The Customer Development

Model
Sales, Marketing, and Business
Development in a Startup

Steve Blank
[email protected]
 Goals of This Presentation

n Offer a model for how to organize “out of the

building” activities
n Understand how the Customer Development
model can help
• Methodology
• Checklist
• Model works for startups as well as follow-on
products of existing companies
• reduce customer and market risk

© 2003 Steven Blank, all rights reserved

How to Recognize a Company Funded
in the Bubble

© 2003 Steven Blank, all rights reserved

 Tough Times

n VC’s are back to basics

• $’s not available to cover execution errors
• CEO’s pay with their jobs (and sometimes company)
n Startups must go back to basics as well
n How?
n Build a model that minimizes errors and risk
n What risks?

© 2003 Steven Blank, all rights reserved

 More startups fail from
a lack of customers than from a
failure of product development

n We have process to manage

product development

n We have no process to manage

customer development

© 2003 Steven Blank, all rights reserved

 Product Development Model

Concept/ Product Alpha/Beta Launch/

Seed Round Dev. Test 1st Ship

© 2003 Steven Blank, all rights reserved

 What’s Wrong With This?

Product Development

Concept/ Product Alpha/Beta Launch/

Seed Round Dev. Test 1st Ship

- Create Marcom - Hire PR Agency - Create Demand

Marketing Materials - Early Buzz - Launch Event
- Create Positioning - “Branding”

© 2003 Steven Blank, all rights reserved

 What’s Wrong With This?

Product Development

Concept/ Product Alpha/Beta Launch/

Seed Round Dev. Test 1st Ship

- Create Marcom - Hire PR Agency - Create Demand

Marketing Materials - Early Buzz - Launch Event
- Create Positioning - “Branding”

• Hire First • Build Sales

Sales Sales Staff Organization

© 2003 Steven Blank, all rights reserved

 What’s Wrong With This?

Product Development

Concept/ Product Alpha/Beta Launch/

Seed Round Dev. Test 1st Ship

- Create Marcom - Hire PR Agency - Create Demand

Marketing Materials - Early Buzz - Launch Event
- Create Positioning - “Branding”

• Hire First • Build Sales

Sales Sales Staff Organization

Business
• Hire First • Do deals for FCS
Development
Bus Dev
9

© 2003 Steven Blank, all rights reserved

 What’s Wrong With This?

n Sales & Marketing costs are front loaded

n Sales, Marketing focused on execution versus learning and discovery
n First Customer Ship becomes the goal
n Execution and hiring is predicated on business plan hypothesis
n Heavy spending hit if product launch is wrong
n Unrealistic financial projections, assumes all startups are the same
=
You don’t know if you’re wrong until you’re out of
business/money

10

© 2003 Steven Blank, all rights reserved

 An Inexpensive Fix

Focus on Customers and

Markets from Day One

How?

11

© 2003 Steven Blank, all rights reserved

Build a Customer Development Process

Product Development

Concept/ Product Alpha/Beta Launch/1st

Bus. Plan Dev. Test Ship

Customer Development

? ? ? ?

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© 2003 Steven Blank, all rights reserved

Customer Development is as important
as Product Development

Product Development

Concept/ Product Alpha/Beta Launch/

Bus. Plan Dev. Test 1st Ship

Customer Development

Customer Customer Customer Company

Discovery Validation Creation Building

13

© 2003 Steven Blank, all rights reserved

Customer Development: Big Ideas

n Parallel process to Product Development

n Measurable Checkpoints for the CEO

n Not tied to FCS, but to customer milestones

n Iterative to represent reality

n Executed by a small team including CEO

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© 2003 Steven Blank, all rights reserved

 Customer Discovery:
Step 1

Customer Customer Customer Company

Discovery Validation Creation Building

n Stop selling, start listening

n Test your hypotheses

• Two are fundamental: problem and product
concept

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© 2003 Steven Blank, all rights reserved

 Customer Discovery:
Details

Phase 3
Phase 4
Customer Test
Discovery Iterate &
Product
Expand
Concept

To Validation

Phase 1
Phase 2 Hypothesis
Test
Problem
Hypothesis

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© 2003 Steven Blank, all rights reserved

 Customer Discovery Hypotheses

n Product n Distribution/ Pricing

• Features • Distribution Model
• Dependency Analysis • Revenue Model
• Benefits • Sales Cycle/Ramp
• Product Delivery Schedule • Channel strategy
• Intellectual Property • Pricing
• Total Cost of Ownership • Customer Organization Map
• Demand Creation
n Customer/Problem
• Types of Customers n Positioning and Differentiation
• Magnitude of the problem • Existing Market
• Customer Problem • New Market
• A Day in the Life of a customer • Redefine Existing Market
• Organizational impact
• ROI Justification
• Problem Recognition
• Minimum Feature Set

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© 2003 Steven Blank, all rights reserved

 Customer Discovery: Rules
n Rule 1:
Facts are outside the building, opinions are inside.

n Rule 2:
Solve a problem that customers say is important and
valuable

n Rule 3:
Does the product concept solve that problem?

