Ent Guide To Cust Dev 07082010

Buyer: Hugo Falsen (hugo.falsen@gmail.
com)
Transaction ID: jg-1IEIHI-PIUXMB60EF8C6A3
The
Entrepreneur’s Guide to
Customer Development
A “cheat sheet” to The Four Steps to the Epiphany
by Brant Cooper & Patrick Vlaskovits

Foreword by Steven Gary Blank
Buyer: Hugo Falsen (hugo.falsen@gmail.com)
Disclaimer
© 2010 Brant Cooper and Patrick Vlaskovits
“Customer Development” is a term used to describe business processes defined in The Four Steps to the Epiphany, by Steven Gary Blank.
The Four Steps to the Epiphany used by permission from Steven Gary Blank.
“Lean Startup” is a term trademarked by Eric Ries and represents a combination of Customer Development, Agile development methodologies, and
open source or low cost development platforms.
Product & Market Development, Inc. claims a trademark for “Minimum Viable Product.”
All other trademarks and copyrights are the property of their respective owners.
ISBN-10: 0982743602
ISBN-13: 978-0-9827436-0-7
Fonts include Trade Gothic and ITC Officina Serif. Design by Garth Humbert and the May team.
Foreword
A lot has happened with the Customer there are now over 3,500 members in Lean businesses. Customer Development is not
Development process since I published The Startup Groups in 27 cities and 9 countries. one book. It’s not a religion. It is a malleable,
Four Steps to the Epiphany. When I first Dave McClure’s AARRR metrics represent customizable, and bespoke methodology for
conceived of the concept, I was attempting the quintessential method for measuring dealing with the chaos of the real-world. And
to articulate a common pattern I recognized progress through Customer Development for I am proud to note, it is growing and evolving.
in successful startups. I did this because web startups. In a series of deeply insightful
I wanted to change the way startups were blog posts, Ash Maurya extended my work by This book, The Entrepreneur’s Guide to
built–without completely depending on building a Web Startup version of Customer Customer Development represents another
serendipity and at a much lower cost. Development. milestone. Not only is it the first “third party”
book about Customer Development, it raises
Today, thousands of students have heard my Before I began writing and speaking the bar. Authors Brant Cooper and Patrick
lectures and more than twenty thousand have about the Customer Development model, I Vlaskovits have integrated the thinking of
read my book on Customer Development. thought it paradoxical that these methods leading Customer Development practitioners
Hundreds, if not thousands, of startups were employed by successful startups, yet and evangelists so any entrepreneur can
are practicing some elements of Customer articulated by no one. Its basic propositions apply them to his or her startup. They have
Development today. Many in the venture were the antithesis of common wisdom yet distilled Customer Discovery into a series
capital community have come to embrace they were followed by those who succeeded. of steps illustrated with clear examples,
the concepts, encourage and, in some cases, concrete action items, and traps to avoid.
require their portfolio companies to adhere to “It is the path that is hidden in plain sight.”
the Customer Development principles. This is a must read for all startups and their
No longer is it hidden. Clearly, Customer stakeholders.
In addition to growing adoption of Customer Development has lit a fire.
Development, is its advancement. A former – Steven Gary Blank
student of mine and intrepid entrepreneur, What I find perhaps most gratifying is Menlo Park, CA, April 2010
Eric Ries, combined Customer Development this: Customer Development continues to
with Agile development methodologies be advanced by practitioners, mentors,
to form the powerful concept of a “Lean entrepreneurs and investors who endeavor
Startup.” In little more than a year’s time, to build successful startups into scalable
Acknowledgements
Without Steve Blank and his book, The Four Andrew Chen. We would also like to thank for participating in our Customer Development
Steps to the Epiphany, this book would have those big-brained entrepreneurs and practi- efforts on the book and for providing valuable
been, of course, impossible. Steve’s shared tioners who continue to discuss and debate feedback: Adam Harris, Ann Miura-Ko, Anne
“epiphany” of Customer Development prac- these ideas on Rich Collins’ Lean Startup Rozinat, Ash, Giff, Bill Earner, Dave Concan-
tices and processes has inspired countless Circle Google group and elsewhere. Most non, Jeff Widman, Kevin Donaldson, Kyle Mat-
entrepreneurs, investors and other business importantly, these individuals put their ideas thews, Matthew Gratt, and Pete Mannix.
leaders to take a hard look at the way they into action, share their experiences, and ad-
build new businesses. Not only do we want vance the Customer Development discipline We would like to single out Hiten Shah for
to thank Steve for the generous insights he vigorously: Ash Maurya, Babak Nivi, Cindy inspiring us to undertake this task and for
has provided through his books, on his blog Alvarez, Dan Martell, David Binetti, Giff providing us a constant stream of encourage-
and in his classroom, but also for the support Constable, Kent Beck, Kevin DeWalt, Rich ment, contacts, and wisdom.
and encouragement he has offered us in our Collins and Sean Murphy. Discussing the
endeavor to write this book. day-to-day tactics with these people as they Finally, we would like to thank Fabrice
implement Customer Development practices Grinda, Bruce Moeller, Ranjith Kumaran and
We would like to acknowledge the leading has been instrumental to our own thinking Jeff Smith for sharing their stories with us.
thinkers and supporters of Customer Develop- reflected in this book.
ment and its like-minded principles, specifi- – Brant Cooper and Patrick Vlaskovits
cally Eric Ries, Sean Ellis, Dave McClure and Further, thanks to the following individuals
Introduction Customer Case Study: Concept Case Study:

Development Naive Thinking Definitions Multiple Pivots
Why this book? What Customer Early Adopters/Early

Development Is Evangelists
Who Should Read This
What Customer Segmentation
Development Is Not
Market Type
Three Levels of Learning
“Non-Traditional”
Getting Started Business Model
Positioning
Product-Market Fit
Minimum Viable Product
(MVP)
Lean Startup
Pivot
Getting Out of the
Building
Know Thy Case Study: 8 Steps to Case Study: Conclusion

Business On Customer- Customer Testing Towards
Centric Cultures Discovery a Scalable
Business Model
To the Whiteboard Overview Summary

An Example Step 1. Document C-P-S Resources
Hypotheses
Know Thyself About the Authors
Step 2. Brainstorm
Business Model
Hypotheses
Step 3. Find prospects
to talk to
Step 4. Reach out to
prospects
Step 5. Engaging
Prospects
Step 6. Phase Gate I
Compile | Measure | Test
Step 7. Problem Solving
Fit/MVP
Step 8. Phase Gate II
Compile | Measure | Test
Introduction
Why this book?

Steve Blank’s book, The Four Steps to the of catchy business aphorisms. It is a mal- We have made it our goal to get to the point,
Epiphany, changes the game. In a business leable process of testing, learning and iterating but also not get to the wrong point. While
world full of marketing “fluff,” “get-rich- upon the fundamental business assumptions debate is healthy, and we can only hope that
quick”, self-help guides and analytical tomes you hold about your product, customers and people will discuss this book, we hope to
that predict history with undeniable accuracy, market. minimize “paralysis by analysis.” Participa-
Blank’s book lays out an actionable frame- tion in debates over terminology, semantics,
work for starting and building new startups, So, then, why this book? The objective of this or history - particularly in high-tech culture
based on the insight that most startups fail “non-fiction novella” is to remove the barriers - often is an excuse for not taking action. We
because they didn’t develop their market, not to understanding and implementing Customer feel Customer Development does not need to
because they didn’t develop their product. Development (referred to as CustDev through- be at the center of such a debate. You can,
out this book) and take The Four Steps to of course, take it or leave it. But more to the
Steve Blank published The Four Steps to another level. We hope to provide the follow- point, you can further it, change it, and even
the Epiphany in 2005 not as a “traditional” ing insights: mold it to your business, your vision, and
business book, but as a compilation of your values.
lecture notes for the business school classes 1. “Boil the content down” to an even
he taught at Stanford University and UC simpler, more straightforward, actionable As Steve Blank says, “Customer Development
Berkeley. Tens of thousands of people have guide to CustDev practices. is not just one idea, but the sum of Customer
purchased this “non-marketed” book. Its dog- 2. Summarize and unite the ideas of mod- Development itself. It’s more than one smart
eared pages, highlighter-marked paragraphs ern CustDev “thought leaders” who have guy sitting on the beach in Hawaii writing a
and note-filled margins prove its value like emerged since The Four Steps was pub- business book. It is what it preaches.”
few other books because it doesn’t get put lished.
away – it remains on the desk, never quite 3. Put a “stake in the ground” to create stan-
reaching the bookshelf. dards with respect to common CustDev
terms and concepts.
The Four Steps to the Epiphany (referred to 4. Demonstrate the flexibility of CustDev
as The Four Steps throughout this book) is when applied to any business model.
not a grand, conquer-the-world strategy, or a 5. Make the CustDev process available in an
set of “tried and true” tactics, or collection ebook format.
6
Introduction
Who Should Read This

The Customer Development framework is not
tied to a particular business type, market “[SuperMac was] one of the first companies to sell an external disk drive for the original Mac;
segment, or product category. Company size, they had the first ‘color paint programs’ for the Mac; and when the Mac was just black and white
revenues, or location are immaterial, as long they had the first color graphics boards and large screen color monitors for the Mac. And with all
as the company is planning on launching a of that they had gone broke, out of business and into Chapter 11… no one inside the company
new product. had a profound belief in who the company was and why they existed. They had no model of who
their own customers were and what it would take to make those customers bang down their doors
Anyone can benefit from Customer Develop- to buy their products.
ment thinking. The philosophy applies to all
entrepreneurs even though specific Customer Nothing I couldn’t fix. I took the job.”
Development processes are typically associ- – Steven Blank
ated with those businesses just “starting up.”
you may have already built an organization. Regardless of the stage your business is in,
Although our background is working with If, for example, you must report revenue those of you most likely to pick up this book
high-tech companies and that has formed growth to your investors next month, it may are significantly involved in a startup technol-
our primary frame of reference, the Customer be a difficult proposition to stop what you’re ogy company, either as a developer, product
Development model is broad and flexible, doing in order to question your fundamental manager, or founder. Fundamentally, this
and can be applied to various industries and business assumptions. Even though taking a is a book for entrepreneurs who are willing
markets. This book focuses on the first step “time-out” to go through a set of processes and able to question their most tightly-held
of Customer Development, namely Customer that might explain why your growth is slower business assumptions; it is for this group of
Discovery. Therefore, we will focus on startups. than projected might be exactly what you people this book will benefit the most.
need, your board is likely to think you took
The reality is that Customer Development the wrong turn at Albuquerque and ended up
methods become more difficult to implement in Taos! Such a drastic step typically requires
the “further along” your business has been a little bit of desperation and a lot of sympa-
established. The further along you are, the thetic Directors. It might even be said, that
more difficult it is to question and test fun- The Four Steps was born out of just such a
damental business assumptions upon which predicament.
7
Introduction
In The Four Steps, Steve recognizes specific Another example when CustDev may be inap-
cases where CustDev may be inappropriate. propriate is in a bubble - when investors or
Some businesses face technology risk, but capital markets are throwing money at any
little or no market risk. Steve Blank states that: startup with “a pulse”. In such instances,
Steve recommends “throwing Customer
“the risk in biotechnology companies is in Development out the window.” We would
the front-end of Product Development; [in] caution, however, that rather than defenes-
taking a research hypothesis and devel- trating Customer Development altogether, you
oping [it] into a successful and effective may want to keep it on the shelf. Bubbles, by
drug, not in the back-end of customer definition, are short-lived.
acceptance and adoption.”
8
What Customer Development is

Customer Development is a four-step frame- This process is used to discover and validate the following business-related information:
work to discover and validate that you have
identified the market for your product, built • A product solves a problem for an identifiable group of users (Customer Discovery)
the right product features that solve custom- • The market is saleable and large enough that a viable business might be built (Customer Validation)
ers’ needs, tested the correct methods for ac- • The business is scalable through a repeatable sales and marketing roadmap (Company Creation)
quiring and converting customers, and deployed • Company departments and operational processes are created to support scale (Company Building)
the right resources to scale the business.
At an abstract level, Customer Development

is simply about questioning your core busi-
ness assumptions. It applies an engineering,
or scientific method, to what is really not a
scientific endeavor (building a business).
Your process will resemble the scientific
method by following these steps:
• Observing and describing a phenomenon

