features and benefits of the product?
- Step 3 – Identify who the customers are and where they can be found. For this purpose, market research, relevant statistics and customer surveys help decide if the product idea has potential.
- Step 4 – Discover how the product will finally reach the customer and the distribution channel. Most companies start wondering who their competitors are and how different they are from the business at this stage. They build their first positioning chart and based on that, they explain the company and product benefits to venture capitalists. An important point to remember is that if the business wants financial support from venture capitalists, the business’s financial model needs to be convincing and attractive.
Product development stage
In this stage, everyone is focused on their relevant department’s contributions to launching the product. The Engineers design the product, mention the product’s initial release and employ more engineers to build the product. The engineering team after that, makes a detailed chart with the main steps. The engineering team estimates the product delivery dates and development costs based on this information.
At the same time, the marketing team finetunes the size of the market for which it’s aiming to sell the product. In this context, ‘market’ refers to the number of companies with standard features. It then begins to target the first set of customers. In most well-organized startups, the marketing team runs focus groups on the potential market and builds a Marketing Requirements Document (MRD) for the engineering team. They make a sales demo, come up with presentations and data sheets and employ a PR agency.
In the product development stage or even at the alpha/beta testing stage, the company usually hires a Vice President of Sales.
Alpha/Beta testing stage
In this stage, the engineering team works with a small group of customers to ensure that the product works as believed and tests it for potential errors. The marketing team builds a comprehensive marketing communications plan, provides the sales team with helpful material and starts the public relations. The PR agency improves the product’s positioning and starts contacting the press and media while the marketing team starts branding the product.
The sales team registers the first beta customers who happen to be volunteers in testing the product sample, begins to develop the distribution channel and operates and scales the sales organization outside the business. On the other hand, the venture capitalists start measuring the progress based on the number of orders placed by the first customer ship.
It’s possible that some investors will be happy at this stage of the product development model due to the progress made by the business in terms of the potential product and the customers. This makes investors want to invest more money in the product. The CEO improves his fund-raising pitch and searches for additional capital.
Product launch and first customer ship stage
This is the final stage of the product development model and what the company aims to achieve. When the product starts working, the company is in a spending mode. The sales channel has built quotas and sales goals. The company has a significant press event on the product, and the marketing team puts forward seminars, ads and emails to potential prospects. The management board starts measuring the company’s performance based on sales against the initial business plan when the owners search for investors at the very start of the business.
It’s important to note that much cash needs to be invested in developing the sales channel and supporting marketing activities. If there was no prior liquidity in the business, more funds must be raised.
What’s wrong with the product development model?
Most startup businesses launching a new product fail miserably even after adopting the product development model. So, why is this happening? It all lies in the name! The product development model is always misunderstood as the marketing, sales, customer acquisition or finance model. It’s supposed to be used in the engineering field, yet, it’s still used for non-engineering activities. In addition to this, there are 10 shortcomings in the product development model in a startup business:
Most startups believe that they are not succeeding in the new product as there is a defect in developing it. However, the primary cause of startup failure is identifying new customers and markets to sell the product to. Startups, therefore, fail most of the time because they don’t secure customers and a convincing financial model. This should be an excellent clue to most startups as to what’s wrong with the product development model as it’s been misused. “Where are the customers?” is what you should be asking when adopting the product development model.
Focusing on the first customer ship date
Using the product development model, the sales and marketing team focuses on the first customer ship date. Most sales and marketing executives misunderstand the first customer ship date as the date when the product development model assumes that they are finished developing the product. The first customer ship doesn’t necessarily mean that the startup understands who its customers are or how to market its product to them.