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© 2003 Steven Blank, all rights reserved

 Three Types of Markets

Existing Market Resegmented New Market

Market

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© 2003 Steven Blank, all rights reserved

 Three Types of Markets

Existing Market Resegmented New Market

Market

n Market n Sales
• Market Size • Sales Model
• Cost of Entry • Margins
• Launch Type • Sales Cycle
• Competitive Barriers • Chasm Width
• Positioning

• Finance
• Ongoing Capital
• Time to Profitability
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© 2003 Steven Blank, all rights reserved

 Customer Discovery: Big Ideas

n Big Idea 1:
There are three types of startups. Which are you?

n Big Idea 2:
Are there customers for the product as spec’d?

n Big Idea 3:
Are you synchronizing customer and product
development early and often?

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© 2003 Steven Blank, all rights reserved

 Traditional organizations and titles fail

Typical Startup
CEO

VP Engineering VP Marketing VP Sales VP Business Dev

n People equate their titles with their functions

• But standard titles describe execution functions
• We need new titles = learning & discovery functions

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© 2003 Steven Blank, all rights reserved

 The Customer Development Team
Tasks Not Titles
Customer Development
Driven Startup

CEO

VP Product Dev Technical Visionary Business Visionary Business Execution

In Front of Customers

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© 2003 Steven Blank, all rights reserved

 Customer Discovery: Exit Criteria

n What are your customers top problems?

• How much will they pay to solve them?

n Does your product concept solve them?

• Do customers agree? How much will they pay?

n Draw a day-in-the-life of a customer

• before & after your product

n Draw the org chart of users & buyers

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© 2003 Steven Blank, all rights reserved

 Customer Validation:
Step 2

Customer Customer Customer Company

Discovery Validation Creation Building

• Develop a repeatable sales process

• Only earlyvangelists are crazy enough to buy

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© 2003 Steven Blank, all rights reserved

 Customer Validation:
Details

Phase 3 Phase 4
Customer
Validate Business
Validation
w/Orders Model
Verified

From Discovery
To Creation

Phase 1
Phase 2
Get
Develop
Ready
Sales
to Sell
Roadmap

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© 2003 Steven Blank, all rights reserved

 Customer Validation:
Finding an “EarlyVangelist”

EarlyVangelist

Has / Or can Acquire

a Budget

Has Put Together a Solution

out of Piece Parts

Has Been Actively Looking For a Solution

Know They Have a Problem

Has A Problem

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© 2003 Steven Blank, all rights reserved

Customer Validation: Big Ideas

n Big Idea 1:
The goal is build a repeatable sales process
Orders are proof that the process works

n Big Idea 2:
Only earlyvangelists are crazy enough to buy
unfinished products

n Big Idea 3:
No orders? Back to Discovery

n Big Idea 4:
Early customers help spec version 2
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© 2003 Steven Blank, all rights reserved

 Build the Organization Map

Dave Jones
CEO

Karen Rogers
VP Marketing

Neil Garrett Suzanne Kellogg

VP Database VP Merchandizing
Marketing

Our Potential
Customer

= in house competition 29

= issues to be addressed before a sale © 2003 Steven Blank, all rights reserved
 Build the Organization Map:
One Step at A Time
Dave Jones
CEO

Ben White Karen Rogers

VP Sales VP Marketing

Joe Black Neil Garrett Suzanne Kellogg

Dir. Sales Operations VP Database VP Merchandizing
Marketing

Leslie Elders
Financial Modeling
Our Potential
Customer

= in house competition 30

= issues to be addressed before a sale © 2003 Steven Blank, all rights reserved
 Organization Map

Dave Jones
CEO

Ben White Karen Rogers Roger Smith

VP Sales VP Marketing CIO

Joe Black Neil Garrett Suzanne Kellogg Phil Whitry

Dir. Sales Operations VP Database VP Merchandizing Director IT
Marketing

Leslie Elders Geoff Smith

Financial Modeling Financial Tools
Development
Our Potential
Customer

= in house competition 31

= issues to be addressed before a sale © 2003 Steven Blank, all rights reserved
 The Influence Map