• Formulating a causal hypothesis to explain
the phenomenon
• Using a hypothesis to predict the results of
new observations
• Measuring prediction performance based on
experimental tests
Figure 1: Steven Blank’s Four Steps of Customer Development
9
There’s an old sales adage that says “may- The second most desired
be” is the worst answer you can get from a outcome is the realization
customer. This applies to Customer Develop- that there is no market, or that the market is
ment as well. The first desired outcome of insufficient upon which to build the business
implementing Customer Development is a you desire. The iterative aspect of Customer
thriving, successful company; all Customer Development is designed to eliminate the
Development can promise is to maximize the middle ground between these two end points.
potential to succeed. At each phase gate, you “pivot” - change
your assumption(s) - in order to test another
path. Ultimately, you either find the path, or
realize that the market has spoken and close
the business.
10
What Customer Development is Not

Customer Development is neither a rigid set ness. Customer Development will help you ing them – success is just around the corner.
of actions that leads to business success, – force you – to make better decisions based They tend to illustrate this sort of advice with
nor is it a “high-falutin’” philosophy that on tested hypotheses, rather than untested inspiring stories of entrepreneurs who suc-
requires deep contemplation and adherence assumptions. The results of the Customer ceeded against all odds and simply refused to
to laws brought down from “nigh”, lest you Development process may indicate that throw in the towel. While maintaining persis-
be cast away into startup hell. To wit, Cus- the assumptions about your product, your tence and willpower is certainly good advice,
tomer Development is neither authoritative customers and your market are all wrong. In Customer Development methodologies are
nor dogmatic. fact, they probably will. And then it is your designed to give you data and feedback you
responsibility, as the idea-generator (read: may not want to hear. It is incumbent upon
Customer Development grew out of Steve entrepreneur), to interpret the data you have you to listen. There are no billion-dollar
Blank’s experience: “distilled from things I elicited and modify your next set of assump- companies who will proclaim to you that Cus-
got right, and things I screwed up,” as well tions to iterate upon. tomer Development was the model they used
as by his observations of the practices of suc- to achieve success. On the other hand, most
cessful companies. Many “airport business books” urge entre- billion-dollar companies have practiced some
preneurs to never give in. They tell them to element of Customer Development, regard-
Successful implementation of Customer persist in their dream of building a great less of whether they knew what it was or what
Development, let alone simply believing in product and/or company, no matter what the they may have called it.
it, will not guarantee success for your busi- odds are or what the market might be tell-
11
Getting Started
Customer Development, as a framework, must be tailored to your business. In order to help you Future books will attempt to tackle other
accomplish this goal, we have structured this book as follows: portions of the Customer Development pro-
cess - believe us when we say that Customer
• We provide you with our interpretation of key concepts and definitions related to marketing, Discovery is more than enough to “bite off”
Customer Development, and “Lean Startups” at one time.
• Next, we help you “describe” your business, including your vision, model, product and target
market, in a way that prepares you for Customer Development
• Finally, we provide you with the steps to take in order to complete the first step of Customer
Development: Customer Discovery
13
Three Levels of Learning

There are three levels to discussing Customer Philosophy cess. But the more complex your model and
Development: If you put down this book having learned only your business ecosystem, the more difficult
one thing, we hope that it would be simply it is to figure out the order in which to test
1. Understanding the philosophy. this: “Question Your Assump- assumptions, who to test them against, and
2. Applying the principals to your specific tions”. how. There are no right or wrong answers, but
business. as you dig deeper into all the variables you
3. Laying out the concrete steps to take. Separate the zeal of entre- must evaluate, you will realize how high your
preneurship from the blind- “house of cards” actually is.
ness of hubris. Pivot your way to achieving
your vision or let the market guide you to a The Steps
different conclusion. Most successful compa- If you can navigate how to apply these prin-
nies have done this. ciples to your business model successfully,
working through the actual steps outlined
Principles in this book will be relatively easy to under-
Applying CustDev principles to your specific stand, if not surprisingly difficult to imple-
business is perhaps the toughest task you will ment. Hopefully our exercises and “pitfalls
face. If you have a simple business model, to avoid” will help you navigate through the
you’re likely good-to-go. Testing your assump- obstacles encountered when actually getting
tions regarding the right product for the right out and doing it.
customer, how to best deliver the product,
and how to most efficiently reach and convert
your customers is a fairly straightforward pro-
12
Case Study
Naïve Thinking
SonicMule makes mobile products for a new Jeff: Well, we knew we wanted to go mobile, But the very first product we built was a
phenomenon called “social music.” While but being a B2B enterprise software guy, virtual cigarette lighter for the iPhone. It was
SonicMule founders Jeff Smith and Dr. Ge what did I know? So we approached the mar- cool. The flame was rendered at 30 frames
Wang’s vision of their business was clear, how ket with “naive thinking”, which means we per second and you could play with the
to actually realize it was anything but. We would have to test a theory and iterate and flame; you could blow it out. Our feeling was
spoke with CEO Jeff Smith about how their test again and that’s how we have gone at it that if you didn’t get to the demo within thirty
diligence toward testing turns guesses into facts. since day one. Test if the technology works, seconds, forget about it. So, blowing out the
if the distribution works, if there’s a value flame became a classic word of mouth demo.
As we were setting up for the interview, we proposition. In fact, you could click on the world and see
were chatting about our own music playing, where other people were igniting their flames
which dovetailed into our formal conversation: Author: It seems that you have built a slew of at that point in time. It was this crazy social
products in a short period of time. Were you experience around awareness, but the whole
Author: My own music playing, regardless of searching for the right application? point of the exercise was to see if some of
my skill or lack thereof, is about playing with these pieces of functionality would work - the
my brothers. Jeff: We developed specific “mini products”, technology to simulate blowing out the flame,
each of which tested different components. the viral distribution. The product was a great
Jeff: Before recording was invented, all music Actually, the first thing we built was a mobile success, though we found only 3% of our us-
was about playing and usually socially. The analytics engine that would allow us to figure ers igniting one phone to another.
philosophy of our company, the vision for us out exactly what people were doing with the
is that music is a social experience. Music, products and why. And as we got users, we Author: And 3% wasn’t going to cut it…
today, is ripe for being redefined - and by interacted directly with them in order to cali-
redefined I really mean being returned back brate some of the data we were getting out of Jeff: Right, so we did a course correction half
to its roots as a social experience. the analytics. Later, it helped us calibrate our way into Tech Boom to improve that number
research of marketing conversions. and when we launched Tech Boom, a vir-
Author: So that’s a really big vision - where do tual fire cracker to test if people would do
you start? phone-to-phone networking (over sound), that
number was up to 20%.
14
Case Study
The next day I came in to work and said if we Author: A huge percentage of iPhone applica- Author: So you’ve tested and proven the tech-
don’t have a latency problem on the phone, it tions are free. Did you go with a free or paid nology, tested and proven there’s a potentially
would open up a whole dimension of what our model? huge market, tested and optimized appropri-
value proposition could be. The next day we ate channels, and are now in the test and
launched Sonic Vox, which allows you to turn Jeff: All of our apps required iterate the business model phase.
your voice into Darth Vader in real-time. This payment from the beginning.
was a one-day application. This was the only way we felt we could truly Jeff: Yes. We did much more testing on
test our value proposition. We’re now up to market channels in the second half of ‘09.
Three weeks later, we launched Ocarina to 4M paid users. Now we are moving on to business model and
test whether we could move sonic network- engagement. We are expanding the model to
ing from an impersonal state, as in ignit- Author: How does this become really big? Are better monetize our base of 4M users. How
ing one phone with another, to a personally you in search of a business model that makes do we increase monetization per user? Can we
self-expressive state through the creation and you a truly scalable business? open up social music capability to partners?
sharing of Ocarina songs.
Jeff: We’re not out of the woods yet, there are
still questions we need answers to. But we’re
pretty confident about the future of social
music. What we found is:
1. Everyone cares about social music

2. It’s fantastic from a marketing standpoint
because it puts our users to work for us.
We believe the data is in, this is real, so
we’re doubling down.
15
Concept Definitions
Concept Definitions
Early Adopters/Earlyvangelists For each of the definitions, we draw upon our
knowledge from a “Customer Development”
context. We have not studied Japanese lean
Segmentation manufacturing (Kaizen); we didn’t search for
the original source of the term “Minimum
Market Type
Viable Product;” we didn’t interview Mark
Andreessen about Product-Market Fit. Our
intent here is to synthesize recent think-
“Non-Traditional” Business Models ing on these subjects and “put a stake in
the ground” as to what these terms mean
in today’s startup community. You may not
Positioning agree with our definition of a concept, but
at least you’ll know what we mean when we
Product-Market Fit use one of the terms. You can argue whether
a particular tactic is “lean” or is “not lean,”
but be forewarned, we’re going to interpret
Minimum Viable Product (MVP) that as an excuse to avoid “getting out of the
building.”
Pivot
Getting Out of the Building
16
Concept Definitions
Early adopters/Earlyvangelists
In a Nutshell: Passionate, early users The Revised Technology Adoption Life Cycle
of new technology or products who
understand its value before mainstream
markets. Acquiring early adopters is
important to jumpstart product adoption.
Geoffrey Moore, in his 1992 book Crossing

the Chasm adapted and popularized the con-
cept of the “Technology Life Cycle Adoption
Curve,” whereby technology is adopted in five
phases categorized by the type of buyer:
Ea
Ea
La
te
rly
rly
La
Inn
Ma
Ad
Ma
gg
ova
jor
op
ard
jor
ter
ity
tor
ity
s
s
s
Figure 2: Moore’s Revised Technology Adoption Life Cycle Curve
• Innovators – • Early adopters – • Early majority – • Late majority – • Laggards –

aggressively pursue are the first to pursue rely on benefits of new not interested in don’t want anything
new technology, often technology for its technology, but will technology per se; to do with technology;
out of pure interest in intrinsic benefits. wait for others to work waits for established uses technology when
technology. out the kinks. leader to emerge, buys it’s without knowledge
de facto standard. of its existence.
17
Concept Definitions
The movement to each phase is hindered Early adopters are important to startup com-
by a gap caused by the difference between panies because they:
a product’s requirements and the buying
habits of customers from the subsequent • Seek out new technology to solve their (or
phase. Moore’s book concentrates on the gap their companies’) problems, not just for the
between early adopters and the early majority sake of owning the newest technology.
- a gap that is so wide and deep, it’s best de-
scribed as a chasm. CustDev concentrates on • Don’t rely on references from others to
getting to and preparing to cross the chasm. make buying decisions. While they are in-
fluenced by other early adopters, their main
concern is solving a known problem.
• Early Adopters want to

help you and (here is the
best bit) want you to be successful. Early
adopters enjoy opportunities that allow them
to be heroes, by solving real problems.
18
Concept Definitions
Segmentation
The reasoning is: and marketing efficiency, sticking to the “one
In a Nutshell: The practice of breaking segment” philosophy maximizes the benefits
down a larger market into smaller 1. Word of mouth regarding products works of segmentation. Proper segmentation allows
identifiable group of users who share best among those who share a need and a you to:
specific needs and who reference each other. means to communicate a solution.
2. “Access to each other” indicates a com- • Learn faster about market fit
mon methodology to reach them. • Find an “unoccupied” segment, i.e., no
Market segmentation is often confused with 3. Indirect knowledge (e.g., PR, testimonials, competition
customer profile or industry verticals. The etc.) of like individuals buying a product is • Become a market leader earlier (by domi-
definition is a bit more sophisticated: Market a powerful influence. nating a segment)
segments are comprised of like people, who • Line up (and knock down) segments like
share a common interest, who have access to One of the basic tenets of Moore’s Crossing bowling pins (one segment conquered suc-
each other and who look to one another as a the Chasm is that one should choose one cessfully destabilizes its neighbors)
trusted reference. If a customer prospect in segment with which you establish a “beach- • Maximize capital efficiency by focusing
California shares a need with a prospect in head on the shores” of the early majority. existing resources
Zaire, but they do not share a means of com- Attempting to scale a business when forced
munication, they are in separate segments. to customize products, tailor marketing activi- Fortunately, one of the big benefits of Inter-
Similarly, if both prospects are in New York, ties and execute sales processes for multiple net marketing, especially social media, is
but work in very different industries and have segments is a difficult proposition. that it may allow you to pick up neighboring
different responsibilities, they are likely to be segments opportunistically, while you remain
in different segments. You treat them that way, While targeting multiple segments is less ex- dedicated to building value for your core
because typically, your marketing and sales must pensive today in terms of development costs constituency.
target each differently.
The point isn’t that the individuals within a

