By Brian Laung Aoaeh January 21, 2013 1 Comment

Customer Discovery Phase I: State Your Business Model Hypotheses?[i],[ii]

 

Author: Brian Laung Aoaeh

 

I’m picking up where I left off in our discussions of The Startup Owner’s Manual[iii]. We made it as far as chapter 3 before I took a detour to explore other topics.

 

A caveat to this post is that I can’t possibly do it justice without writing a really long post. So I urge you to check out Steve Blank’s course at Udacity. I am reading the book and taking that class simultaneously, and applying the lessons of Customer Development at work.

 

The first step in customer discovery is developing a rough estimate of market size and sketching out an initial business model for your startup using the business model canvas, which we have discussed in some detail here. Using the business model as a guide, develop a hypothesis brief for each component of the business model canvas. A hypothesis brief should contain a succinct statement of the hypothesis itself as well as a sufficiently detailed but brief outline of the information that makes the hypothesis a reasonable and valid one for that business model component.

 

The market size hypothesis is probably the most critical, even though it does not correspond directly to any of the business model canvas components. Investors like to back companies that target potentially large markets. At the same time, be careful to differentiate the total addressable market opportunity, the serviced addressable market, and your target market. Needless to say, your initial target market will be the smallest of these three. In most cases a bottom-up estimate is better than a top-down estimate.

 

The value proposition hypothesis should discuss the problem your startup solves for its customers. A segment of this brief should capture product features, and a minimum set of initial product features that early customerswould be willing to pay for. This is the minimum viable product, a bare-bones version of your product that solves the “core” problem your customers face.

 

The customer segments hypothesis forces you to answer the questions “Who are my customers?” and “What problems do my customers face?” The hypothesis brief should discuss customer problems, types, and archetypes respectively. Understanding “a day in the life” of your typical customer is a powerful way to understand your startup’s customers. Finally, Steve and Bob suggest you develop a customer influence map.

 

The channels hypothesis should differentiate between physical, web, and mobile channels. An important consideration during the development of this brief is whether your product fits the channel. At this stage it is important to pick the channel with the most potential and to focus on gaining customers and cultivating sales through that channel to the near exclusion of every other alternative. With very few exceptions, since you are still testing your hypotheses, developing your business model, and determining what product is best positioned to solve your customers problems avoid the temptation to launch via multiple channels.

 

The market-type and competitive hypothesis discusses the nature of the market into which your startup is entering and tries to anticipate the competitive landscape of the market that you will be attacking. You might consider it the second half of the value proposition hypothesis – your product solves a product for a group of customers, or a market. In broad terms a market already exists, or your startup is creating a completely new market where none existed previously. Your market entry strategy will depend on the market type you identify, as will your cost of entry into that market. In an existing market, your startup will have to position itself against the competition in a manner that ensures it can win given the basis upon which you have chosen to compete.

 

The customer relationships hypothesis describes how you get, keep and grow your customers. It is similar to the LBGUPS model, which we discussed here. There’s no need to emphasize that this is an important hypothesis brief – without customers or users your startup will die a not premature death. How you get, grow and keep customers is very channel dependent. Your analysis should take that into account, and should also factor in related costs.

 

The key resources hypothesis discusses how you’ll obtain resources that are critical to your startup’s operations but that you do not have within the startup.  These resources might be physical, financial, human or intellectual property. In each case it is important to list the resource and an outline of how it will be secured to enable the startup run its operations. For example, servers can be rented in the cloud at a cost that is lower than if you managed your own server.

 

The key-partners hypothesis describes the partners that are essential to enabling your startup to succeed. It also describes the value-exchange that keeps the partnership alive. For example, a startup might have all its development and design work done by a software engineering consulting firm established for that specific purpose. In this case the startup pays the software engineer money in exchange for software engineering related to its product. Key-partner relationships might take the form of a strategic alliance, a joint new business development effort, a key supplier relationship, or co-opetition. Certain of these are more common early in the startup lifecycle, and others are more common late in the startup lifecycle.

 

The key activities hypothesis summarizes your startup team’s understanding and assumptions about where its energies should be most focused in order to create the most value for its customers. These are those activities that you feel cannot be left to one of your startup’s key partners. A hardware startup might view design as a key activity, while assembly is left to a manufacturing partner in a low-cost manufacturing jurisdiction.

 

The revenue and pricing hypothesis brief is important because it ensures that the startup can extract value for itself and its investors. It asks 4 simple questions all related to revenue. The nature of the specific questions asked depends on the channel, but the essence of those questions remains the same. Together they should enable you determine if there’s a business worth pursuing along the path you have chosen for your startup.

 

The cost structure hypothesis brief forms the second half of the value extraction hypotheses – the first being the revenue and pricing hypothesis. Your startup’s cost structure must ensure that it can effectively deliver on the value proposition it has promised customers, and keep a portion of the revenues that the startup cultivates in the form of profits.  Here too the questions asked will be relatively simple, and will reflect the channel and the market type. For example, a startup whose only channel is the web will have a lower cost structure than one with a physical channel.

 

Once your hypothesis briefs are complete, your entire startup team should discuss the output. Seek contradictions, conflicts and inconsistencies. After this it will be time to get out of the building.

 

Let’s talk again in two weeks.



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

[ii] This article is based on Chapter 4 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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