Why the Customer Development Model instead of the Product Development Model (4 Steps to the Epiphany revisited)

I read the book The Four Steps to the Epiphany about two and half years ago and was convinced that I would revisit the book in the coming years (see my earlier post where I summarized my initial thoughts on it).  Based on some current thinking I'm doing about new market entry, it seemed like the right time to do that.  As I'm re-reading the book, I'm taking some more detailed notes and thought I'd post them here for reference.  Apologies for them being a bit terse.

So, to start, why the customer development model instead of the traditional product development model?

• Primary risks in entering any market:
• do you understand the customers’ needs?
• do you understand the basis for competition in this market?
• will those customers purchase and adopt?
• Traditional approaches are terribly inefficient and often lead to disaster
• traditional product development model
• concept/seed
• vision
• what’s the product? (features, feasibility)
• who are the customers? (market research, customer interviews)
• how will it reach the customer? (pricing assumptions, R&D cost assumptions, sales and distribution approach, positioning relative to competitors)
• product development
• start building product
• refine target market (market size, target customer list)
• go-to-market prep (sales demo, collateral, hire PR, establish thought leadership, establish brand name, hire VP of Sales)
• alpha/beta test
• make sure product works (test with outside users, resolve bugs)
• marketing communications plan (sales support material, start PR, start contacting long-lead-time press)
• build sales org (sign-up beta customers, build distribution channels, staff and scale sales org)
• start measuring progress by number of orders
• launch
• scale sales org (set sales goal, track quotas, etc.)
• press event
• lead gen activities (trade shows, seminars, email, ads, etc.)
• board measures success on sales execution
• CEO starts fund-raising because this all costs money
• examples
• WebVan - built warehouses, purchases fleet of delivery trucks, built easy-to-use website
• Traditional approach only really relevant for certain products and markets
• specifically, new product into an established, well-defined market where the basis for competition is understood and its customers are known
• What’s wrong with this traditional approach?
• hint: “product development model” … where’s marketing, sales, customer acquisition, financing, etc.
• 1. Where are the customers?
• startups don’t fail because they lack a product
• they fail because they lack customers and a proven financial model
• 2. The focus on first customer ship date
• first customer ship date does not mean the company understands its customers or how to market or sell to them
• sales, marketing, biz dev all set their watches to ship date and work backwards → “fire, ready, aim”
• 3. Emphasis on execution rather than learning and discovery
• emphasis on getting things done fast
• marketing and sales assume prior experience is relevant, so they execute the same strategies that worked in the past
• basic questions that aren’t answered with a focus on execution:
• what are the problems that our product solves?
• do customers perceive these problems as important?
• who in a company has a problem that our product could solve?
• how do we reach consumers?
• how big is this problem?
• who do we make the first sales call on?
• who else has to approve the purchase?
• how many customers do we need to be profitable?
• what’s the average order size?
• you may think you know the answers to these questions, but you have to validate them before executing → humility leads to learning and discovery
• 4. The lack of meaningful milestones for sales, marketing, and business development
• sales → revenue and hiring are markers, signing “lighthouse” customers
• marketing → creating buzz, creating collateral
• these aren’t true objectives
• real milestones should be related to understanding customers and their problems, discovering a repeatable roadmap of how they buy, and building financial model that results in profitability
• 5. The use of product development methodology to measure sales
• sales works backwards from ship date
• they are not actually ready to sell, because they haven’t learned how to
• typical that VP of Sales quits or is fired after 9 months post-ship
• 6. The use of product development methodology to measure marketing
• marketing works backwards from ship date
• generate collateral (based on assumptions around appropriate positioning), start PR, conduct events, generate buzz, generate thought leadership (also based on assumptions)
• “marketing death march” -- you don’t know if any of this is right until first customer ship … but you have to be ready for ship so you had to make tons of assumptions to be ready (and you have no opportunity to try something different)
• 7. Premature scaling
• three docs that traditionally guide hiring and staffing: business plan, Product Development model (staff up by the time the product is done), revenue forecast.
• these are all execution documents -- none of them tell you to stop and learn from what’s actually happening
• result is that you scale your organization before you’re actually ready
• 8. Death spiral: the cost of getting product launch wrong
• premature scaling causes the death spiral
• burn rate accelerates → pressure for revenue grows exponentially → marketing spends even more trying to generate pipeline for sales (including “credibility capital” on positioning to analysts, etc.); spending also contributes to need for more revenue → sales misses their numbers because they don’t know how to go-to-market → fire VP of Sales and hire a new one → sales misses their number again → fire VP of Marketing (because you already fired the VP of Sales) → continue to miss numbers → fire the CEO → company implodes (runs out of money, has a down-round, or fire-sale to competitor)
• 9. Not all start-ups are alike
• not all start-ups are bringing a new product into an existing market
• most are bringing a new product into a new market or bringing a new product into an existing market and trying to resegment that market as a low-cost entrant (or niche entrant)
• the customer needs, basis for competition, and likelihood of adoption are dramatically different
• things like the Bass diffusion model and other sales forecasting techniques don’t work in other entry types
• 10. Unrealistic expectations
• a) the product development model can be used for activities that have nothing to do with product development → finding customers, a market, and a viable business model.
• b) customer development will move on the same schedule as product development
• c) all new products will achieve acceptance and deployment at the same rate (at first customer ship)
• d) to get initial funding, you provided totally unrealistic forecasts to investors that you are now expected to meet
• Traditional alternatives (or complements to) the product development model
• technology lifecycle adoption curve + the chasm
• used to guide sales and marketing as you “scale” post-launch
• why it’s not relevant early stage
• because everything you’re doing is way, way before the curve starts
• crossing any chasm is a luxury and shows that you are already succeeding
• makes you think that technology enthusiasts are part of the adoption curve, but they are not → they are very important, but none of them will be paying customers … ever
• the fact that it’s a nice, smooth curve invites the notion that it’s really a “sales execution” problem; even when considering the different segments and how you have to adjust sales and marketing for each, they are really dependent on how you’re entering the market (the start-up market type) and result in step functions rather than smooth progressions
• books about the curve all emphasize “execution and adoption” (you should be so lucky to have that problem) rather than “learning and discovery”
• instead of dreaming up ways to cross different chasms, you should instead focus on learning and discovery