segment do communicate with each other,
but rather that they “have access” to do so.
19
Concept Definitions
Market Type
Existing market Similarly, a new product entering an existing
In a Nutshell: A concept coined by A new product entering an existing market market with unique functionality targeted at
Steve Blank to describe different types is primarily attempting to steal market share a specific user class, not only takes market
of market conditions confronting new from major market players. The new product share from incumbents, but expands the size
products, comprised of existing market, isn’t trying to grow the market “pie,” as much of the market by selling to new customers
re-segmented market, and new market. as steal a “slice.” brought to the market by the new functional-
ity. Either customers will stop using a com-
In this market type, users will stop using a petitors’ product and use yours because your
If you are introducing a new product into a competitor’s product to use yours. They will functionality better matches their needs, or
new market: use your product because it has compelling you will acquire new users because existing
features and better product functionality, not products never adequately fit their needs.
• Your technology is so dramatically new that because you are offering a dramatically lower
the existing market is shattered. price to a targeted group of price-sensitive “Rules of Thumb”
• By definition, your product owns 100% users, or a specific set of functionality toward The toughest distinction to make is whether
market share. a group of users with unique needs. your product represents a new market, or is
• You must explain to your customers what re-segmenting an existing market. There is a
the product is, what it’s for, and how they Re-segmented existing market (low cost and niche) tendency for startup entrepreneurs to be-
will use it. A new product entering an existing market lieve that they have a new product for a new
• Your target users will likely NOT stop using with a sustainable, dramatically lower price, market, though this is rarely the case. It can
a product when they start using yours, be- not only takes market share from incumbents, be argued that most technological advances
cause no other products exist in the market. but expands the size of the market by selling either lower costs or enable new functionality
If they do stop using a product, it is one that to price-sensitive customers who otherwise do that improves problem resolution within exist-
is being replaced with a completely new not purchase from anyone. Either customers ing markets. True market disruption often
product type, not a new product of the same will stop using a competitors’ product and requires major technology innovation or uses
(or similar) type. For example, the automobile use yours because of significant cost savings existing technology in a new and unforeseen
replaced the horse-drawn carriage. or they will simply start using yours because way. Most likely, you are re-
they could not afford to use your competitors’. segmenting a market.
20
Concept Definitions
Further, here are two seemingly paradoxical points to consider:
1. Your customers’ view of your market type is more important than yours.
2. You can choose your market type.
First, you can say that you are in a particular Second, if you don’t have a lot of money,
market type, existing in a particular place you need to act like you are re-segmenting a
with respect to competitors within a speci- market. Launching in a new market requires
fied market, but if the customer doesn’t see millions of marketing dollars to teach cus-
it that way, what good are your beliefs? For tomers what the new product does and why
example, if you develop “Facebook for senior they need it. Launching in an existing market
citizens,” you and your techy friends, as well also requires millions of marketing dollars to
as tech savvy pundits will see that you have compete with the existing players who hope
segmented the social networking market for to squash you. If you don’t have millions of
the senior citizens’ market niche. All well and dollars to spend, you must build your busi-
good, but if the senior citizens have never ness or prove the traction to investors by
heard of Facebook, what good does the com- dominating a specific niche market segment.
parison do you? Try a landing page headline In the latter case, you are essentially in a
proclaiming your product as the “Facebook “segmented new market” that acts in a simi-
for Seniors” with this group and see how far lar way to a re-segmented existing market.
it gets you.
21
Concept Definitions
“Non-Traditional” Business Models

Freemium businesses are those that offer
In a Nutshell: Business models that multiple account levels differentiated on
do not sell a product to a customer product functionality and price, one of which
directly for a set amount of money. For is free. A freemium business must have one
example, business models that include version or account level that requires pay-
some element of “free” or the desire to ment. Otherwise, by definition, it is free, not
demonstrate scale prior to revenue. freemium.
A “free” business model is used by a busi-

Later on, we will discuss how to apply Cus- ness when its primary early objective is
tomer Development processes to “alternative” user-growth, prior to knowing (as opposed to
business models. First we wanted to make a assuming to know) how to monetize the users
clear distinction between the terms. It’s im- through ad revenues, selling leads, meta-da-
portant to distinguish between entrepreneurs ta, or virtual goods. Some of these businesses
who believe that free is the best way to grow may be “pre-revenue model”. For example,
their businesses, versus those who are reluc- they haven’t decided the exact method they
tant to test the validity of their ideas with the will use to monetize the users. Some busi-
ultimate market arbiter - cold hard cash. The nesses need the free usage of one product in
two are not (necessarily) the same. order to sell those users other goods, while
others require the number of users to scale (up)
before a value creation mechanism kicks in.
22
Concept Definitions
Positioning
Notes: Your positioning varies by audience. In the
In a Nutshell: Positioning is the act of Your differentiator is not your example from the Market Type discussion,
placing your product within a market compelling reason to buy, “Facebook for Seniors” is bad positioning for
landscape, in your audience’s mind. but the benefit the differentiator provides, your customer, but perhaps very appropri-
likely is. So, for example, if you are the first ate for investors, partners, and some media
to offer a sales force automation tool in a and analysts. This leads us to issue a note of
In Geoffrey Moore’s Crossing the Chasm, SaaS business model, your customers don’t caution when briefing media (PR) and ana-
product positioning includes the following buy because you are SaaS, though this is lysts (AR) too early: wrong
insights: knowing who your customers are your primary differentiator. They buy because positioning (and untimely
and their needs; the name of your product of the benefits that SaaS provides outweigh PR) can kill your company. If you are branded
and its product type or category; what the the benefits that an in-source solution pro- by media and analysts in a way that confuses
key benefit of the product is to your customer vides: IT costs are lower; deployment costs customers or lumps you with existing prod-
(the compelling reason to buy); the “state of are lower; remote access is easier; integration ucts incorrectly, you may never be able to
being” without your product; and how your with the web is easier; web interface lowers undo the damage.
product differs or “changes the game.” training costs, etc.
Your positioning will form the basis of your

communications with all of your constituents,
including customers, investors, partners, em-
ployees, etc. For your customer, the goal of
positioning is to have them understand what
benefit they will receive from you and why
you are better than everyone else.
23
Concept Definitions
Product-Market Fit
All businesses need to reach revenue at some Of course, it is possible to build a successful
In a Nutshell: When a product shows strong point, so all businesses must have a Product- business with less than half of your custom-
demand by passionate users representing a Market fit milestone. If you cannot prove that ers being very disappointed without it. I’m
sizable market. you can acquire customers for less than what sure you can think of many products you buy
you earn from selling them your product, you that you could easily live without. Conversely,
have a fundamental business problem. While not all businesses with greater than 40%
Mark Andreessen defines Product-Market fit the Product-Market fit definition may seem will succeed. But here’s why 40-50% is a
as “being in a good market with a product rather obvious, and getting to revenue is a reasonable number - first, if you buy into
that can satisfy that market.” Steve Blank clear milestone, measuring Product-Market fit Moore’s technology lifecycle adoption curve,
writes that “Customer Validation proves that from a market acceptance perspective is a bit your target customer at this point is the early
you have found a set of customers and a more difficult. adopter. Your early adopter will care sig-
market who react positively to the product: nificantly more about your product than the
By relieving those customers of some of their Sean Ellis offers this view: “achieving early majority or late majority adopters will.
money.” In a traditional business model - Product-Market fit requires Second, if you have waited to try and scale
one in which products are sold for money - at least 40% of users saying your business until achieving that mark (as
Product-Market Fit requires three criteria be they would be “very disappointed” without Ellis recommends), then you want to be sure
satisfied: your product. Admittedly this threshold is a you have nailed it before you spend money on
bit arbitrary, but I defined it after comparing demand creation efforts (scaling up).
1. The customer is willing to pay for the product. results across nearly 100 startups. Those that
2. The cost of acquiring the customer is less struggle for traction are always under 40%,
than what they pay for the product. while most that gain strong traction exceed
3. There’s sufficient evidence indicating the -mar 40%.”
ket is large enough to support the business.
24
Concept Definitions
While the 40% number is a good indica- a bigger market.” But that doesn’t mean you
tion that you have achieved Product-Market shouldn’t think through where a particular seg
-
fit, it doesn’t say anything about the size of ment is taking you from a scaling point of view.
the market. Does that matter? The answer
depends on your values and funding desires Finally, even if you are lucky enough to have
(discussed in the next section). Regardless, such strong evidence, this doesn’t neces-
a bottoms-up approach to market sizing at sarily mean 1) it will last; 2) the size of the
this point should be quite straightforward, market is large enough to sustain the type of
since you know a lot about your market seg- business you hope to build. As Ben Horowitz
ment and likely, other segments you could points out, often the evidence is not so clear,
eventually target to grow the market. As Sean and even it is, it may not be where you end up.
Ellis says, “crazy startups pivot away from
strong customer-perceived value in search of
25
Concept Definitions
Minimum Viable Product (MVP)

We’ve purposefully generalized the definition While there’s little disagreement that a busi-
In a Nutshell: A product with the fewest to avoid “money” as part of the definition ness should move “to revenue” as quickly as
number of features needed to achieve a since it’s possible to define “intermediate” possible, the MVP evolves through the stages
specific objective, and users are willing to MVPs that not only measure something useful between product conception and Product-
“pay” in some form of a scarce resource. (“validate learning”), but also act to minimize Market fit. As Eric says,
risk while on route to discovering the correct “that’s why entrepreneurship
business model. Incorporating some element in a lean startup is really a series of MVP’s,
of supply and demand, however, is important each designed to answer a specific question
So all our efforts to “not be too academic”
to ensure you are measuring something that (hypothesis).” Both “a landing page and a
failed with that nutshell definition, but read on.
matters. Think of an MVP buy button”1 and a working hardware proto-
as requiring a trade of some type can be considered MVPs, depending on
Eric Ries’ original definition is “the mini-
scarce resource (time, money, attention) for the product, market, and current objective of
mum viable product is that version of a new
the use of the product, such that the trans- the product owner.
product which allows a team to collect the
maximum amount of validated learning about action demonstrates the product might be
useful or even successful, i.e., viable. For Figure 3 demonstrates an example of the
customers with the least effort.” This defini-
non-paying milestones, you must define the MVP evolution for a new, miniaturized 3-D
tion has evolved over time, but its essence
currency and your objective (what you are video camera:
has not changed much from Steve Blank’s
product feature set hypothesis in the Custom- trying to learn). For example, intermediate
er Discovery phase of The Four Steps: “the MVPs might include: landing page views that
last part of your customer/problem brief is prove there’s some amount of interest in a
one that the Product Development team will product; a time commitment for an in-person
be surprised to see. You want to understand meeting to view a demo that shows the cus-
the smallest feature set customers will pay tomer’s problem being resolved; or a resource
for in the first release.” commitment for a pilot program to test how
the product fits into a particular environment.
1“With the explosion of new startups in the landing page automation business, in our darker moments we envision the future Internet as a dystopia, littered with
optimized landing page facades decorated with fancy buy buttons that lead to grand, yet unfulfilled promises of future products.”
26
Concept Definitions
All three columns are valid MVPs designed to

move the company along the path of Cus- MVP1 Concept MVP2 P-M Eval MVP3 P-M fit
tomer Development, from concept through
to paid product. Founder decides to test
market viability through a landing page that
MVP #1 MVP #2 MVP #3
describes the proposed product, technology,
PPC Campaign Product Drawings Hardware Prototype
features and benefits. The objective is to get Landing Page Detailed Specs Functional Output
users to click on a specific “call to action.”
The currency, in MVP1, is “attention” or
“interest.” MVP2 includes a mishmash of Customer Features/Benefit
technical specifications, detailed drawings Interaction description
"More info" Call
Face-to-face
technology demo
Field Pilot
and perhaps the ability to demonstrate key to Action

technology. Depending on the audience, the
founder’s objective may be to win invest-
Locate strategic Revenue
ment, technology partnership, or committed
beta customers. The final MVP is an early
Objective Market insight
Find early adopters
partners Seed Funding
Paid-beta customers
Customer Validation
Capital Investment
version of the product that is not necessarily
in its final form factor, but that is actually
usable by customers to solve a real problem.
The currency at this stage is most assuredly
Figure 3: Example MVP Evolution
Greenback.
Note that in this context “viable” is not lim-

