The Customer Development Process
Four iterative steps to find and validate a scalable business model before scaling the company
The Customer Development Process is a four-step methodology that runs in parallel with product development. Unlike the traditional product development model that moves linearly from concept to launch, Customer Development assumes that finding the right customers and market is unpredictable and requires multiple iterations before you get it right.
The four steps are Customer Discovery, Customer Validation, Customer Creation, and Company Building. Each step is drawn as a circular track with recursive arrows, emphasizing that going backwards is a natural and valuable part of learning. The philosophy is that it is acceptable to get it wrong if you plan to learn from it.
The first two steps, Customer Discovery and Customer Validation, focus on searching for and validating the business model. They keep the startup at a low cash-burn rate until the company has proof from paying customers that it has a viable business. Only after validation does the company move to Customer Creation to drive demand and Company Building to scale the organization.
A critical feature of the model is the pivot loop between Customer Validation and Customer Discovery. If you cannot find enough paying customers during validation, the model returns you to discovery to rediscover what customers want and will pay for. The model also depends heavily on Market Type, as the speed and approach through each step varies dramatically depending on whether the startup is entering an existing market, creating a new market, or resegmenting an existing market.
Customer Development must remain synchronized with Product Development throughout. The two groups hold formal synchronization meetings at each step, and neither moves forward without agreement from the other.
- Finding the right customers and market is unpredictable and will require multiple iterations
- Going backwards is a natural and valuable part of learning and discovery, not a failure
- Keep cycling through each step until you achieve escape velocity to carry you into the next step
- Keep a startup at a low cash-burn rate until the business model is validated by paying customers
- Do not build non-product teams until you have proof of a business worth building
- Product Development and Customer Development must remain synchronized and operate in concert
- Market Type choices affect how the company deploys sales, marketing, and financial resources
- The goal is proving there is a profitable, scalable business for the company
- 1. Customer DiscoveryFind out who the customers for your product are and whether the problem you believe you are solving is important to them. Test whether the problem, product, and customer hypotheses in your business plan are correct by getting outside the building and talking to potential customers. The goal is to find a market for the product as specified, not to develop a new spec based on an unknown market. The initial product specification comes from the founders' vision, not focus groups.Pro tipWrite down all of your initial hypotheses before you leave the building. You will refer to them, test them, and update them during the entire process. These hypotheses cover the product, customer, channel, demand creation, market type, and competition.WarningDo not confuse Customer Discovery with collecting feature lists from customers or running focus groups. The job is to see whether there are customers and a market for the founders' vision.
- 2. Customer ValidationBuild a repeatable sales roadmap by selling the product to early visionary customers. This step proves you have found a set of customers and a market that react positively to the product by actually getting purchase orders. A customer purchase validates what polite words from potential customers cannot. Completing this step verifies the market, locates customers, tests perceived value, identifies the economic buyer, establishes pricing and channel strategy, and checks the sales cycle and process.Pro tipYou care less about generating revenue at this point than about finding a scalable and repeatable sales process and business model. Resist the instinct to speed up the process by adding more salespeople, as this only slows learning.WarningIf you cannot find enough paying customers, do not press forward. The model requires you to pivot back to Customer Discovery to rediscover what customers want and will pay for.
- 3. Customer CreationCreate end-user demand and drive that demand into the company's sales channel. This step is placed after Customer Validation to move heavy marketing spending after the startup has acquired its first customers, controlling cash-burn rate. The process varies dramatically depending on Market Type. Startups in existing markets can use traditional demand-creation tactics, while startups creating new markets need an early adopter launch focused on market adoption rather than market share.Pro tipBefore spending on demand creation, determine your Market Type. In a new market, spending money early to grab market share is a terrible idea because customer choice is not permanent and next year there will be many more available customers.WarningExecuting an expensive branding and advertising campaign in a new market is like throwing money down the toilet. Customers have no clue what you are talking about, and you have no idea if they will behave as you assume.
- 4. Company BuildingTransition from the informal, learning-oriented Customer Development team into formal departments with VPs of Sales, Marketing, and Business Development. These executives focus on building mission-oriented departments that exploit the company's early market success. This step only begins after the company has validated its business model and proven it has a repeatable sales process.Pro tipPremature scaling is the bane of startups. Do not staff up before you have validated the business model. Having 200 employees and a massive burn rate before proving business plan assumptions is a recipe for catastrophe.WarningScaling the company before completing the first three steps means you are spending money based on unproven assumptions. If any assumption is wrong, the burn rate becomes catastrophic.
Furniture.com followed the traditional Product Development model, spending seven million dollars building its website before knowing what customer demand would be, then launching a twenty million dollar advertising campaign. Design Within Reach took the opposite approach. Founder Rob Forbes was constantly out talking to customers and suppliers, treating each new catalog as a learning opportunity. Staff meetings were devoted to lessons learned and what did not work. Each subsequent catalog incorporated feedback and sales results from the last one.
InLook had eleven people in sales and marketing, a VP of Sales with an impressive pipeline, and zero revenue. The CEO had delegated all customer contact to the VP of Sales and had never personally validated the sales forecast. When the CEO finally called the top five accounts and asked if they would deploy the product for free, every single one said no. The entire forecast was built on polite interest, not genuine demand.
Steve Blank developed the Customer Development process over several years of working through a different approach to building startups. He realized that while educators and investors had adapted tools for executing a business model, there were no tools for searching for a business model. Searching is what startups actually do, and the Customer Development model captures the best practices of winning startups. Blank describes the process as sharing features with the OODA Loop, a war-fighting strategy articulated by John Boyd and adopted by the U.S. armed forces.