Although it’s no doubt that being a startup, you would expect to market and sell your new product as soon as possible, it cannot be done until you understand to whom your company is selling the product and why they will buy it. According to Steve Blank, who wrote the book ‘The Four Steps to The Epiphany’, since product development is focused on developing and shipping the product, it risks ignoring customer discovery. Let’s consider what happens after the first customer ship date. The sales team should find more customers, which it claimed it could secure at the very start when drafting the business plan. Although the sales team would have located a few beta customers, the question lies in whether those customers represented the mainstream market. A mainstream market is where most customers can be found in any popular market segment. These customers are more cautious and practical when it comes to purchasing. Unfortunately, most startups discover that only after their first customer ship, their previous customers don’t happen to form the mainstream market, the product doesn’t solve the customer’s problem or fulfil their desires, or the cost of distributing the product is exceptionally high. Most departments cannot think straight at this point. The sales department will be trying to execute a failing sales strategy desperately. The marketing department will be running around wondering what the customers’ needs are. The company will be investing more and more cash during this process.
Doesn’t this seem like a waste of money and time for you? Indeed, it does. This is why it’s always important to identify who your mainstream market is before building and shipping the product. Simply having a couple of beta customers and assuming that they are the company’s mainstream market is a highly absurd assumption that startups could ever make. You should first identify the common problems of most customers in a popular market segment and build your product according to that.
More importance on executing the product rather than learning and discovery
Most startups shower their primary focus on quickly executing a product to the market. Therefore, it’s evident that the heads of the sales and marketing teams believe that the company hired them for their previous experience and not what they can learn in the new company. This is a silly mistake because most heads of sales and marketing are big-headed, so they believe that they have everything under control and assume they understand the customers’ problems. Therefore, the product needs to be developed and sold accordingly.
Most sales and marketing heads should understand that every company doesn’t necessarily rely on their previous experience for everything that happens at the new company. Before developing and selling the new product to increase sales, the following questions should be explored:
- What problems does the product solve?
- Do the customers consider these problems to be essential or “must-have”?
- If we’re selling the product to a business, who in the company has a problem that our product can solve?
- If we’re selling the product to customers, how can we reach them?
- How serious is this problem?
- To whom should we make the first sales call on?
- Who else will buy the product?
- How many customers should we target to become profitable?
- What’s the average order size?
These questions are not merely for companies to follow and execute the new product to the market, but these are questions which are pivotal for your learning and customer discovery which is essential for the company’s success or failure. If you want to increase your sales, these questions will undoubtedly help you find the right customers, understand why people will buy your product and understand what features are essential in the product that solves the customers’ problems.
The lack of essential sales, marketing and business development achievements
Using the product development model is extremely helpful as it provides a clear-cut structure of all the achievements for the product. Most engineers are clear about the required documents, specifications, execution, alpha/beta test and the first customer ship date before the first customer ship happens. If the product is a failure, they stop and fix it. In contrast, the sales and marketing team is hasty, unclear and confused about what they’re trying to achieve. They don’t pause to see what’s wrong with the product, test if there is something wrong, or don’t know how to stop!
The main question lies in what the company is trying to achieve. This is where everything goes wrong, as most teams prioritize the wrong objectives as their primary objectives. For example, most sales and marketing executives focus on execution as it’s measurable. Revenue matters the most to the sales team, and they use the revenue as an indicator of progress in understanding customers. They also believe that hiring the leading sales team and having early “lighthouse” customers who are essential customers that will attract more customers are crucial objectives. On the other hand, the marketing team believes that the main objectives are making presentations, datasheets, collateral, and having a PR agency to promote to build buzz around the new product at its launch. Therefore, most startups should understand that the main objective lies in understanding customers’ desires, likes, problems, and pains to build a plan on understanding how customers buy their products and make a profitable financial model.
That being said, the relevant discoveries in measuring a startup’s progress are:
- How well does the company understand the customers’ problems?
- How much will the customers pay to solve their problems?
- Do our product features solve their problems?
- Do we have an understanding of the customers’ business?
- Do we have an understanding of the customers’ hierarchy of needs?
- Have we found inspired customers who will purchase early?
- Is our product essential for these customers?
- Do we correctly understand the sales plan to sell the product continuously?
- Do we have an understanding of what we need to become profitable?
- Are the sales and business plans realistic, reliable and achievable?