ited by an external determination of success,
but rather is framed by the entrepreneur’s
objective (user scale, specific functionality,
payment) as measured by specific “currency”
(usage, problem solved, money).
27
Concept Definitions
Lean Startup
In a Nutshell: A startup which combines
Problem
fast, iterative development methodologies
Core CPS Solution
with customer development principles.
Assumptions; Customer Product Platform;
Positioning Architecture
Acquisition Features
A concept coined (and trademarked) by Eric
Feedback
Ries, a Lean Startup is one that combines
fast-release, iterative development meth-
odologies (e.g., Agile) with Steve Blank’s
“Customer Development” concepts. Eric
writes that lean startups are born out of three
trends:
Customer Product
• The use of platforms enabled by open Development Development
source and free software
• The application of agile development Problem/Solution
methodologies
• Ferocious customer-centric rapid iteration, Validation
as exemplified by the Customer Develop-
ment process Figure 4: Lean Startup: Customer and Product Development Interrelatedness
We would add a fourth element, and that is edented “speed of iteration,” or “number distinct, but interrelated and iterative pro-
the use of powerful, low-cost, and easy-to-use of learning cycles per dollar,” as a business cesses. As Eric Ries describes, the Customer
analytics. While some characteristics of lean hones in on product-market fit. Development team works on testing the
startups have been practiced for years, the assumptions about who the customers is, the
confluence of these trends is a recent phe- Figure 4 demonstrates that customer devel- problem they hope to solve, and what the
nomenon and offers the potential for unprec- opment and product development are two solution should be, while the Product Devel-
28
Concept Definitions
opment team actually builds the solution. In the Customer Discovery context, a lean It is perhaps worth pointing out what criteria
The Product Development process receives startup is not one that necessarily uses lean are not required in ordered to be considered
input from customers indirectly through Cus- manufacturing precepts per se, but rather lean in Eric Ries’ context:
tomer Development, and (when available) by one that uses fast, iterative development
measuring product use directly. The Product practices along with Customer Development • Bootstrapped
Development process iterates on the product methodologies in order to: • Consuming unholy amounts of Top Ramen
continuously, releasing new or different func- on a daily basis
tionality directly to the customer as quickly 1. Validate core hypotheses (customer- • Unpaid workers
as possible. problem-solution). • Build system based on a 386 architecture
2. Develop the minimum viable product. • Open cubicle culture
The Customer Development process receives 3. Achieve Product-Market fit. • Command-line interface
input from customers indirectly through 4. Produce a development and marketing • Chairs without casters
Product Development reports about fea- roadmap for scaling.
ture usage, but also directly from Customer
Development processes and analytics. The Creating a proper iteration loop requires you
Customer Development process iterates on to predefine success and failure for each
core business assumptions, product function- stage and to create a means to measure
ality, and acquisition and conversion assump- your progress. For example, in the web-
tions, resulting in updated hypotheses, honed based world, Dave McClure’s AARRR metrics
messaging, positioning, feature requirements, (Acquisition, Activation, Retention, Referral,
and marketing and sales tactics. and Revenue) can be applied to measure the
testing loops inside the various Customer and
Product Development stages from concept to
product-market fit (and beyond).
29
Concept Definitions
Pivot
In the Customer Development context, pivot
means to change an element(s) of your
customer-problem-solution hypotheses or
business model, based on learning. As Eric
Ries writes “by testing, each failed hypoth-
esis leads to a new pivot, where we change
just one element of the business plan (cus-
tomer segment, feature set, positioning) – but
don’t abandon everything we’ve learned.”
Pivoting is at the heart of

the “fail fast” concept. The
sooner you realize a hypothesis is wrong, the
faster you can update it and retest it.
30
Concept Definitions
Getting Out of the Building

This phrase is Steve Blank’s short hand for of “getting out of the building” is to learn
not accepting your business assumptions as whether you have a viable business idea. If
true. Go speak (in person, if possible) with you don’t, then you need to move on to some-
living, breathing customers to determine thing else as quickly as possible. You should
the validity of your assumptions. For many remember that “getting out
people, speaking with customers is diffi- of the building” is designed
cult to do. They will look for any excuse or to minimize your real and opportunity costs
rationalization not to undertake this task, (what you could have been doing if not build-
such as feeling uncomfortable cold-calling or ing a product no one wants).
speaking on the phone with strangers. One
reason for this reluctance is simply the fear Note that analytics, surveys, and other auto-
of rejection. Some entrepreneurs would rather mated user-facing testing tools are comple-
nurse their doomed prized possession – the mentary, to but not substitutes for “Getting
Grand Idea – rather than learning quickly that Out of the Building.”
there is no market for it. Part of the purpose
31
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Case Study
Multiple Pivots
In 2005, Zingy was the largest mobile media company in the Americas, selling ringtones, Assumption 3: B2B2C
wallpapers and games to carriers, media companies and consumers. The New York-based Because customers wouldn’t pay by credit
company had 130 employees and generated over $200 million in content sales. We spoke with card directly and carriers wouldn’t open
Fabrice Grinda, Founder and CEO of Zingy (2001-2005), to hear about his multiple pivots in their billing system, Zingy decided to try and
search of market traction. provide the content directly to the carriers.
What started out as a relatively simple direct
Assumption 1: B2C with carrier billing Assumption 2: B2C with direct pay to consumers sales process, had become
Zingy will sell directly to U.S. consumers us- In an effort to maintain a direct-to-customer a business to business sale, requiring the
ing carrier billing. business model, Zingy tried credit card bill- navigation of a complex ecosystem with large,
ing and 1-900 numbers. The customer buys bureaucratic companies notorious for long
The plan was modeled on Europe and Asia, the ringtone that is delivered to the phone. sales cycles.
where content companies sold ringtones and The carrier was bypassed completely.
other cell phone content directly to consumers “It was extremely hard to identify who to
who paid with SMS or smartphone technology. “But it’s much more cumbersome to order talk to and it was even harder to identify
online and to wait for the ringtone, than what it would take to get a deal done even
“It was impossible to get any of the cell using a one click purchase directly on your if we did find them. These companies are
phone companies to give us access to phone or by sending a text message. Our notoriously risk-averse, each waiting for
either the delivery system for the content product worked fine, but it just so hap- the other to make the first move.”
or to the billing. They didn’t have open pens that the complexity inherent in the
billing networks; they didn’t really believe billing that we introduced decreased po- Serendipity
this could be big.” tential volume by 99.9% relative to where Carriers wouldn’t budge but Zingy made sure
it should be.” to be extremely present at the right trade
shows and approach each and every carrier
to setup additional meetings and “finally,
randomly, one of the handset manufacturers
called us out of the blue.”
32
Case Study
Zingy provided a small sample of content “We ran out of cash in the process; we had no
to one of Nextel’s handset manufacturers, more money to pay anything. We missed payroll
which still didn’t include billing, but did have for four or five months. The company almost
the ability to store credit card information went under just as we were building this plat
-
directly on the phone. Though few customers form for Nextel. And then a miracle happened.
were willing to do that, those that did bought The first check from Sprint arrived.”
a lot of ringtones, providing the necessary
proof of consumer demand. One thing led to another. Zingy soon followed
up the Sprint success by building the service
While this fact opened up the minds of Nex- sites for AT&T and Virgin Mobile. The sales of
tel executives, to scale the service Zingy was the company went from about 1M in 2002 to
forced to develop all the code to integrate 200M to 2005.
with Nextel’s multiple billing systems. Mean-
while, Sprint caught wind of the deal and “What’s interesting is the
decided they wanted a sample of content, approach that finally suc-
too, so Zingy turned over the content licenses ceeded: be extremely flexible and highly
they owned without any technical implemen- iterative.”
tation and waited to hear back about sales.
33
Know Thy Business

To the Whiteboard
The application of Customer Development for developing your business model and Steve and creating a plan to mitigate risk are not
processes necessarily varies from business to Blank, along with Floodgate’s Ann Miura-Ko, bad ideas either! It might actually get you to
business. While understanding core CustDev developed their own useful business model (and through) your (inevitable if successful)
principles and applying them to simple busi- template. pivots quicker.
ness models is pretty straightforward, entre-
preneurs using a complex business model Part of the problem with imploring entre- We feel that mapping Customer Development
within a complex ecosystem may struggle preneurs to write a business plan, or to go to your business model should be a white
with the understanding of “how to test what, through complicated processes unearthing board exercise. The goal here isn’t to get you
when?” The business ecosystem - the rela- every business model variable one might en- to document a million “facts,” but rather to
tionships between the company, its partners, counter, or to go through a set of exercises in help you think through the critical areas of
customers and other players - creates compli- a Customer Development book for that mat- your business model. We seek to help define
cated interdependencies that produce busi- ter, is the risk of discouraging entrepreneurs your ecosystem, identify risks, and prioritize
ness risk and thereby influence the priority from actually “Just Doing It.” business milestones necessary to discover
of the business assumptions you need to test and validate your core business. The end
and validate. For the vast majority of entrepreneurs who result is a proposed (final) MVP with interme-
are unfunded, getting products out there and diate milestones you should test first.
While the death of the business plan as a iterating as they go is arguably a better use
method to engage investors is a welcome of time. On the other hand, thinking through
development, it doesn’t eliminate the need to your business, documenting your hypotheses,
think through your business – a process aided
by, ironically, the writing of a business plan.
Alexander Osterwalder’s Business Model
Generation provides a comprehensive process
34
Know Thy Business

First, draw a map of your ecosystem. Questions to consider:

Are you relying on third party technology that
1. The entities involved. Draw a box or a circle representing each entity in your ecosystem. Enti- requires a formal partnership?
ties include users, customers, channel partners, technical partners, strategic partners, adver-
tisers, your customers’ customers, etc. Include all entities that either provide value to you or Are you relying on channel partners that will
receive value from your product. Value can be derived from money or the use of a product. help you bring the product to end-users?
If you have a “free” business model and are
2. Value can be direct (what a user receives from using a product) or indirect (money an adver- looking to scale users, who will you eventually
tiser gets from product user eventually). earn money from?
2. Flow of currency. Draw lines or otherwise show your assumptions regarding the flow of cur- Are you partnering with a manufacturing firm?
rency. Who pays whom?
Will you sell data or leads to third parties?
3. Product Distribution. Show your assumptions regarding how the product moves through
channel(s) to reach end users. Does your product benefit your customers’
customers?
35
Know Thy Business

Second, define the value proposition Examples:

for each player.
Each entity is only a member of the “ecosys- • Users will be entertained
tem” if it will receive benefits by participat- • Advertisers get the attention of thousands
ing. For each member of the ecosystem, what of users
benefit do they gain and what are they willing • Buying influencer is happy to choose “green
to trade in exchange? These value proposition technology”
statements will evolve into your core C-P-S • Customer’s customer gets highly qualified
(Customer-Problem-Solution) hypotheses that leads
you test during Customer Discovery. For now, • Channel able to sell services on top of product
however, provide a concise description of the • Customer will save money, mitigate risk, or
value you presume they will receive. increase market share
36
Know Thy Business

Third, posit a final MVP

As defined above, an MVP is “a product with • Currency = what the user/buyer “pays” for
the fewest number of features needed to using the MVP
achieve a specific objective, for which users • MVP Metric = what you are measuring to
are willing to ‘pay’ in some form of a scarce determine viability
resource.” The reason the definition is some- • Value Determinants = what the user/buyer
what obtuse is that we wish to differentiate requires (minimally) in order to spend their
between a “final” MVP and one or more in- currency, such as features
termediate MVPs. Final MVPs ostensibly test
the business model. Intermediate MVPs test
high risk components of the business model.
To develop assumptions regarding your final

MVP, think of what you need to provide to
each entity with whom you have a direct
relationship in order to achieve the value you
identified above. What are the basic features
of the product each user requires to get the
ecosystem functioning? What does each en-
tity pay - whether money, attention, resources
or some other currency? Describing what your
final MVP looks like establishes an end point
to the Customer Discovery process.
37
Know Thy Business

