Monday, January 7, 2013

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

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