By Brian Laung Aoaeh October 15, 2012 3 Comments

What is Customer Discovery?[i],[ii]

 

We are now three chapters deep intoThe Startup Owner’s Manual – a recently published book by Steve Blank and Bob Dorf[iii]. You can catch up by reading Chapter 1, and Chapter 2. You can also read the main precepts of the Customer Development Manifesto here.

 

Why does it make sense not to invest enormous amounts of energy, time and other resources working on a fully baked business plan when the entrepreneur is still in the early stages of building a startup? There are four important questions every startup must answer before it makes sense to begin the process of building out the infrastructure of a company – remember that we differentiate between a company and startup. These questions are;

 

  1. “Have we identified a problem a customer wants to see solved?”
  2. “Does our product solve this customer problem or need?”
  3. “If so, do we have a viable and profitable business model?”
  4. “Have we learned enough to go out and sell?”

 

The first step in Customer Discovery focuses on answering these questions. So how an entrepreneur and startup founder go about answering these questions?

The entire process begins with recognizing that although the entrepreneur might have a “good idea” there is no way of knowing if anyone outside the entrepreneur’s immediate family agrees without a concerted and consistent effort to “get out of the building”. What does getting out of the building entail? In my opinion, getting out of the building involves getting in front of potential customers and gaining a deep understanding of how they experience the problem the entrepreneur wants to solve. It also involves gaining an understanding of the value that potential customers place on various approaches to solving. This is important because it will help the entrepreneur make choices early on that will affect how easily the startup can defend its market position and how wide a net it can cast for customers at the outset. For example, a startup that begins with a premium only offering stands the risk that a copycat will seize significant market share by quickly coming to market with a more affordable offering of a similar product.A startup that eschews the option to white-label its software for other companies that want to partner with it stands the risk that a direct competitor will come to market with that strategy and through a combination of tactics undercut the position it had secured in its market.

 

Once the entrepreneur has started getting out of the building, the entrepreneur must seek a problem/solution or product/market fit. In other words the startup must seek information that confirms that the customer segment it is seeking to target actually finds the startup’s value proposition compelling enough to want to pay for and use the product. During this process the startup must also confirm that there exists a mechanism by which it can continuously communicate with existing, new and not-yet customers about its value proposition in a manner that moves them to begin using and paying for the startup’s product.

 

At this point the startup ought to have enough information to start developing a product. Steve Blank and Bob Dorf suggest building a Minimum Viable Product (MVP) – a product with the narrowest possible feature set that will still make “earlyvangelists” want to buy it. What is an “earlyvangelist”? That is someone that is willing to buy an early product from a startup for any number of reasons – it could be that the MVP dramatically eases the stress that the earlyvangelist is experiencing at a major pain-point, it could be that the MVP gives the earlyvangelist a competitive edge over its commercial rivals, or in the case of a consumer product it could be that the earlyvangelist gets a psychic reward from being “first” to adopt a new technology, product, or service. Earlyvangelists are important because they provide the startup with a cohort of paying customers that the startup can use to test its hypotheses, its buying/selling process, its pricing structure as well as other elements of its business model.

 

Customer Discovery is an evolving process, and so startups should keep score by using the business model canvas. If you have no idea what the business model canvas is you may read our truncated discussion of business models and the business model canvas here. The business model canvas is a great tool for tracking the startup’s progress towards finding a scalable, repeatable, profitable and viable business model that can be executed as it goes through the transition from startup to company. The canvas should be updated often, and everyone working at the startup should understand the implications of the choices that the team has accepted in relation to the business model canvas.

 

In this chapter of the book, Steve and Bob describe the case of Iridium, a startup founded by Motorola and global partnership of 18 companies. It blew through $5.2 billion in its bid to build a mobile telephone system in the early 1990’s. They argue that the company went out of business mainly because it did not answer the 4 key questions that must be part of every startup’s customer discovery.

Let’s talk again in two weeks. On deck?The first phase of the Customer Discovery Process – Business Model Hypotheses, Chapter 4 of the book.



[i] Any mistakes in quoting from my sources are entirely mine.

[ii] This article is based on Chapter 3 of The Startup Owner’s Manual Vol. 1: The Step –by-step Guide for Building a Great Company, Steve Blank and Bob Dorf, Pub. March 2012 by K and S Ranch Publishing Division.

[iii] I have no relationship to the authors, besides the fact that I bought one of the earliest available copies of their book. I do not benefit from sales of the book.

About

Brian Laung Aoaeh is a partner at KEC Ventures. Before KEC Ventures he worked at Watson Wyatt, UBS AG and Lehman Brothers respectively. He holds a BA with a double major in Mathematics and Physics from Connecticut College, and an MBA from New York University's Leonard N. Stern School of Business. He is presently a participant in the CFA Program.

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    Tekedia » Customer Discovery Phase I: State Your Business Model Hypotheses?

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