3. Steve Blank : The four steps to the Epiphany
Who is that guy ?
Steve Blank participated directly to several startups in his entrepreneur life, and is now a professor at Standford. and advisor to many startups. He built his theory by looking backward at his past experiences and what failed/succeeded.
Theory Sum-up
Steve Blank’s theory is called customer development. It is designed specifically for start-ups. Customer development is a process that can be opposed to the product development process. Product development can be seen as the classic way of building a business, that is to say rush until the product is finished and then test it on the market with real customers.
Customer development is built to put the product (or idea or concept whatever you want to call it) in front of customer’s eyes before it is even built and listening to him. Steve recommends doing it as much as it is necessary in the early life of the product for the founder to be sure that he has found a market for the product he is going to build. Indeed this process is cyclic and sometimes cycles must be done in a step before being able to go to further step.
Goal of this theory
The goal is to mitigate risk and be able to "pivot" (change strategy) if necessary.
Indeed:
- the product is not built yet so if customers do not like it or need it, it can be changed or even cancelled
- The company does not ramp up on expenses (particularly about human resources : sales, marketing or development teams) before being sure a viable strategy on a viable market has been found.
Main concepts
- Product development
Product development is the traditional way to build a product, it consists in 4 steps:
Concept/Seed => Product Development => Alpha/Beta test => Launch/1st ship
However there are several drawbacks :
1. Where are the customers ?
Actually there is no reference to the customers in Product Development. When the product ships, nobody can tell how much the customers will like it or if they are going to buy it...
2. Emphasis on execution instead of learning and discovery.
The concept is decided once, and then implemented as quickly as possible... There is no time to think about customers or market and adapt the product to them...
3. Focus on first customer ship date/Use of product development methodology to measure marketing.
Marketing and sales team get feedback from customers only when engineers think they finished their job and ship product. Investors thinks the startup is ready to earn some money but depending on the market type this might not be true...
4. Lack of meaningful milestones for sales, marketing, and business.
Although there is a well defined roadmap for technical matters, there are no clear objectives concerning sales and marketing.
5. Premature Scaling.
Getting full staffed marketing and sales team, or expensive warehouse at product launch without even knowing how many customers will be willing to buy can lead to disaster...
6. Death spiral: the cost of getting product launch wrong.
High costs caused by premature scaling generates expectatons on sales that a company which does not know its market will probably not fullfil... When the company misses numbers, the VP of sales is then fired, next one is the VP of marketing. If the company still does not meet expectations, the CEO is changed... All this changes are not good at all for the company and it may not get funded in the next round and have to close down...
7. Not all startups are alike.
A startup s strategy needs to vary depending on its market type (see below for description of market type).
8. Unrealistic expectations.
"Build it and the customers will come". By focusing entirely on product development, many startups follow this strategy, but it proved to be wrong many times.
- Synchronization points
Customer development is parallel to product development. Synchronisation points are needed in order to ensure that the two processes go in the same direction and that the usual clivage between sales and engineering does not happen... A step cannot be crossed until customer development and product team agreed on all hypotheses and facts. These synchronisation points particularly focus on features and spec of the products. Customer development team should only add new features IF customers expressed an urgent need AND they validated this with VP of engineering.
- Earlyvangelists
A startup cannot develop a product that will please ALL customers, because that would take years to develop. Instead it needs to find visionary customers, that would be happy to pay for even an incomplete and buggy product. These type of customers are really valuable because they will be a source of fresh money but also because they will help you to drive product development in the good direction.
Earlyvangelists can be recognized at the following attributes :
* Has a problem
* Is aware of having a problem
* Has been actively looking for a solution
* Has put together a solution out of piece parts
* Has or can acquire a budget
This type of customers is very very rare, but once you found them your understanding of your customer is going to be decupled !
- Market Type
There are 4 categories your start up could be classified into. The strategy and timing you need to adapt greatly depends on the market type you are in.
Existing Market (Steve Blank associates it himself to sustaining innovation):
The market and customers are known, so are the competitors. You will sell your product by differenciating on performances or features..
New Market (Steve Blank associates it to disruptive innovation):
a new market is created when you create a large customer base who could not do something before. The base of the competition is not performances or product features and you have few competitors (other than startups). Market and users are undefined and unknown, so the problem is to find them and to educate users to buy your product. This also means that you need to be patient because it is difficult to know when you will be able to convice new customers.
Resegmenting a market as a low cost entrant (this could be associated to disruptive innovation on low cost):
you can find a segment in the existing market that will be satisfied with good enough performances and lower cost.
Resegmenting a market as a niche entrant:
you can find a segment in the existing market that would buy a product designed specifically for their needs even if the price is higher or performances are worse in an aspect of the product unimportant to this niche.
- The four steps of customer development
The market and customers are known, so are the competitors. You will sell your product by differenciating on performances or features..
New Market (Steve Blank associates it to disruptive innovation):
a new market is created when you create a large customer base who could not do something before. The base of the competition is not performances or product features and you have few competitors (other than startups). Market and users are undefined and unknown, so the problem is to find them and to educate users to buy your product. This also means that you need to be patient because it is difficult to know when you will be able to convice new customers.
Resegmenting a market as a low cost entrant (this could be associated to disruptive innovation on low cost):
you can find a segment in the existing market that will be satisfied with good enough performances and lower cost.
Resegmenting a market as a niche entrant:
you can find a segment in the existing market that would buy a product designed specifically for their needs even if the price is higher or performances are worse in an aspect of the product unimportant to this niche.
All these types of market are defined precisely in the innovator's solution, which is Part 1 of this post series (see here).