Fourth, where’s the risk? If your risks are predominately marketing

The goal for laying out a path for your Cus- ones, what minimum set of features will re-
tomer Development efforts is to prioritize sult in paying customers? Or: What minimum
and test your gating factors. If you validate set of features will result in a minimum of X
key assumptions, you have proven critically number of users?
important aspects of your business model. If
you hit unexpected roadblocks and points of Time and money risks may affect intermedi-
failure, then you have increased your odds of ate MVP decisions. If your MVP will require
success by catching these issues early. $XM to build, but you only have $X/1000M,
an intermediate MVP might be the answer
Think of critical near-term risks. Does your to “what must I prove in order to acquire ad-
technology represent a significant risk? In ditional funding?”
other words, can you build what you believe
the market needs? If your technology is Think of dependencies. If your final MVP
difficult or costly to produce, what market- requires that X happen, then can you build
testable milestones can you build that would an intermediate MVP around X? What does X
result in sufficient evidence to induce you to depend on? If possible, go to the root of the
pivot or move forward? A proof of concept? A dependencies.
prototype? A demo?
38
Know Thy Business

Fifth, create your Value Path

Your value path is the journey of Customer Discovery that takes you from where you are today
to your proposed final MVP and includes both intermediate MVPs and core assumptions to be
tested. From the risk table you created, map out the set of core assumptions you need to test for
each identified gating factor. For each intermediate MVP, you will likely have a set of assump-
tions to test through direct customer interaction, in addition to a version of the product to build
and test through usage.
Intermediate MVP
1 Assumptions Final MVP
Entitles (e.g. customer) Features Assumption validated
Big Vision Assumption
Problem Currency
Features for all entities
Solution Core Value
1st pass at sales
You are here marketing roadmap
Intermediate
MVP Product
Figure 5: Value Path Template
39
Know Thy Business

An Example
Providing an example for this exercise is nuts and a touch of sea salt, Hopped-Up PB
difficult. To understand the application of is also chock full of vitamins, caffeine, and
CustDev principles to a particular business taurine to give customers’ energy level and
requires a detailed understanding of the busi- brainpower a needed boost. Hopped-Up PB
ness. Deciding to delve into the business with relies on a patented, high-energy ingredient
enough detail to understand it moves your cocktail created by a neo-Paleolithic, Hungar-
focus away from the processes themselves ian peanut farmer who has agreed to issue
and toward critiquing the business. As an a short term exclusive license to a pair of
attempt to avoid this, we’ve created a (ridicu- Australian vegemite entrepreneurs living in a
lous) fictitious business. Volkswagen bus at the San Elijo State Beach
campground in Encinitas, California.
Hopped-Up Peanut Butter (PB) is healthy
“pick-you-up” energy food spread for teenag-
ers and young adults. Made from organic pea-
40
Know Thy Business

The Ecosystem
Hopped-Up PB wants to sell their peanut but- Customers
ter to U.S. moms looking for tasty, healthy,
high energy food for their teen-aged sons Ingredient Licensor
and daughters. It is assumed that the peanut
butter will be sold direct to consumers via
a web-site, as well as through commercial
grocery stores. Because of its “high-energy”
ingredients, Hopped-Up PB will first be sold Hopped-Up
through health and fitness stores like GNC. Peanut Butter
These stores don’t sell peanut butter now.
The ingredient licensor has agreed to offer
a short-term exclusive license to Hopped-
Up PB for revenue sharing considerations in
order to prove the model before a long-term
contract is signed.
Money Health Stores
!!
Product Distribution
!!
Indirect
!!
Figure 6: Basic Business Model Sketch
41
Know Thy Business

Value Statements
Ultimately, the licensor and the health food
stores are only going to participate in this
ecosystem if they make money. Health food
stores also appreciate increased customer
satisfaction for recurring customers and the
possibility of expanding their customer base
due to an exciting new product offering. Re-
gardless of the distribution method, consum-
ers demand high-quality and good taste, but
the compelling reason (we think!) to buy is
the energy boost. Core Value:
Customer
Satisfaction; Money
Figure 7: Business Model with Value Statements
42
Know Thy Business

MVP Posit
The finished MVP must deliver value to all
players in the ecosystem. Because the licen-
sor and the brick-and-mortar stores will not
receive value from anything but the finished
product, it is assumed both will require
exactly that – the finished product. (Although
advanced labeling and other brand identity
collateral will not be required initially. In
other words, they will require merely “Mini-
mum Viable Packaging”). The founders have
hypothesized that the minimum features
required to sell Hopped Up PB are good taste
and recognizable, high-quality, energy-boost-
ing ingredients like caffeine and taurine.
Figure 8: Basic Business Model with Proposed MVP
43
Know Thy Business

Risks
Figure 9: Basic MVP with Risk Table
44
Know Thy Business

Figure 10: Business Model Value Path
Value Path
Clearly, the first item to test is whether or not a demand exists for high-energy peanut butter.
Without spending a dime on the actual product, the founders could interview potential custom-
ers from various target markets, as well as set up a landing page and attempt to drive traffic and
measure interest.
If that goes well, the next major milestone is to prove that the peanut butter tastes good. A full-
blown product does not yet need to be produced, but rather, a way to provide free samples at
health food stores.
45
Know Thy Business

Know thyself
As well as knowing your business, you need Here are a few examples to get you thinking: If you require capital to grow, your vision of
to take time to understand yourself. Your You might be stridently opposed to Venture where the business is in five years affects the
values will be reflected in your business and Capitalist funding. That is certainly your pre- type of investment you should seek. Do you
so will also affect how you conduct Customer rogative, but you must accept the ramifica- hope to have a simple Internet business that
Discovery. Do your passions align with your tions of that value. Will such a decision affect generates consistent revenue? Do you hope to
market segment? Is your vision reflected in how big you can grow, and does that matter build a scalable business, such as growing to
your business model? Do you have strong to you? Will it affect how you deal with new at least 100M in annual revenues? We don’t
opinions about external funding? One poten- competitors once you have proven the attrac- cast judgment on any of these businesses.
tial benefit of embracing Customer Develop- tiveness of your market? Do you still dream They are all worthy. But the actions you take
ment principles is that it teaches you how of building a large, publicly-traded company? are reflected in your values and you should be
to be self-aware, and how to question and Because refusing venture capital just might realistic about what you want and formulate a
analyze your beliefs. It encourages you to be at odds with that ambition. corresponding strategy, while remaining flex-
be honest with yourself. For you to build a ible to what the market dictates.
successful business, it is necessary to have a You might be committed to serving an urban
vision of what you hope your company will be non-profit market segment, even though your
two, three and five years down the line. The Customer Discovery efforts reveal a more
vision should be based on facts where you lucrative market segment elsewhere. This is
have them, guesses where you don’t, and an commendable, but your vision must reflect
honest appraisal of your business values. that value and affects your Value Path.
46
Case Study
On Customer-Centric Cultures
DriveCam uses video technology, expert Author: And what about the original vision? Author: Based on their own assumptions of
analysis and driver coaching to save lives and market viability…
reduce claims costs by improving the way Moeller: I believe you have to follow where
people drive. We spoke with Bruce Moeller, the market wants to go. In our case, the vi- Moeller: Right, taxi drivers drive like crazy;
former CEO of DriveCam (2004 - 2008) who sion of the original inventor, Gary Raynor, was they don’t care about safety; they don’t have
grew the business to 50M in annual revenue, that the video camera was mounted in the any money, etc. It turns out that being a cab-
to hear how he integrated customer feedback vehicle facing outward. There were concerns bie is an incredibly dangerous occupation.
into the company culture. about privacy (if it were to face inward), and There’s a high risk of being robbed or killed.
the idea was that people would want proof if You can’t get in a cab in Vegas today without
Author: You and I have talked before about an something happened to them - a recording a DriveCam.
entrepreneur’s need to balance customer in- of truth to tell your side of the story. But in
put with the ability to stick with one’s vision. reality, what we found is that people don’t Author: So did that sort of episode vindicate
You have a reputation for being adamant buy such devices before something happens; your approach? Did others come on board?
about listening to customers… no one ever believes bad things will happen
to them. Moeller: No, not really (laughs). We had a lot
Moeller: To a fault (laughs). At DriveCam, of incredibly sharp minds, with university-
we were constantly iterating based on news So we said, what if we turn the camera facing type experience. Others of us enjoyed talking
coming in. I had a reputation for changing in? Maybe if a driver’s behavior was recorded, to customers and relied on intuition and em-
the business plan every day. But seriously, we could change bad driving patterns and pathy for our customers. The intuitive people
if a piece of information we received from a reduce accidents. Some companies invest debated the academics in a constructive way.
prospective customer ran counter to what we millions of dollars in their fleets. What about We’d go and test the result in the market and
believed to be the case, we immediately dug taxi cabs? But the board argued vehemently they were wrong sometimes, and sometimes
into the details and asked “why would they against that. we were wrong.
think this way?”
47
Case Study
Author: Did this affect who you brought on Author: Is this something that can be learned;
board the company? can this be taught?
Moeller: We hired and fired a lot of people Moeller: Some people apply skepticism
who couldn’t handle that startup dynamic. I automatically, some don’t. Some can handle
once had an epiphany on the road and came change, others not so much. My philosophy
back and told the company that there were is you don’t know what you don’t know and
going to be business plan changes. One of if you were ever right in a given moment,
my executive team members looked at me and if your guesses were ever true it would
with wide eyes, “but Bruce, this [the old way] be serendipitous. You must
is the model we have to do. You’re the one attack your assumptions at
who said this is how we could get there.” I all times. My basic tenet: question yourself,
said, “I was wrong. I said left, now we have because the world is ever-changing.
to go right.”
48
8 Steps to Customer Discovery

Overview
The eight steps are:
1. Document C-P-S Hypotheses
2. Brainstorm Business Model Hypotheses
3. Find Prospects to Talk to
4. Reach Out to Prospects
5. Engaging Prospects
6. Phase Gate I Compile | Measure | Test
7. Problem-Solution Fit/MVP Testing
8. Phase Gate II Compile | Measure | Test
49
STEP 1
Document C-P-S hypotheses

Example Customer: I believe my best customers are
Objective: You can’t test your hypotheses Paid active users: small and medium-sized business (SMB)
until you create them. Write down what Customer: I believe my best customers are marketers.
you believe to be true about your business Marketers.
idea and why it is a winning one. Problem: Who cannot easily measure
Problem: They have no idea if a specific campaign ROI because existing solutions
campaign is generating a return on invest- are too expensive, complicated to deploy,
It’s important to document your hypotheses ment (ROI). and display a dizzying array of non-
by writing them down or typing them into a actionable charts.
document. Merely storing hypotheses in your Solution: Analytics that easily demonstrate
mind allows you to rationalize by altering marketing ROI. Solution: Low cost, easy to deploy analytics
them subconsciously to suit the occasion. systems designed for non-technical market-
Your intention is to learn and if you don’t Can you refine this? Are all marketers the ers who need actionable metrics.
write them down, you impair your ability to best customers? Are marketers calculating
do so. Writing down your hypotheses enables ROI? Are they cognizant of the problem (is it Added bonus: These three components also
you to measure successes and failures a problem for them?) How are they trying to serve to create your basic “elevator” pitch!
objectively, note specific errors so you don’t solve the problem today, including non-tech-
repeat them, and to track where you are nical workarounds? How are other vendors There are numerous other questions you can
within the process. trying to solve the problem? The objective is ask yourself to help you better understand
not to come up with phrases, but to define a your C-P-S assumptions. How are people
From the value propositions you created in hypothesis that is testable: dealing with the problem today? Are they
the previous chapter, you will now specify using competitors? If so, why is the competi-
your core C-P-S (Customer-Problem-Solution) tion not good enough? Are people using a
hypotheses for each mission-critical entity in workaround, like spreadsheets? Or offline
your business model. measures like pen and paper? What does your
customer’s life look like after they use your
product compared to before? What is the cost
of “doing it the old way?” How does it affect
time, money or some sort of risk?
50
STEP 1
Example: Pitfalls to Avoid Don’t Mistake Guesses for Facts