- What do we do if our plan becomes wrong?
Therefore, it’s essential to understand that focusing on the wrong objectives will not take the business anywhere.
Using the product development model to measure sales
This is the wrong way of using the product development model from a sales angle. Assume that the Vice President of Sales looks at the four stages of the product development model and wonders, “…. If the beta test is on this date, I should get a small sales team to gain my early customers before this date. Also, if the customer ship is on this date, I better hire another sales staff by then so that the revenue plan we showed the investors show us generating revenue from the first customer ship”. Doesn’t this thinking sound silly to you? Using the product development model to measure sales isn’t based on discovering the right market to sell to or whether customers will pay for your product. Having a hasty sales attitude won’t let you know whether the sales plan works until after the first customer ship date. Your company will be selling less than anticipated in the business plan, thereby losing profitability.
Using the product development model to measure marketing
The marketing department views the product development model differently. For them, the first customer ship means constantly streaming prospective customers to the sales pipeline. The marketing activities start early in the product development model to gain prospects. While the product is being designed, the marketing team starts creating presentations and sales materials. By looking forward to the product launch, the marketing team will hire a PR agency to finetune the company’s position and begin generating buzz around the company and its future product. The PR agency helps the startup understand and ensure that the company’s upcoming product inspires the leading industry analysts, industry leaders, and influencers. This leads to press conferences and interviews prepared for the product launch date.
All this buzz and marketing activity starts before the sales team has had an opportunity to test the positioning, marketing strategy or demand activities on actual consumers. It should be noted that when certain marketers have such early communication with customers before the product launch, it’s done on their own accord and vision and not as a part of a straightforward process. This is simply wrong.
premature scaling occurs when the startup makes the sales and marketing team believe it’s mandatory to have an entire staff by the first customer ship. According to Steve Blank, startup executives manage their hiring and guidance with three documents:
- A business plan.
- A product development model.
- Revenue forecast.
The above three documents record spending and hiring as if there is guaranteed success.
Getting the product launch mistaken
Premature scaling causes sales, salaries, infrastructure facilities, recruiting fees and travel expenditure to use up the company’s available funds. As a result, there is pressure to raise revenue. At the same time, the marketing team is investing a significant amount in promoting sales and in, the company’s positioning and promoting the company to the press, industry analysts, and consumers.
The consequence of having a fully staffed sales and marketing team after the first customer ship is a failure in terms of not understanding its market and customers is dire. Sales will lose their numbers, the board gets worried, and the optimistic VP of sales provides reasonable explanations for the situation to the board and pressurizes the sales team to work harder. At the same time, the sales team will call different departments for help and provide various types of presentations. Instead of learning and discovering, the sales team becomes disorganized and wastes a lot of money. The marketing team ends up changing presentations continuously to the confused sales team. This makes the sales team believe that the product is useless and can never be sold. After that, the CEO gets affected by convincing the board and investors to give the company one more chance. Positions are lost due to no money flowing in.
All startups aren’t the same
The product development model doesn’t tell startups that they are not alike. According to Steve Blank, startups fall into four categories:
- Introducing a product to an existing market.
- Introducing a product to a new market.
- Introducing a product to an existing market and trying to resegment the particular market as a low-cost entrant.
- Introducing a product to an existing market and trying to resegment the particular market as a niche entrant.
It’s important to note that the product development model sometimes effectively makes a product launch successful in a market with known customers, as seen in the first category. Following past practices in this market category may be successful if the market is used to such practices. However, most startups don’t go after existing markets and focus on the second and third categories, thereby having no idea where their customers are. It’s important to understand that the four kinds of startup categories have different types of customers and acceptance and that their sales and marketing strategies are different. On a more serious note, generating cash differs in each category. A company introducing a product to a new market may be bankrupt for 6 years, while introducing a product to a well-known existing market may generate profit in 1-2 years. Thus, the product development model is not only useless at this point, but it’s also dangerous if it’s adopted as it doesn’t tell the different types of departments in the company about the different kinds of startup categories or how to foresee the resources needed for the company’s success.