Functional Technical

High Executive 1 2 CIO or Division IT executive

Low End Users 3 4 Corp. IT staff or Division IT

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© 2003 Steven Blank, all rights reserved

 The Sales Model:
Starts with What You’ve Learned

Educate & Present

Solution

Operational Technical

High Execs CIO

End IT
Users
Low Staff

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© 2003 Steven Blank, all rights reserved

 The Sales Model:
Adds Access, Assessment & Strategy

Access Assess Strategy Educate & Present

Needs Solution
Finance

Product Operational Technical

Mgmt

Sales High Execs CIO

Intro Account
Meetings Strategy
Corp. End IT
Mktg Users
Low Staff
Support

IT

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© 2003 Steven Blank, all rights reserved

 The Sales Model

Access Assess Strategy Educate & Present Sell, Sell, Sell, Sell
Needs Solution
Finance

Product Operational Technical

Mgmt

Sales High Execs CIO

Intro Account Implement Proposal
Meetings Strategy Plan
Corp. End IT
Mktg Users
Low Staff
Support

IT

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© 2003 Steven Blank, all rights reserved

 The Sales Pipeline
4. Understand
1. Prepare 2. Initial Meeting Existing Situation
• Hoovers, One • Ask tough questions a) Technology
Source, Web • Do Buy- In Demo
3. Qualify?
b) Organization
c) Competition

5. Custom Pitch
• Prepare! 6. Win Over IT 7. Define Problem 8. ROI Pitch
• Get NDA signed • Tech deep dive • Develop Action Plan • Prove the Value!

9. Exec Session
• Set expectations for
this meeting early on.

10. Solution 11. Formal Pricing 12. Negotiate

Session Proposal • Sales
• Detailed
• Tech discovery 13. Close!
• No surprises! • Finance
• Support
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© 2003 Steven Blank, all rights reserved

 Customer Validation: Rules

n Rule 1:
Build a sales roadmap, not a sales staff

n Rule 2:
Roadmap is an org chart plus an influence map

n Rule 3:
No sales staffing until the roadmap is proven

n Rule 4:
The sales roadmap becomes the sales pipeline

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© 2003 Steven Blank, all rights reserved

 Customer Validation:
Details

Phase 3 Phase 4
Customer
Validate Business
Validation
w/Orders Model
Verified

Back to Discovery if no Sale To Creation

Phase 1
Phase 2
Get
Develop
Ready
Sales
to Sell
Roadmap

38

© 2003 Steven Blank, all rights reserved

Customer Validation: Exit Criteria

n Do you have a proven sales roadmap?

• Org chart? Influence map?

n Do you understand the sales cycle?

• ASP, LTV, ROI, etc.

n Do you have a set of orders ($’s)

validating the roadmap?

n Does the financial model make sense?

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© 2003 Steven Blank, all rights reserved

 Customer Creation:
Step 3

Customer Customer Customer Company

Discovery Validation Creation Building

• Creation comes after proof of sales

• Creation is a strategy not a tactic

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© 2003 Steven Blank, all rights reserved

 Customer Creation:
Details

Customer Phase 3 Phase 4

Creation Launch Create
Demand

Phase 2 Phase 1
Positioning Set
Objectives

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© 2003 Steven Blank, all rights reserved

 Customer Creation: Big Ideas

n Big Idea 1:
Four Customer Creation activities:
• Year One objectives
• Positioning
• Launch
• Demand creation
n Big Idea 2:
Creation activities are different for each of the
three types of startups

n Big Idea 3:
There is no first mover advantage
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© 2003 Steven Blank, all rights reserved

 Customer Creation: Four Activities

Year 1 Positioning Demand Launch

Objectives Creation

Existing
Market

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© 2003 Steven Blank, all rights reserved

 Customer Creation: Four Activities

Year 1 Positioning Demand Launch

Objectives Creation

Existing • Market share • Differentiation • Create/drive • Credibility/

Market & credibility demand into delivery
sales channel
• Product • Existing basis of
differentiation competition

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© 2003 Steven Blank, all rights reserved

 Customer Creation: Four Activities

Year 1 Positioning Demand Launch

Objectives Creation

Existing • Market share • Differentiation & • Create/drive • Credibility / delivery

credibility demand into the • Existing basis of
Market • Product sales channel competition
differentiation

Reframing • Market • Segmentation & • Educate • Segmentation,

reframing + innovation market on delivery and
Existing
new market change innovation
Market share • Redefining
existing market • Drive demand • New basis of
& product into channel competition
differentiation

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© 2003 Steven Blank, all rights reserved