Current Solution: Users today have to Don’t be Lazy You likely know what you don’t know. You cer-
choose between free Google Analytics or You are NOT creating investment or mar- tainly know you need to test for those things.
very expensive products like Omniture. keting materials. It is imperative that you But you also need to test what you know
Both require IT intervention and both rely exercise discipline when answering these you know. Those pesky “facts” you like to
on displaying “vanity metrics” such as the questions; otherwise, garbage in, garbage share about your business are likely the most
numbers of hits to a website or the number out. Also, it is often the case that you will significant assumptions you hold onto and are
of unique visitors. More complicated (yet present an undeniably better solution to a re- the most difficult to face head on - document
more relevant) metrics require complex markably disinterested customer. You need to and test ‘em.
website coding. remember that humans are famously irratio-
nal. So, it doesn’t matter if you are right, you Exercise: explore your C-P-S hypotheses
Our Solution: Our SaaS service replicates must understand and describe the problem Date of hypothesis documentation:
all activity on he customer’s site so that it you are solving from the customer’s perspec-
requires zero IT intervention. Our out-of- tive. When discussing how they’re using the Draw your value chain:
box graphs and metric tracking provides problem now, describe the specific shortfalls
actionable, conversion-based metrics. For with the existing method. What is the cost of Who has the problem?
more complex sales funnels, our wizards those shortfalls to the customer in terms of
walk non-technical users through funnel time, money, market share, risk, or customer What problem(s) are you trying to solve?
configuration. satisfaction? Your solution must address one
or more of these shortfalls. How does your How are you solving the problem?
Our benefits: Zero configuration saves time solution do that? Be specific. What function-
and money; relieves IT’s headache. Our ality (feature) of your solution resolves which How is this person dealing with the problem now?
actionable metrics increase marketing ROI. shortfall?
How is your solution better?
What benefits does the user get by using your

solution instead of their existing solution or
workaround?
51
STEP 2
Brainstorm Business Model Hypotheses

Business Assumptions MVP Assumptions
Objective: Document all the Return to the diagram you created in the last Return to your Value Path diagram and
assumptions required to build, market, chapter and flesh out all of the assumptions document your objective for the first MVP,
and sell your product to the indentified that your diagram suggests. For example: its “currencies,” and assumptions regarding
customer segment. the minimum features required. If you have
• My product reaches my customers through no intermediate MVPs, refer to your final
these distribution methods (e-commerce, proposed MVP. The final MVP must describe
You have three more major sets of hypotheses SaaS, VARs, Resellers, inside sales, direct the minimum product features required that
to document: sales, etc.) will result in each entity participating in your
• I need to partner with the following compa- entire assumed ecosystem.
1. Your business – document your assump- nies in order to deliver a complete solution
tions concerning business model, partners, to my customer’s problems • Free users require these features to sign up
relationships, and dependencies captured • We believe this % of free users will upgrade and be active users
in your ecosystem diagram. to premium accounts annually • What do account level 1 users require for
2. Your product – document the feature • We will monetize free users via advertis- these features to sign up and pay $x?
requirements you believe are necessary to ers, advertising networks, data miners, lead • Advertisers will pay $z for y # of active
complete your final MVP. purchasers, etc. users/mo
3. Your funnel – document your assumptions • Some users will pay for premium features • Businesses will sign a Letter of Intent
about how you will acquire and convert based on a live demo of these features
your customers. • Strategic investors will provide development
funds by proving this works in a live demo
• Users will click on the “more info” button,
upon reading content of the landing page
52
STEP 2
Funnel Assumptions represents a traditional business-to-business

Funnel Stage Buyer’s A funnel represents each step a prospect funnel. You can change the labels to anything
Process goes through, from blissful ignorance to hap- you want, but they must represent each stage
py customer, or from Internet “Googler” to a potential buyer (or user, or partner) goes
satisfied user. The first column in Figure 11 through (from top to bottom), before commit-
Suspect
Funnel Stage Buyer’s Desired Metric Customer Discovery

Business Task
Process Response
Suspect
Lead
Lead
Prospect
Prospect
Customer
Customer
Reference
Reference
Figure 11: Funnel Stage and Buyer’s Process Figure 12: Funnel Matrix
53
STEP 2
In column 3, describe what your business

must do in order to move the buyer down
through the funnel. The desired action you
want the user to take in response (column 4)
to your activity determines what you need to
measure (what metrics to track in column 5).
Column 6 is where you brainstorm the ques-
tions you need to get answered, in order to fill
out the matrix.
Example: Marketing analytics startup

Figure 13 shows a completed chart:
Read the first row from left to right:

For this marketing analytics software com-
pany, in order to acquire suspects – get warm
bodies into the sales funnel – the founders
are assuming that marketers are actively
seeking a better marketing analytics tool.
So the business task is to make their web-
site readily available for searching and to
Figure 13: Example Funnel Matrix
convince bloggers who are influential among
marketing analytics users to mention their
ting to your product. that this isn’t the same thing as the selling solution. The desired response is for the user
process. The selling process is what you need to click on a link that directs them to the
In column two, you describe your assump- to do in order to get the buyer to do what the marketing analytics’ website. This can be
tions about how the customer proceeds buyer does when he or she buys. measured by metrics such as Click-thru Rate
through his or her buying decision. Note (CTR), the number of unique visitors, amount
54
STEP 2
of time on the site, etc. The last column Pitfalls to Avoid

includes questions that attempt to validate Write specific assumptions. Just about any
and optimize the assumptions in the previous assumption can be written so broadly that
columns. it is both irrefutable and un-testable at the
same time. It is better to be wrong than
Once the visitor clicks on the link (column vague. If you are wrong, you iterate; if you are
4), he or she becomes a lead. To continue vague, you have wasted your time and cannot
reading the matrix, read from left to right in draw any conclusions. For example, it’s bet-
row 2, and so on. ter to guess that your (initial) target market
is “IT Managers in a small to medium-sized
Exercise: document follow-on hypotheses financial services firms based in Manhattan,”
Use your completed business model eco- than “IT Managers.”
system diagram, proposed MVP, and funnel
chart to brainstorm all of your hypotheses!
55
STEP 3
Find prospects to talk to

In order to test your hypotheses, you must
find prospective customers to talk to. You are
looking for people whom you believe are suf-
fering from the problems you solve and who
are willing to pay for (or use) your solution. In
all likelihood, you cannot find these prospec-
tive customers immediately - you will have to
seek them out. Fortunately, this allows you to
gain experience, hone your presentation, and
increase your confidence as you get closer to
those people who really matter.
As shown in Figure 15, as you move toward

your true target audience, your objectives of
the interview become more focused.
Depending on your business model, you may

be wondering who to talk to. For example,
if your business model requires you to scale
users prior to monetizing them, do you talk
directly to users or those who might pay for
some sort of access to thousands of users?
We recommend testing along the Value Path
you defined in the last chapter. Figure 14: Interview Evolution
56
STEP 3
How do you find and reach your prospects? Exercise: Think small Pitfalls to avoid
There’s no one right answer or magic formula. Entrepreneurs think big. That’s great and Don’t simply survey your friends and col-
It depends on your resources, the breadth of it is needed to be successful. However, in leagues. While those people are likely to be
your network, money, time, and your assump- some instances that kind of thinking can friendly, their input is likely to be skewed.
tions on how best to reach those customers. make things more difficult. When looking for Use them to find people, not answers. Don’t
Your objective at this point is not to test prospective early adopters to interview, you rely on only one method of prospect acquisi-
customer acquisition methods, though you have to think small. Rather than say, “Snap! tion, since this will likely limit the type of
certainly can start to learn something about How am I going to manage to find a thousand person (i.e., market segment) you speak with.
their efficacy by using them now! Here are people I don’t know,” think “who can I talk to Experimentation may be the key to uncover-
some ideas for your initial outreach: about my product idea?” ing the hidden gem of who your ideal custom-
er actually is. Also, note that these are not
Write a list of five names of people you know methods of engagement, but rather methods
who share some of the characteristics (job, to obtain a list of people with whom you will
demographics, hobbies, industry, etc.) of engage. Don’t confuse the two!
your ideal early adopter customer. Log onto
Facebook, LinkedIn, look at your Twitter fol-
lowers, etc., and write down five names. Write
an email to all five asking for introductions to
five people they know, who might also share
these characteristics. This is your first con-
tact list. If you don’t know anyone with the
same characteristics, simply ask your network
for the names of five people who might!
57
STEP 4
Reach out to prospects

There are several “schools of thought” re- information on competitors, internal decision Intro email:
garding engagement tactics, including phone making processes, etc., than a “partner” who !"#$%&'()*%+%,,-.)+,/0)1,%+%,%2&%)2-0%3
conversations, “informational interviews” might be willing to share.
and “selling before buying.” The first may be 45)6-,78
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necessary due to geographic constraints, but Steve Blank’s formulation is geared toward
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it is less than ideal, since you have no way of creating a partner. While you eventually hope
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learning what your prospect’s initial, physical, to sell to this person, the initial conversations
,%'",2)/2):>%&5C&)0-,?%'52;)-&'5D5'5%:)
and emotional reactions are to what you are are for learning, not selling. Steve writes:
0/,%)%E%&'5D%.7F)=)B%-,)+,/0)0-,?%'52;)
presenting. Do they flinch when you men- >,/+%::5/2-.:)'B-')%G5:'52;):/."'5/2:)-,%)
tion the price or do they roll their eyes at a “Before you pick up the phone and talk to '//)%G>%2:5D%8)'//)B-,<)'/)<%>./78)-2<)
screenshot? Do they begin to talk fast and lean someone you don’t know [assuming you get '%2<)'/)<5:>.-7)2/2H-&'5/2-#.%)0%',5&:)
forward? Do they bring one of their colleagues over cold call jitters], it’s usually a good I/"')/+)'B%)#/GFJ)K%)B/>%)'/)&B-2;%)-..)
into the room to have them talk to you too? It’s idea to know what you want to say. What 'B-'F
important to meet as many of your prospects you don’t want to say is, ‘Hi this is Bob and
in person as possible so that you can observe NewBanking Product, Inc., and I’d like to 1*%+%,%2&%)9-0%3),%&/00%2<%<)7/")-:)-)
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“Selling before building” is a good way of Instead, you want to create an atmosphere
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learning very quickly whether a particular of “needing their expertise,” to which most
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customer type might be willing to pay for people respond positively. The best, of course,
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your planned product. The problem with this is to be referred to someone. If you are not
approach is twofold: 1) you may be receiv- referred to prospects, expect to send 10 times =+)>/::5#.%8)&/".<)=)#"7)7/")-)&">)/+)
ing “no sell” indications from a market that the number of emails when you’re starting out. &/E%%)-')7/",)&/2D%25%2&%L)=).//?)+/,A-,<)
doesn’t need your current problem-solution Once you reach people you will ask for refer- '/)B%-,52;)+,/0)7/")-2<)'B-2?)7/")+/,)7/",)
definition, but the “no” precludes you from rals, thus eliminating your no-referral problem. &/2:5<%,-'5/2F
learning where you might pivot; 2) establishing
a seller/customer relationship from the get-go You might try recording yourself or practice M%:'8
may limit what you can learn. A “buyer” may with friends and family. 1N/",)9-0%3
be less likely to give feedback about pricing,
58
STEP 4
Phone call: Exercise: make a cold call Pitfalls to avoid

“Hi, this is Joe at NewGeoSocNet, Inc., and You heard us. Do it. Do the thing you dread Don’t expect lovers, friends or family to be
as you remember I was referred to you by most: call someone you don’t know and ask objective. Use them for support. For example,
[insert helpful reference name here]. I ap- them about your lame idea. when you’re feeling down or overwhelmed.
preciate you taking my call. We are starting a The best practice is to just start. It gets
company to link a person’s geographic loca- What is the worst thing that can happen? easier once you get going.
tion with relevant ad content on their mobile They will tell you your idea is lame, that they
device. We are currently in the development hope you haven’t quit your day job, start It’s amazing how easy it is to avoid “getting
phase and are hoping you might provide us laughing uproariously and hang up on you. out of the building.” Typically, several excus-
some insight into the market. I assure you es are employed again and again. However,
that I am not selling you anything. I would What is the least likely thing that will some tips for overcoming inertia include:
just like to understand your perceptions of happen? Oh well, they won’t literally hang up
the market and how you and your company on you. 1. The vast majority of people are eager to
target and deliver ads to mobile devices right help you, as long as you are respectful of
now. In exchange, I’d be happy to tell you But seriously, it’s not like you’re base-jump- their time.
about some recent innovations in geo-located ing off the Himalayas. Confront your fears. 2. The vast majority of people are eager to
ad technology.” Make a cold call and be pleasantly surprised share their expertise.
when it turns out people like to share their 3. The vast majority of people like free cof-
expertise and want to help you. fee/tea/etc.
4. When reaching out, email takes priority
over phoning, because phoning prioritizes
their tasks (not good).
5. Use the “Ice, Ice, Baby” presentation tips:
Be Concise, Precise, and Entice.
6. JFDI!
It’s worth repeating that online surveys, focus

