Sales and Marketing
Why Does “Customer Development” Matter to Every Organization?
Customer Development (as opposed to the more familiar Customer Acquisition or Product development models) is a four-step framework developed by entrepreneur and business school Professor Steve Blank. The model aims to help companies (especially new start up ones) discover and validate the right customers and market for their ideas, and to build the right product features that meet real customers’ expectations. Blank’s model has four parts to it (shown in the diagram below) although in this article we will be mainly concerned with the first two steps of “customer discovery” and “customer validation”, as it is these that are often “short-changed” or given too little attention most of the time.
In Blank’s model, Customer Development is essentially about working to find out whether or not your product or service is attractive to at least some customers (and with luck discovering that there are enough of them to build a solid business). In other words, a given organization which wants to be effective in this area, applies a structured or systematic learning process to discover what customers really want and make changes to the product or service to accommodate this – therefore validating that their efforts are worthwhile.
This customer learning process involves the following systematic steps (as any scientific process would do):
- Observing some need or pain in the market and describing a phenomenon
- Forming a hypothesis or theory about how this need or pain may be alleviated (with a new offering or product/service)
- Testing the theory or hypothesis (and the early product/service) to see if it actually alleviates the need or pain
So in the language of customer discovery this process looks like the following:
- A customer pain point or need is identified (this may be an end consumer or business need)
- A specific product or service is initially designed to try to solve the problem for an identifiable group of users (Customer Discovery)
- Through iterative testing, the customer market is deemed to be large enough to become a viable business (Customer Validation)
When should a company engage in Customer Development?
Clearly customer development, as we describe it above, applies to any start up business. However, it also applies to more mature businesses that are launching a new product or service, or even looking to significantly change an existing one. Hence the main realms in which customer development most applies are when your company has:
- a great new product/service idea, or
- Is building a new or different product or service, or
- Has finished creating a product/service, but have few to no customers, or
- Has a product/service and several customers, but little market penetration as yet
In all of the above there are essentially 3 discrete stages in the Customer Discovery process:
- Identifying the Problem-Solution fit: At this earliest stage, you validate with real prospects that an often theoretical or outline specific product/service solution will solve a known problem to such a degree that they will spend money on it.
- The company develops a Minimally Viable Product/Service (or what is called an MVP for short): Here you look to build a product/service that actually delivers on the value you talked about at stage one above – this is where the major validation effort is invested with lots of “loop” iterations of product service offering and comment on what customers liked and didn’t like.
- The company builds a robust sales “funnel”: Typically by conducting interviews, surveys and by analyzing a lot of feedback data from any other viable source, the company offers its product or service offering to the target customers identified but continues to collect feedback and make adjustments so that customers not only initially buy what is offered but come back and buy again. This stage also helps prove how to best spend any marketing and sales dollars and to minimize waste. At this point a company will usually be able to determine whether or not they can achieve significant scale.
Brief Case Study
The following fictional case study aims to illustrate how the above approach can be applied:
Peter had an electronics background and Ben had lots of experience in building apps for smart phones. After experiencing the severe drought in California, both business partners believed they could help home owners with yards/gardens to save water by giving them a ground water sensor connected to their smart phone which would help them to use less water overall. Market research had revealed that 4 million homes in Southern California had yards with lawns or vegetation that needed watering and Peter and Ben figured that converting 1% of this population to use their system by the end of year 3 would be a reasonable target with a price point of $95 for their system (which they could manufacture and distribute for under $50). If they were right, revenues would be $3.8 million with a 40% gross profit margin, and this would be a good base on which to scale nationally. Although Peter and Ben built a prototype app and sensor to offer, they struggled to attract sales. Several small garden centers and 2 big box home material supply depots agreed to trial the system for 60 days but reported low interest and take up (even when Perter and Ben were present at the booth to try to sell to customers directly). Peter was finally given a book to read about customer development and he convinced Ben that this would be “worth a try as a last throw of the dice”.
According to the customer development methodology the first issue was to address where the problem or pain point was for customers. As little or no “pain” was being felt by home owners when they were interviewed for the first time in a focus group, Peter and Ben talked to several City water departments and to a variety of small businesses. This feedback revealed that Cities wanted to save water and lower supply costs (and wanted a good analysis dashboard and not a smart phone app). Small businesses (most of which were restaurants with some landscaping surrounding them), on the other hand, wanted the smart phone app but also wanted some use analytics on which they could act quickly. Peter and Ben immediately made changes to the product design and added a basic analytics dashboard that would suit both customer groups now identified and took this back to many of them to use for free for 30 days. Feedback was very positive from both groups but many other suggestions for new product features were made, including comfort with a pricing point of $195 initially and a $95 annual charge for an annual software and system update which included new functionality.
Slowly Peter and Ben realized that the 1,000 City organizations (and their water departments) across SOCAL and 150,000 businesses were the real short-term target and that as many as 5% of these could be won within a 3 year time frame (mainly because Cities would help them to promote their product). This meant 7,500 clients and once off revenues of $1.5 million and recurrent income of $750,000 (with a 65% gross profit margin). This result quickly validated their belief that the business could be scaled on a national basis (initially focusing on the drier states in the US) by as much as ten times over a subsequent 5 year period.
Customer Discovery and Validation are often overlooked because many businesses go straight from concept to product or service and then spending a lot of marketing effort and money on trying to achieve scale, but with little or no external customer validation to justify this action. Some companies even think that real and practical customer discovery can be replaced by remote analysis or market research. Unfortunately, this approach only serves to support a company’s assumptions as opposed to really validating them. Customer development is therefore not only critical in any new product/service development but is the main way in which to conserve precious sales and marketing dollars.