 Customer Creation: Four Activities

Year 1 Positioning Demand Launch

Objectives Creation

Existing • Market share • Differentiation & credibility • Create/drive demand • Credibility / delivery
Market • Product differentiation into the sales channel • Existing basis of
competition

Redefining • Market • Segmentation & innovation • Educate market on • Segmentation, delivery

Existing reframing & • Redefining existing market & change drive demand and innovation
new market product differentiation into channel • New basis of
Market
share competition

• Market • Vision & innovation • Customer • Credibility &

New adoption in new market education innovation
Market • Defining the new • Drive early • Mkt education,
market, the need & adopters into standards
the solution sales channel setting, & early
adopters
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© 2003 Steven Blank, all rights reserved

 Customer Creation: Type of Launch

Year 1 Launch
Objectives Type
Existing • Market share
Market

Reframing an • Market resegmentation

Existing Market & new market share

• Market adoption
New
Market

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© 2003 Steven Blank, all rights reserved

 Customer Creation: Type of Launch

Year 1 Launch
Objectives Type
Existing • Market share
Market
• Onslaught

Redefining • Market reframing & • Education &

Existing Market new market share appropriate share

• Market adoption • Education

New
Market

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© 2003 Steven Blank, all rights reserved

 Customer Creation: Rules

n Rule 1:
No demand spending until customer validation

n Rule 2:
Match the creation strategy to the company

n Rule 3:
Match the spending goals to year 1 objectives

n Rule 4:
You can’t get customers if they aren’t there

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© 2003 Steven Blank, all rights reserved

 Customer Creation: Exit Criteria

n Which startup strategy are you executing?

n Positioning tested & complete?

n Launch strategy match startup type?
n Demand creation activities match startup
type?

n Year 1 objectives match startup type?

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© 2003 Steven Blank, all rights reserved

 Company Building:
Step 4

Customer Customer Customer Company

Discovery Validation Creation Building

• Move from earlyvangelists to mainstream

customers
• (Re)build your company’s organization &
management

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© 2003 Steven Blank, all rights reserved

 Company Building:
Details

Phase 4
Scale Phase 3 Build
Company Transition Fast-Response
Development Team Departments
To Departments

Phase 1
Phase 2
Earlyvangelist to
Review Mgmt/
Mainstream
Mission-centric
Customer
Culture
Transition

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© 2003 Steven Blank, all rights reserved

Company Building: Big Ideas
n Big Idea 1:
Geoff Moore was right - there is a chasm, but…
• The chasm differs by market type

n Big Idea 2:
Management strategies need to change as the company
grows
• Development-team centric ⇒Mission -centric ⇒Process-centric

n Big Idea 3:
Mission-oriented culture is the “bridge” culture
• Unanimity and clear understanding of purpose, focus & direction
• Adaptability, empowerment, initiative

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© 2003 Steven Blank, all rights reserved

New Market Chasm

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© 2003 Steven Blank, all rights reserved

 New Market =
Hockey Stick Sales Curve

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© 2003 Steven Blank, all rights reserved

Existing Market Chasm

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© 2003 Steven Blank, all rights reserved

 Existing Market =
Linear Sales Growth

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© 2003 Steven Blank, all rights reserved

Resegmented Market Chasm

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© 2003 Steven Blank, all rights reserved

 Resegmented Market =
Complex Sales Growth

Year 7

Year 6

Year 5

Year 3 Year 4
Year 2
Year 1

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© 2003 Steven Blank, all rights reserved

 Evolution of Management Strategy

Customer Company Large

Development Building Company

Development Mission-centric Process-centric

Team-centric

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© 2003 Steven Blank, all rights reserved

 Mission Culture &
Fast Response Departments
n Not the traditional PR mission statement
• Mission + Intent
• Actionable words, achievable goals
• Driven down to the lowest operational units

n Organizing principle of Fast-Response Departments

• Based on John Boyd’s OODA loops
• Observe, Orient, Decide & Act

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© 2003 Steven Blank, all rights reserved

 Company Building: Exit Criteria

n Does sales growth plan match market type?

n Does spending plan match market type?
n Does the board agree?
n Is your team right for the stage of company?
n Have you built a mission-oriented culture?

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© 2003 Steven Blank, all rights reserved

 Summary

Customer Development

Customer Customer Customer Company

Discovery Validation Creation Building

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© 2003 Steven Blank, all rights reserved

 Summary: Why Should I Care?

n VC’s will no longer pay for startups mistakes

n You now have tools for:

• course correction
• management
• planning
• deliverables

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© 2003 Steven Blank, all rights reserved

[email protected]

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© 2003 Steven Blank, all rights reserved