groups, user testing are not substitutes for prop
-
erly conducted Customer Discovery interviews.
59
STEP 5
Engaging prospects
Problem/Current Situation/Solution Presentation there security issues around a web-based ap-
In The Four Steps, Steve Blank provides a proach?” • What is the biggest pain about how you
specific method of presenting your problem- work?
solution hypotheses. On a sheet of paper or Again, if all goes well, the conversation will • If you could wave a magic wand and change
a slide, you create three columns: one for naturally flow into your idea for a solution. anything in what you do, what would it be?
containing the problem, another for your cus- This is perhaps the toughest part where it
tomer’s current solution or workaround, and will be tough to avoid selling. Start simple. As you get more comfortable with these con-
then your solution. You should have your elevator pitch nailed by versations, you will be amazed at the amount
now. You only want to convey the “big idea” of data you can uncover. Keep your broad,
You present and discuss each column in turn, as Steve puts it, and not a list of features. second set of hypotheses in mind in case
without revealing the subsequent columns. Describe your core differentiator and how it these come up, or if there’s an opening to
For instance, you describe the problem(s) is going to solve the problem. Sit back again, bring them up during the conversation.
and then get them to discuss it. Does it ring and look for the response. As they digest the
true? Do they nod? What are their thoughts idea, they will likely follow up with questions. If you are speaking to users who you hope
on the subject? Get them to open up and The first thing you want to glean is whether will pay for the product, you must frame
talk to you about their perspective on the they are asking questions because they don’t the conversation with that in mind. If you
issue. How important is it to them? Is there understand, or because they are digging into get through 90% of the conversation and
a monetary aspect to the pain? The conver- the solution. If it’s the former, you need to your prospect says “oh, you mean I’d have
sation should flow naturally into whether work on your “pitch.” If it’s the latter, you’ve to pay?” you’ve just wasted a lot of time.
they’re using a competitive product, building passed a major hurdle. Discussing specific pricing may or may not
a solution themselves, or cobbling together a be appropriate, depending on your busi-
workaround. Again, you should provide leads The other thing you would like to discover is ness model and what you’ve learned so far.
into the conversation. For example, “I hear whether or not your proposed solution is “a We’ve found that open ended questions like
from a lot of CEOs that they still use spread- vitamin or a pain killer?” (i.e., nice to have “How much would you be willing to pay?” is
sheets to manage around the issue.” “Who vs. must have) Put another way, here are a question that is often awkward to deliver,
codes your online forms now? How involved Steve’s “IPO questions;” awkward to receive, and results in poor data.
is IT in deploying your current solution? Are
60
STEP 5
Proposing a specific price or price range is Follow up email:

better. Also, depending on how far along in 45)O-D%8
the process you are, you may want to test
what sort of trial would meet their expecta- PB-2?:)+/,)'-?52;)'B%)'50%)'/):>%-?)Q0%%'R)A5'B)0%)7%:'%,<-7F)N/",)52:5;B':)A%,%)%GH
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tions. For example, “If we offered a free-trial,
%D%,)B%)/,):B%)A-:)52'%,%:'%<)52):%%52;FR)T27)-<<5'5/2-.)+%%<#-&?)A/".<)#%);,%-'.7)
would you be interested in signing up?”
->>,%&5-'%<F)N/")-.:/)0%2'5/2%<)'B-')7/")B-<)-)&/">.%)/+)>%/>.%)52)052<)AB/)05;B')#%)
52'%,%:'%<)52)07)5<%-)/,)AB/)05;B');5D%)0%)D-."-#.%)+%%<#-&?F)=@D%)52&."<%<)-)#.",#)B%,%)
When you close the conversation, there are
+/,)7/")'/)+/,A-,<F
several things you want to keep in mind:
Q#.",#()1N/",)9-0%3)5:)#"5.<52;)-)2%A)0/#5.%)-<)2%'A/,?).52?52;)-)>%,:/2@:)&",,%2');%/H
• Always be gracious for their time ;,->B5&)./&-'5/2)A5'B)>%,:/2-.5U%<)-<)&/2'%2'F)!B%)5:).//?52;)'/):>%-?)A5'B)%G>%,':)52)
• If there’s any fit or value you received from 'B%)0/#5.%):>-&%)'/)<5:&"::)'B%)0-,?%')-2<)/>>/,'"25'5%:F)M%&-":%)/+)7/",)%G>%,5%2&%)52)
the conversation, ask if it’s okay to follow 'B5:):>-&%8)=),%&/00%2<%<):B%)'-.?)'/)7/"F)!B%)-::",%:)0%):B%@:)2/'):%..52;)-27'B52;8)
up again later #"')5:)0%,%.7).//?52;)+/,)0-,?%')-2<)&":'/0%,)52:5;B':F)4%,%)5:)B%,)&/2'-&')52+/,0-H
• Ask for references for others who may be '5/2FR
suffering from the same problem, or may
have market insight V52-..78)B%,%@:)'B%)&/2'-&')52+/,0-'5/2)+/,)'B%)0-,?%'52;)>%,:/2)A%):>/?%)-#/"'F)=+)
• Send a follow-up email that includes: a 'B%,%@:)-27'B52;)=)&-2)</)+/,)7/"8)>.%-:%)</)2/')B%:5'-'%)'/)-:?F
thank you; a summary; a list of action

M%:'8
items, if they were created and it is appro-
QN/",)2-0%R
priate; and sample text to send to referrals
61
STEP 5
Exercise: practice your presentation versation to feel scripted. Through practice, Be Cognizant of Others’ Assumptions
Find some friendly associates and present you hope to find key phrases that frame the One thing is assured when you “get out of
your problem-solution hypothesis. You’re not discussion and act as great on-topic conversa- the building” is that people will “pepper”
looking for feedback on the hypothesis, but tion starters. The key is to hold onto three or you with assumptions. But of course they
rather on your method of presentation. If it four “must-learns” in your mind and steer the won’t be called assumptions, they will be
feels rough, practice. If it still feels rough, conversation toward learning those items. “expert opinions” on your business model, a
change the words in your presentation until go-to-market strategy, company name, logo
they feel more comfortable. Use the examples Pitfalls to Avoid color – you name it. Take it with a grain of
here as guides, but make the words and style Don’t Be Knee-jerk Anti-Customer Development salt and take it for what it is: someone else’s
your own. This will enable you to feel natural Receiving negative feedback may trigger guess. Nod politely when someone asks you
when speaking with strangers. You want the natural “anti-Customer Development” ten- “have you thought of franchising?” or “have
presentation to be smooth so the conversa- dencies. “You just don’t get it” is a com- you thought of licensing your technology to
tion flows. Sometimes you have to learn how mon reaction to prospects who dismiss your Google?” It’s up to you to politely steer the
to get out of the way of yourself! Start by idea. You are particularly susceptible if you conversation back to the assumptions you
presenting in front of people you know well, do not lead the meeting. For example, the want to test.
but migrate to people you don’t know quite as topic might wander away from the core value
well, but whom you respect. Tell them you’re proposition into product features, and then
looking for feedback on your presentation possibly macro market theories. A nega-
style but they can comment and have opin- tive reaction to one of your statements may
ions about the hypothesis, too. trigger defensiveness that results in selling,
rather than listening. Despite best intentions,
At the risk of repeating ourselves, the point many entrepreneurs look to
isn’t to practice so that your presentation confirm hypotheses, rather
comes off overly-rehearsed, but rather to be than test them. This is called confirmation
able to integrate what you need to learn it into bias and may lead to false positives.
a real conversation. You don’t want the con-
62
STEP 6
Phase Gate I Compile | Measure | Test

The object of the first round of interviews is Based on the interview responses, you are Pitfalls to Avoid
to test and confirm a core value proposition, either ready to move forward, pivot, or you Customer Feedback
matching your product idea with a market remain unclear. Responses that are all over One of the toughest parts of communicating
segment that suffers from the problem you the map likely require some kind of a pivot. with customers is knowing what to ignore
are solving. Ideally, this work occurs prior to For example, a modification or rewording of and what to act upon. Again, there is no
when real product development has be- your hypotheses or perhaps, you simply need process or “Holy Grail” that will fix this for
gun. You only begin building the product in to speak with more prospects. If all the data you. Intuition is an important part of being
earnest after confirming your (iterated-upon) is looking the same, then either: an entrepreneur. The startup
C-P-S assumptions. founder owns the vision,
• You have identified the right customer, the customer owns the pain. You must weigh
The object of the second round of interviews who suffers the specific problem you are customer input against your vision carefully.
is to hone in on the core product functionality addressing, and who is interested in your Ideally, this is why you find early adopters.
that your customers must have, while testing particular solution to the problem. Once You recognize an early adopter because he or
business model assumptions and learning the you have “discovered” your proper market she is aware of and understands the problem
characteristics of your market segment that segment, you are ready to start measuring you are addressing, usually better than you
will allow you to reach out and acquire them product fit and to tackle your next set of as- do. This individual may already be thinking
efficiently. The number of interviews you sumptions. (Step 7) of and looking for solutions, developing one
conduct is dependent upon your market and internally or perhaps has already cobbled
nature of your interview responses. Generally, • One or more of your three basic C-P-S as- together a workaround. When you’ve nailed
the size of your sample should be proportion- sumptions is wrong and you must return your presentation of primary assumptions,
al to the size of your market. One could prob- to Step 1. Revising your assumptions may early adopters are ready to write you a check!
ably determine the proper sample size sta- entail the following adjustments: small
tistically, but that is overkill at this point. If changes to your product idea; tweaking who
the responses from a tightly defined segment your buyer might be; changes to the market
trend clearly in one direction or another, then segment you are pursuing; finding the exact
you probably have talked to enough prospects problem you are addressing; determining
for this round. As Steve says, stop “when all your proposed solution.
the data begins to look the same.”
63
STEP 6
How long do I have to do this stuff?

Listing eight steps in a 74 page document
can provide the illusion that the Customer
Development process may take merely days.
This is not realistic. Customer Discovery by
itself takes many months. The amount of
time it takes to develop your product can be
shortened somewhat via Agile development,
Minimum Viable Product concepts and the
like, but customer development runs in paral-
lel with Product Development and continues
for as long as Product Development, Market-
ing and Sales continue; for as long as the
business is an ongoing concern.
64
STEP 7
Problem-Solution Fit/MVP
By this point, you have reached out to dozens Step 7 represents a new iteration cycle, If you haven’t already mentioned it, talk
of prospective customers successfully. You which will likely last longer than your first. about pricing with your customers. Before you
have also iterated (likely multiple times) on During this cycle you are developing a func- ask how much they might be willing to pay,
your core C-P-S hypotheses and you have rea- tioning product and getting it in front of your try to learn the value of your solution. It is
son to believe that you have determined that early adopters as quickly as possible. Though important to remember that value is not the
a viable market exists for your product. As Ash your product is not highly refined, you need same as cost. Does your product save time?
Maurya says, you have achieved “Problem- users to “test” your product versus their Money? Increase market share? Increase
Solution Fit,” and you have a strong, tested problem. This is not a classic “beta” program (their) customers’ satisfaction? The price
hypothesis for the right market segment. (though you might run one of those, too). your customer is willing to pay is somewhere
This is not about testing for bugs or usability, between what they tell you and what the real
From your many conversations, you have but rather testing for suitability – are you value of your product is to them.
identified a few who are willing to work with solving the users’ needs?
you to further define the precise functionality In addition, you should be going back to your
of the product to suit their needs. You have Circle back regularly with your early adopters, group of prospects to learn more about them
also identified others who wish to track Prod- including in-person meetings. Show them or as potential customers. In other words, you
uct Development, test functionality and who discuss your product evolution, and continue must validate the assumptions you document-
are generally optimistic about its suitability to explore the problems they are facing. Are ed in Step 2. From these answers, you will
to their needs. These two groups represent the problems different somehow? Are they eventually develop a “roadmap” for acquiring
your “early adopters” or “earlyvangelists,” as any less or more pressing? Is something else and converting your prospects into customers.
Steve calls them. bothering them more?
65
STEP 7
Exercise: Pin this to your forehead Again, there’s no one right answer. Here are
Am I making a product some thoughts to consider:
somebody needs?
1. You must do what it takes to keep your
Seriously, you need to ask this everyday - business alive (take consulting or custom
not to induce fear, uncertainty and doubt work if you must).
(“FUD”) - but to challenge you and your 2. Be committed to the vision (Don’t let the
team. It’s not about marketing or sales or lure of services income kill the product
product bugs. This second iteration through dream).
Customer Discovery is all about making sure 3. Choose a segment to focus on (70%
you are building something people need. resources into segment A, 20% in B, 10%
opportunistic).
Pitfalls to Avoid 4. If segment A fails due to lack of size,
Feature Creep money, or commitment – PIVOT!
Beware, you are now in feature creep danger
zone. People you are speaking with are asking
for different features. Some will dangle real
money. It’s difficult for you to say no - you
have real bills. Professional services dollars
are calling you, too. As you dig deeper, you
discover you are serving multiple segments.
What do you do?
66
STEP 8
Phase Gate II Compile | Measure | Test

