Wednesday, June 2, 2010

The Four Steps to the Epiphany and the Customer Development Model

When I visited FlightCaster over spring break as part of the Duke Week-in-Cities trip, Jason Freedman (founder and CEO) suggested that we all read The Four Steps to the Epiphany by Steve Blank. FlightCaster went through the YCombinator program in 2009 and from what I gathered the book was required reading. I had never even heard of it and it was required reading! I just finished it and I certainly understand why that's the case now.

I have to admit the book wasn't necessarily what I expected. It certainly wasn't product management 101. It turned out to be much more about navigating the start-up process rather than specifics about how to design great products. But I can't believe I almost missed out on this one.

The book outlines the Customer Development model, a parallel technique to product development that is meant to guide you in the process of iterating and testing each part of your business model until you find one that is repeatable and scalable. The model starts with the Customer Discovery phase where you test your hypotheses (about the product, customers, distribution, pricing, demand creation, market type, and competition). Once you've battle tested your hypotheses, you move on to the Customer Validation phase where you validate that you have a scalable and repeatable business model before turning up your burn rate. Next, you turn up that burn rate in the Customer Creation phase where you create and drive end-user demand into your sales channel. You're positioning yourself in the market as you launch your product (albeit which has already been in the market for a while now selling to earlyvangelists). Finally, you enter the Company Building phase where you reorganize for scale (i.e. to cross the chasm).

There are some excellent other posts by Eric Ries (What is Customer Development?) and VentureHacks (How to develop your customers like you develop your product) that provide insights and perspective on the book. The main take-away for me is that it is indeed a must-read and perhaps the best book I've read outlining the roadmap that great start-ups go through. I saw much of this executed on in my last company (as employee 16 I started around the Customer Validation phase), but certainly not all of it.

The three main things that stuck out for me were the following (similar to Eric Ries' key points):
  • Find customers for the product as spec'd rather than customizing it for each - This is not at all what I would have expected. My intuition actually ran completely counter to this. My expectation was that you would identify a market (e.g. call centers), talk to all the customers you could in that market, and then put in all the features that they requested. Wrong. The goal instead is to find the minimum feature set to get early customers to adopt. Product companies scale very profitably, service business do not. You goal is to find the product that will scale. Building every feature request is not scalable ... so why approach things that way?
  • Market types make a huge difference - There's a huge difference between launching a product in an existing market vs. a new one (or a resegmented one). I never gave this much thought previously, but the book outlines a ton of reasons why this is the case and the implications this has on how you launch your product. Marketing should be approached very differently in different market types.
  • Organizing for the task at hand - The book also outlines how your company should be organized at different phases of growth. The way an established company in a mature market is organized is completely different than an early or mid-stage start-up. Functional departments, for instance, like marketing, sales, and business development don't necessarily make sense when you're still learning and iterating on your product and business model. In the early stages, you should organize to learn. Again, I would not have thought of this.
All in all a great book and should be required reading for any entrepreneur. I'm sure I'll re-read this later in my career (perhaps several times). The book has an impressive and incredibly useful bibliography that pulls together a ton of best practice thought as well - everything from marketing strategy to product design to war to sales to VC to manufacturing. I was happy that I had read many of the books listed, but interested to see so many I had never even heard of! A lot of good follow-up research to do. In addition, Scott Caruso suggested that I also read-up on lean startup practices (and agile development). Another great topic.

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