The product development model causes errors in the first few years of a startup. Those errors can be categorized into 3 impractical expectations:
- The product development model can guide activities unrelated to product development, such as finding customers, finding a market and building a practical business model.
- Customer development operates in the same schedule as product development.
- All startups and new products will be accepted and deployed at the same rate starting from the first customer ship.
In addition to these expectations, another error comes in terms of investors, where investors mostly believe that startups have to become profitable as soon as possible. To get funds from investors, startups make impractical financial assumptions about the market size and growth or ignore the consequences of choosing their market type. The goals are, therefore, impractical.
Is there an alternative for startups apart from the product development model?
Many entrepreneurs have been searching for a suitable alternative to reach their customers and the market. Since the early 1990s, the Technology Life Cycle Adoption Curve and the notion of The Chasm have been used by sales and marketing people to achieve their startup goals.
The Technology Life Cycle Adoption Curve
The technology life cycle adoption curve was found by Everett Rogers and was marketed and developed by Geoff Moore’s notion of the chasm. In the technology life cycle adoption curve, there are 5 main captivating ideas that entrepreneurs can explore:
- Different groups adopt technology in phases. They are technology enthusiasts, visionaries, pragmatists, conservatives and skeptics.
- Technology enthusiasts and visionaries are the “early market”, while pragmatists and conservatives are the “mainstream market”.
- The shape of the whole market for any product is closer to a bell curve. The early market is initially tiny and significantly grows into the mainstream market.
- A chasm exists between the different groups, where the largest chasm is between the early market and mainstream market. Chasms are caused due to various product requirements and buying habits of each group.
- The main problem in crossing the chasm is that a few of the problematic early marketing, sales lessons and success can be used in the mainstream market as mainstream consumers don’t find early accepters to be reliable customer references. As a result, new marketing and sales strategies are essential to satisfy the next larger group of customers.
That being said, the technology life cycle adoption curve doesn’t seem to be a successful sales and marketing plan for early-stage startups for 4 main reasons:
- The curve quickly makes early-stage startup entrepreneurs dream about dominating the mainstream market. It’s, therefore, better for such entrepreneurs to not dream big at that point because if the first part of the customer development isn’t satisfactory, they cannot reach the mainstream market, and they’ll be bankrupt.
- The curve makes you consider technology enthusiasts part of the customer adoption curve. Although technology enthusiasts look like an early bunch of customers, they are not. They exist as a path to discovering the actual buyers and a consistent sales process. Thus, early-stage startups need to deal with them and understand their influence over the sales plan. However, these technology enthusiasts hardly buy.
- The idea that the customer base of a startup will develop into a smooth and consistent curve creates a risky belief that customer adoption is a sales execution problem.
- The curve and its books stress the so-called “execution and adoption”. This is dangerous because if a startup focuses on execution in its early stages, it will go bankrupt. Thus, they need a learning and discovery process to get the business to a position where they know what to execute.
Thus, startups’ first step is to learn from starting the company to developing it. This can be successfully done through another similar process to product development, known as customer development.
The customer development model – where common sense encounters the product development model
Like most startups have adopted the product development model to measure the progress of their development team, control its cash burn rate and plan the product launch, there should be a procedure to measure milestones in terms of finding customers, building the market and approving the business model.
Every startup’s customer development model begins with learning and discovering the company’s first customers and the markets in which these customers are found. It should be noted that the customer development model isn’t a sales or marketing process. Before the sales and marketing activities, the company should prove a potential market for its product, confirm that someone will pay real money for the solutions that the company has visualized and then go and build the market. Learning and discovery make the customer development model unique to the product development model. When the product development model pays attention to the first customer ship date, the customer development model provides customer learning and their problems in the early development process.
Most startups have greatly misunderstood the product development model to achieve marketing, sales, or financial goals. The four stages of the product development model and the problems with the model that have been set down in this article will give you a comprehensive understanding of why the product development model should not be used for different objectives by different teams!