Completing Step 8 represents the end of The next step of Customer Development is
the Customer Discovery phase of Customer Customer Validation, wherein you start validat-
Development. You know you are ready to exit ing your customer acquisition methods (with-
this gate when you have a strong hypothesis out “launching”), learn more about segments
for Product-Market Fit based on what you’ve you are serving, achieve Product-Market Fit,
learned, as well as a representative Minimum and firmly understand your business model.
Viable Product. Depending on your product
and your business model, viability should be Pitfalls to Avoid
measured by the existence of some amount of Don’t take shortcuts.
revenue. Your MVP should have functionality All your efforts to date are rendered moot if
that solves enough of your customers’ prob- you don’t have the discipline to pivot when
lem that they are willing to pay for it. (Which the market is indicating that you should. If
doesn’t necessarily mean they have paid, you harbor serious doubts about anything
but that they are using your product with the you’ve learned through the course of Custom-
understanding that it is a for-pay product.) er Discovery, you owe it to yourself (and any
other stakeholders) to dig deeper and learn
the answers to these nagging questions. Now
is the time to do it!
67
Case Study
Testing Towards a Scalable Business Model

YouSendit offers solutions for sending, re- He confirmed that others had the same needs For their first target users, they looked for
ceiving and tracking digital content. Ranjith through casual conversations (primarily) with communities that would need to send large
Kumaran, Founder and CTO of YouSendIt. IT people at various organizations. These files on a regular basis: “to start, we wanted
com, never thought that his early product were the people who were responsible for a simple value proposition,” Ranjith ex-
iterations were “intermediate MVPs” per se, helping frustrated users exchange large files plained. “Our first tag line was: File Too Big
but they had the elements required: mini- or important documents with remote col- for Email?”
mum functionality necessary to test a specific leagues, partners, and clients.
objective, based on specific user behavior. The YouSendIt team frequented message
We spoke with Ranjith about how he grew the Intermediate MVP-1 boards looking for creative profession-
company through a series of MVPs in search Bootstrapped at the time, Ranjith and his als – photographers, videographers, anyone
of the right business model. team’s first objective was to prove product creating digital content – and gave them free
viability. So they built an MVP designed to access to their site.
Ranjith discovered the pain of sharing large see whether anyone was interested and if so,
files due to his own frustrating experiences in prove their assumption that there was a viral The result was a resounding success. After
various professional roles in high tech start- nature to the product. approximately one year, YouSendIt was see-
ups. As a former Engineer, Manager of Sales ing over a million unique visitors per month!
Engineers, and Marketing Executive, Ranjith “Our early testing included two servers, Its viral-nature spread its use beyond the
witnessed the pain of failed attempts to send and literally a four page website – home, creative professional, since the recipients
large files through e-mail first-hand. His upload with a progress bar, upload com- of their file deliveries were often to clients
personal experience was his primary inspira- pleted, and download page. Our goal was outside of that segment. YouSendIt’s trac-
tion: “If you can’t get up every day and use that users would be able to browse to a tion was sufficient to raise a small sum of
your own product, or get up every day and see file and send it to multiple email recipi- seed money to keep the power on and after
a need for your product, it’s that much harder ents within 15 seconds.” another year, saw six million unique visits per
to get it off the ground.” month and based on that, closed a Series A
The key insight, Ranjith said, was to model round of funding successfully.
their user interface after Hotwire’s: “we said,
‘Let’s make sending large files as easy to use
as booking a hotel room or finding a flight.”
68
Case Study
Intermediate MVP-2 From there, YouSendIt looked at pricing

Incredibly, up until this point, YouSendIt had sensitivity, tested messaging and position-
no registered users! With professional money ing, optimizing channels, and expanded into
on board, however, this would soon change. business segments using “secure, reliable”
Having found their Product-Market Fit with a messaging, doubling their conversion rate.
free ad-supported product, and their sub- However, the pivot from free to freemium
scription-based business model still on paper, was not painless. As they concentrated on
YouSendIt faced the dilemma of how to best creating value for their core paying custom-
monetize their users. So they tested. ers, they lost about a third of their traffic who
decided that a secure, reliable, branded site
YouSendIt conducted a “bake-off” between was not what they wanted.
how much ad revenue they could extract from
free users versus getting people to pay. “The end result today,” Ranjith says, “is
a more targeted, engaged 7.5 million
“The subscription model just crushed unique visitors per month and over 12
anything we could do on the ad model. The million registered users.”
paid product was all about getting custom-
ers to pull out a credit card. Four minutes
after launch [of paid features] we had a
paying customer; that was the punch-line
there.”
69
Conclusion
Summary
In this book we aimed to articulate three lev- Many business books fall into the same trap: business. The philosophy of questioning your
els of Customer Development thinking: written by experts, who create models for assumptions leads to the practice of engaging
success based on invented narratives of past with your customers in specific ways that test
First and foremost, is the philosophy: “Be successes, completely ignoring the “grave- those assumptions.
skeptical about your assumptions.” In The yard” of businesses that followed the same
Black Swan, Nassim Nicholas Taleb writes narrative but failed. You “get out of the building” and test your
persuasively about the dangers of human core Customer-Problem-Solution assump-
beings’ predisposition toward believing their You are already skeptical of Customer Devel- tions. You define and build MVPs that test
own assumptions; about relying on “expert” opment and Lean Startups and the slew of technological or market risk - the willingness
opinions; about the appealing, albeit decep- emerging buzzwords and supple-to-the-point- of customers to pay for a specific set of fea-
tive practice of creating narratives about the of-meaningless terms. That’s great, more tures. You document and test your assump-
past in order to “predict” the future. power to you; we applaud your skepticism. tions regarding the mechanics of your busi-
But be philosophically consistent: peri- ness ecosystem including the participation of
Taleb: “The narrative fallacy addresses our odically take the time to question your own 3rd party entities and the mechanics of your
limited ability to look at sequences of facts expertise and that of your friends, partners customer conversion funnel. You create a
without weaving an explanation into them, or, and investors. Make the effort to test your Value Path that attempts to create a path for
equivalently, forcing a logical link, an arrow assumptions. mitigating high risk items first in the hopes of
of relationship, upon them. Explanations bind making major pivots as early as possible.
facts together. They make them all the more Second, is approaching Customer Develop-
easily remembered; they help them make ment principles within the context of your
more sense. Where this propensity can go business. For those wishing to dig a bit
wrong is when it increases our impression of deeper than the philosophy, we have defined
understanding.” the principles and concepts, and discussed
one way (there are certainly others) to think
through your business model in order to help
you apply Customer Development to your
70
Conclusion
The third level is the step-by-step “how-to- As Steve Blank says, the first step toward
do” Customer Discovery. For those seeking fundamentally changing how startups are
tactical guidance, we have provided detailed built is to “admit the busi-
steps on how to work your way through the ness environment is chaotic.
Customer Discovery processes, as well as Customer Development is a framework for op-
providing context with respect to product- erating in chaos. The objective is to see how
market fit and the other Customer Develop- quickly you can change guesses into fact.”
ment steps. Rather than creating a laundry
list of tasks or requesting answers to 100s We hope we have provided you a roadmap to
of questions, we’ve attempted to “teach you do exactly that.
how to fish” – to think about your business,
document your specific assumptions, find Feedback/suggestions/comments/questions
and interview the right people and engage encouraged.
them in the right way, and how to recognize
when it’s time to move forward or pivot. Take or leave Customer Development. But at
the end of the day (and this book), if you take
only one thing away from this book, it’s: “Test
Your Assumptions!”
71
Conclusion
Resources
Book related
Books
The Entrepreneur’s Guide to Customer Development website
The Four Steps to the Epiphany (http://amazon.com)
(http://www.custdev.com)
Crossing the Chasm (http://amazon.com)

Customer Development Q&A (http://questions.custdev.com)
The Black Swan (http://amazon.com)

Resources (http://market-by-numbers.com/tools_and_templates)
Groups/Meetups
Brant Cooper’s blog (http://marketbynumbers.com)
The Lean Startup Circle
Customer Development related blogs

Bootstrapper’s Breakfast
Steve Blank (http://steveblank.com)
Twitter Hashtags
Eric Ries (http://startuplessonslearned.com)
#CustDev
Sean Ellis (http://startupmarketing.com)

#LeanStartups
Dave McClure (http://500hats.com)
Technical Resource Lists

Andrew Chen (http://andrewchen.com)
Lean Startup Wiki (http://leanstartup.pbworks.com/)
Ash Maurya (http://practicetrumpstheory.com)

Start-up Tools (http://startuptools.pbworks.com/)
VentureHacks (http://venturehacks.com)
Ask YC Archive (http://gabrielweinberg.com/startupswiki/Ask_YC_Archive)
Cindy Alvarez (http://www.cindyalvarez.com/)
April Dunford (http://www.rocketwatcher.com)
72
Conclusion
About Authors
Brant Cooper Patrick Vlaskovits
Brant Cooper is a Customer Patrick Vlaskovits thinks

Development “practitioner,” that Customer Develop-
coach, mentor. If you know ment is gratifying and even
of a better term, please let fun. After reading The Four
him know. As a former Mar- Steps to the Epiphany, he
keting and Product Man- used LOIs and screenshots
agement executive, he also to validate a product idea
helps high-tech companies with marketing. (before writing any code) at a startup he
As a former IT guy, he helps his friends and founded and subsequently flamed out. As of
family with computer and network problems. late, he is back in the saddle and recently
He blogs at Market By Numbers and lives in secured seed funding to test a few MVPs. He
Encinitas, CA. He “earned” a BA in Econom- holds a Master’s in Economics from UC Santa
ics from UC Davis. This is his second book, Barbara and blogs at Vlaskovits.com.
the first being a failed attempt at a novel;
back in the day. Twitter: @vlaskovits
Twitter: @brantcooper
Drop us a line. Brant and Patrick can be reached at hello@custdev.com or (415) 347-1849
73

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by Brant Cooper & Patrick Vlaskovits

Introduction Customer Case Study: Concept Case Study:

Why this book? What Customer Early Adopters/Early

Know Thy Case Study: 8 Steps to Case Study: Conclusion

To the Whiteboard Overview Summary

Why this book?

Who Should Read This

What Customer Development is

At an abstract level, Customer Development

• Observing and describing a phenomenon

Figure 1: Steven Blank’s Four Steps of Customer Development

What Customer Development is Not

Three Levels of Learning

1. Everyone cares about social music

Geoffrey Moore, in his 1992 book Crossing

Figure 2: Moore’s Revised Technology Adoption Life Cycle Curve

• Innovators – • Early adopters – • Early majority – • Late majority – • Laggards –

• Early Adopters want to

The point isn’t that the individuals within a

Further, here are two seemingly paradoxical points to consider:

2. You can choose your market type.

“Non-Traditional” Business Models

A “free” business model is used by a busi-

Your positioning will form the basis of your

Minimum Viable Product (MVP)

All three columns are valid MVPs designed to

and perhaps the ability to demonstrate key to Action

Note that in this context “viable” is not lim-

Pivoting is at the heart of

Getting Out of the Building

If you like The Entrepreneur’s

Recommend and Share

Know Thy Business

Know Thy Business

First, draw a map of your ecosystem. Questions to consider:

Know Thy Business

Second, define the value proposition Examples:

Know Thy Business

Third, posit a final MVP

To develop assumptions regarding your final

Know Thy Business

Fourth, where’s the risk? If your risks are predominately marketing

Know Thy Business

Fifth, create your Value Path

Figure 5: Value Path Template

Know Thy Business

Know Thy Business

Figure 6: Basic Business Model Sketch

Know Thy Business

Figure 7: Business Model with Value Statements

Know Thy Business

Figure 8: Basic Business Model with Proposed MVP

Know Thy Business

Figure 9: Basic MVP with Risk Table

Know Thy Business

Figure 10: Business Model Value Path

Know Thy Business

8 Steps to Customer Discovery