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| Market type characteristics |
- The four steps of customer development
Each step of customer development is a circle, this means that it leaves room for trial and error. It is ok to change your plan if you learnt from your errors.
Customer discovery
The goal is to find out who the customers are, and if you solve an important problem for them.
Get outside the building and turn your hypotheses about your customers and users into facts.
It consists in 4 steps :
It consists in 4 steps :
- State your hypotheses (about customer's problem and your product):
You think that you know everything there is to know, but the simple fact of writing hypotheses about customers and their problem, pricing, market type, competition, product features and benefits... will prove you that there are more assumptions than facts in what you know...
- Test problem hypotheses:
go meet potential customers and listen to their problem. If you are lucky they fit your problem hypotheses, else correct them, and update your product hypotheses accordingly
- Test product hypotheses:present products hypotheses to customers and listen to them to see if the product you plan to build (and should already being builing) solve their problem and if your business model is valid. Meet product development for reality check, and visit the customers you visited before as well as new potential customers to verify your product presentation
- Verify:verify that you know everything there is to know, and decide whether you are going to the next customer development step or if you need to iterate.
Customer validation
Customer validation consists in building a repeatable sales roadmap and validating it with a few sales (at full price !). The goal is to answer important questions involved in selling the product :
- Who influence a sale ?
- Who recommends a sale ?
- Who is the decision maker ?
- Who is the economic buyer ?
- Who is the saboteur ?
- Where is the budget to buy your product?
- What is the selling strategy ?
- What type of sale is it ? Solution sale (?), commodity ?
- What is the profile of your earlyvangelist ?
This is the CEO's job to answer all these questions before putting sales responsibilities in the hands of VP of sales. Customer validation consists in 4 steps:
- Who influence a sale ?
- Who recommends a sale ?
- Who is the decision maker ?
- Who is the economic buyer ?
- Who is the saboteur ?
- Where is the budget to buy your product?
- What is the selling strategy ?
- What type of sale is it ? Solution sale (?), commodity ?
- What is the profile of your earlyvangelist ?
This is the CEO's job to answer all these questions before putting sales responsibilities in the hands of VP of sales. Customer validation consists in 4 steps:
- Get ready to sell:
write your value proposition, prepare sales material, plan distribution channel and sales road map... You may need to prepare various sales material depending of the type of people you are going to meet. (it is difficult to sell IT people a software by telling them that it will enable to cut headcount by 2 in their department... However it is a very good point for the person who manage IT budget)
- Sell to earlyvangelists:Try to sell your unfinished product to visionary customers and think about failures and successes and why they happens. Meet potential partners for service or distribution. This is when you are going to test various strategy to close a sale... Should you start by gaining sponsoring from an executive ? by talking to users ? IT ? ...
- Create positioning:
write an initial positioning and validate it with industry experts (you know which one you should talk with, because you asked that to your potential customers during customer discovery!). Of course this product will depend on the type of market you are in... It should be obvious by now if you read the whole series, but let's repeat it :
- existing market : insist on better performances
- new market: insist on benefits, new possible usage... evangelize customers about the new market
- resegmented market: insist on better cost or attributes that target your niche
- Verify: Did you closed enough sales ? Are the sales and business models profitable ? Does your product miss some features ? Are some features really important compared to others ? Are your delivery schedules ok ? what about your pricing ?
Customer creation
Now that we have a validated plan, it is time for scaling up, marketing, PR... It is time to create user demand and drive it in the company's sales channel.
Company building
- Get ready to launch: Even more than the previous ones, this step is highly dependant of the type of market you are in. So the first phase consists in choosing a market type, hence a customer creation strategy and first year objectives. You will define market size, available market and customer budgets and the budget you want to use for customer creation
- Position the company and product: Select a PR agency, perform a positioning audit both internally and extenally (in order to position yourself, you need to know what people think about you) and position your company and product according to your market type.
- Launch company and product: Choose audience and messengers, craft your message and measure results (by number of leads, inquiries and audits)
- Create demand: this means creating end-user demand and driving it to the sales funnel and/or educating customers about your market and product benefits. Then, measure success against previously set goals, and decide to return, iterate or (hopefully not) exit...
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| Customer Creation Strategy by market type |
Company building
This step has 3 main objectives : Performing transition from informal startup to formal company, from early user to mainstream customer, and keeping the discovery and learning attitude.
- Reach mainstream customer: matching sales growth by hiring, spending and relentless execution
- Review management: Is the team in charge capable of scaling the company ? This is the board's job.
- Create mission centric culture: Start by creating a mission centric culture. It does not mean writing beautiful sentences to hang on the wall, but crafting a short and understanble text that will tell employees why they come to work (the vision), what they need to do (the practice) and how they will know they succeed (numbers). It will be useful to guide everyday small and big decisions and management should ensure this mission is shared by all team members.
- Transition to Functional Departments:transform the customer development team to departments. Give each department a mission statement, but keep your market type in mind when building it. That is to say that only teams in an existing market should turn to relentless execution, and the others should keep evangelizing and recruiting "beachhead" customers.
- Build Fast-Response Departments:Maximize low level initiatives (Trust and verify), Maximize trust and communication (in particular, share good AND bad news), do synchronization meetings peerwise and cross department, adopt a good enough decision making policy (it's often better to make a less optimal decision right now, than a better one three weeks later...)
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| Growth curve by market type |
The growth curve differ greatly depending on the market type because the size of the gap to fill between early customers and mainstream ones is much larger for a new market than for an existing market. In an existing marker, the growth will be very linear. For a new market, there will be no growth until the tipping point is reached. As usual resegmented market is a mix of new and existing.
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