When people decide they want to start a business, the majority of them believe that they’ll launch a product and customers will follow. When that doesn’t happen, they keep changing things and spending money, time, and resources; hoping something will go right. It is not then surprising that 9 out of 10 (90%) startups fail.
Simply put, many startup owners don’t analyze customers and markets in a disciplined, rational, and quantifiable manner before launching their products.
That is where the practice of “Customer Development” comes in.
Customer development was first proposed by Steve Blank back in the 90s when he was writing his memoir after retiring from Silicon Valley. Customer development aims to eliminate the unpredictability that comes with customer-based products, especially at the startup stage.
Today, in the world of business and entrepreneurship, customer development has become an essential practice.
In this article, we will discuss:
- Definition of customer development,
- Process of customer development,
- Real-world examples of the successful application of customer development.
Let’s begin with the definition.
Customer development is a four-step process that determines whether the product fulfills the potential customers’ and market’s needs.
By following four steps of customer discovery, customer validation, customer creation, and company building, customer development aims to gauge the interest in a product before execution. Once it is determined that the product is viable, customer development uses consistent feedback to focus on key areas of the product and help scale the business.
Customer development is a scientific and data-driven approach to confirming assumptions that an entrepreneur might have about their product before moving to the execution phase. It helps save valuable time, money, and resources and decreases the chances of losses.
There are four basic steps involved in customer development.
Customer discovery is the formulation stage of a business.
In this stage, the goal is to understand customers’ needs, problems, and pain points before developing the product. The data gathered in this stage is then used to develop a product that is more efficient, problem-solving, and closer to what people want.
After the discovery phase, it is time to test the product to assess its viability. This step gathers data on how customers respond to the product and which areas need improvement.
This is an essential step in determining whether the MVP or Minimum Viable Product is feasible, repeatable, scalable, and fit for the market or not.
This step of the process is all about creating or boosting demand for the product.
The goal is to acquire long-term customers to help scale the business. This involves using various marketing and sales strategies to generate awareness and advertise products.
Company building, as the name suggests, is a step that moves a business from an early-stage startup to a more structured and scalable business.
The focus here is to build a robust and skillful workforce and systems that will bring scalability. Finding appropriate employees for roles and raising capital with the help of investors are also parts of this step.
Even though the customer development process generally involves everyone, the product management, and marketing teams are more invested in this process. They are at the forefront of gathering data and analyzing feedback because of their proximity to the customers.
Importance of Customer Development
As already discussed, the majority of startups fail shortly after the execution. Regardless of the sky-high enthusiasm and an unshakable belief in the “product,” many entrepreneurs still fail to create a sustainable and successful business. Here’s why.
We are beings of emotion, and we often tend to overestimate our creativity, intellect, and acumen when coming up with ideas; this happens in business too. Without a proper framework for testing product ideas that generate actionable data, the likelihood of failure is quite high.
Furthermore, most new entrepreneurs think that all it takes to set up a successful business is a solid team of product engineers, a novel product, and financial capital, but that’s not enough.
Customer development allows startups to rely on cold hard data instead of basing decisions solely on creativity, intellect, or intuition.
From conception to execution, customer development rationally guides businesses every step of the way and saves them from wasted effort, money, and time. It begins with understanding what customer needs, whether you have the product that fulfills those needs, and how accurately it achieves that goal.
Even after execution, the constant feedback loop allows businesses to improve their best products/ideas and rectify their mistakes. It leaves no room for guesswork or a trial-and-error approach.
Conversely, without customer development, it is often too late when an entrepreneur finds the right product that would finally stabilize the business. By that time, all the resources are exhausted, and it is not feasible to keep pouring in time and money.
In short, an emotional approach to setting up a business can cloud our judgment, and customer development saves us from that by putting our trust in data.
Benefits of Customer Development
Identifies Your Customers
You can put all your effort and money into your products, but if you don’t have customers for them, you have no business.
The most significant advantage of using customer development is that you get to identify your customers first and build the product later. Even if you have already built a product, customer development helps you assess whether you have customers for it and make changes accordingly.
Lays Solid Business Foundation
Money and time are an entrepreneur’s currency, and they trade them for the growth of their business.
Without customer development, you are likely to run out of money and time before finding a product that resonates well with your customer. With appropriate customer development, you get to lay a solid foundation based on data and insights before you start investing more time and money into execution.
Helps You Find Your Strengths
Once you launch your product, customer development helps you hear what people say about it.
It helps you identify the best-performing features that attract most of your customers. Knowing this allows you to focus on key strengths and improve those features. It eliminates the anxiety that comes with thinking, “what am I doing wrong?”
Once you solidify the core money-making feature of your product and start making money, you can focus your attention on other areas of the business.
Makes Room for Rational Creativity
When you set out to execute a product, chances are big brands are already dominating that industry.
Customer development allows you to be creative while maintaining a level of rationality. With customer development, you can test new and innovative features your competitors are lacking. Once you get the customer’s feedback after the test run, you can decide whether it is worth going all in or trying something else.
Pitfalls of Customer Development
Like with everything else, there are also some downsides to implementing customer development. However, entrepreneurs can manage them with awareness and foresight.
- It can be Time Consuming. Appropriate customer development can take up months before the business moves to execution. This can discourage some startups that are eager to get into the market and make money.
- Can be Expensive. Customer development requires businesses to spend money to complete all the steps of the process appropriately. Even though it ends up saving money, the initial cost might discourage some entrepreneurs.
- Disagreement among Stakeholders. Customer development only provides you with data. How you interpret and draw decisions from that data is up to you. Sometimes, this can cause disagreement as stakeholders might not settle on a unanimous course of action.
- Can be Exhausting. Customer development is a non-linear process that makes a startup go back and forth between different stages before reaching an optimal solution. This can exhaust entrepreneurs who are used to a more linear approach.
Examples of Customer Development
Let us now look at real-world examples of businesses that successfully implemented customer development.
Today, Dropbox boasts an annual revenue of $1.9 billion. It is also cited as one of Silicon Valley’s most remarkable ventures. But it wasn’t always like that.
Even though Dropbox had a robust team of engineers, it failed badly at traditional marketing. At one point, they were spending hundreds of dollars on various marketing channels to acquire a single customer for a product that cost about $99.
That is when Dropbox ditched the traditional marketing approach and decided to implement customer development. They shifted their focus on listening to what customers had to say, improved their product gradually, and acquired enough customers with word-of-mouth marketing to become sustainable.
Airbnb is a household name for travelers who wish to have a comfortable stay but not pay the price of an upscale hotel. And Airbnb has customer development to thank for its success.
It implemented customer development strategies from the very start by focusing on customer discovery. They began by renting out air mattresses in their apartments to test the idea and whether it had a market. They discovered that people were willing to pay for such a solution (product-market-fit).
That is when they moved on to customer validation and released their MVP(Minimum Viable Product). They focused on San Fransisco first, and after their success there, they moved on to validate their USP and raised money with the help of investors. From there, they expanded the platform in other states and used various marketing strategies to acquire more customers.
Customer development is a practical framework that may seem expensive and time-consuming, but it makes up for it by saving more time and money spent on guesswork.
Today, it is an integral part of lean startup methodology and is considered an essential process by leading entrepreneurs. According to the father of customer development himself:
“The greatest risk is not the development of a new product, but the development of customers and markets.”
Without appropriate customer development, it is almost impossible to launch a business and make it successful, especially when every “new” idea or product is already present in the market.