The Four Steps to The Ephihany
Successful strategies for products that win
by Steve Blank
Chapter 1: The Path to Disaster: The Product Development Model
... for the gate is wide and the road braod that leads to destruction, and those who enter through it are many. -- (Matthew 7:13)
The product development model: Concept --> Development --> Testing ---> Launch
To see what's wrong with using the product development model to building a startup, let's look at the model stage-by-stage.
Concept & Seed Stage
In the concept and seed stage, founders capture their passion and vision and turn them into a set of key ideas, which quickly becomes a business plan. Next, issues to be defined: what is the product or service concept? it is possible to build? is further technical research needed? what are the product features and benefits? who will the customers be and where will they be found?
Product Development
Alpha/Beta Test
In this stage, engineering works with a small group or outside users to make sure the product works as specified and tests it for bugs. Marketing develops a complete marketing communications plan, provides Sales with a full complement of support material, and starts the public relations bandwagon rolling. The PR agency polishes the positioning and starts contacting the long lead-time press while Marketing starts the branding activities.
Product launch and first customer ship
This stage mark the final step in this model and what the company has been driving for. With the product working, the company goes into "big bang" spending mode. Sales is heavily building and staffing a national sales organization; the sales channel has quotas and sales goals. Marketing is at its peak. The board begins measuring the company's performance on sales execution against its business plan. Since building the sales channel and supporting the marketing can burn a lot of cash, more fund raising is required. CEO looks at the product launch activities and the scale-up of the demand without a true understanding of customer's needs. And as Marketing and Sales flail around in search of a sustainable market, the company is burning through its cash.
An Emphasis on Execution Instead of Learning and Discovery
Before we can build and sell a product, we have to answer some very basic questions: what are the problems our product solves? Do customers perceive these problems as important or "must-have"? If we're selling to businesses, who in a company has a problem our product could solve? If we are selling to consumers how do we reach them? 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?
A company needs to answer these questions before it can successfully ramp up sales.
It's human nature that what you think you know is not always what you know. Your past experience may not be relevant.
For startups in a new market, these are not merely execution activities; they are learning and discovery activities critical to the company's success or failure.
Product development is a step-by-step, execution-oriented process. Each step happens in a logical progression with milestones and resources assigned to completing each step. Yet anyone who has ever taken a new product out to a set of potential customers can tell you a good day in front of customers is two steps forward and one step back. In fact, the best way to represent what happens outside the building is with a series of recursive circles -- to represent the iterative nature of what actually happens in a learning and discovery environment. Information and data are gathered about customers and markets incrementally, one step at a time. Yet sometimes those steps take you in the wrong direction or down a blind alley. You find yourself calling on the wrong customers. The ability to learn from those missteps is what distinguishes a successful startup from those whose names are forgotten among the vanished.
The Lack of Meaningful Sales, Marketing and Business Development Milestones
Most sales executives and marketers tend to focus on execution activities because there are measurable. A startup should focus on reaching a deep understanding of customers and their problems and discovering a repeatable roadmap of how they buy and building a financial model that results in profitability.
Premature Scaling
As customer behavior continued to differ from the predictions in business plan, the company might slowly realize that it has been overbuilt and over-designed. The business model may make sense only at the high volumes predicted on the spreadsheet. The average daily volume of orders might be significantly below the capacity the company needed to achieve profitability.
Death Spiral: The Cost of Getting Product Launch Wrong
Premature scaling is the immediate cause of the Death Spiral. Premature scaling causes the burn rate to accelerate. Sales, salaries, facilities, infrastructure costs, recruiting fees, and travel expenses start cutting into the company's cash flow. The pressure for revenue grows exponentially. Meanwhile the marketing department is spending large sums on creating demand for the sales organization. It is also spending "credibility capital" on positioning and explaining the company to the press, analysts, and customers.
The salespeople start inventing and testing their own alternatives, different departments to call on, different versions of the presentations. Instead of following a methodology of learning and discovering, the sales team has turned into a disorganized and disgruntled mob burning lots of cash. Back in the home office, the product presentation slides are changing weekly as Marketing tries to "make up a better story" and sends out the latest pitch to a confused sales organization. Morale in the field and in Marketing starts to plummet. Salespeople begin to believe "This product cannot be sold; no one wants to buy it."
Not All Startups Are Alike and Unrealistic Expectations
Startups fall into one of four basic categories:
1. Bringing a new product into an existing market
2. Bringing a new product into a new market
3. Bringing a new product into an existing market and trying to resegment that market as a low-cost entrant.
4. Bringing a new product into an existing market ant trying to resegment that market as a niche entrant.
The traditional Product Development Model at times succeeds in getting a product out the door into a known market with known customers (first category). However, since most startups are not going after known markets (falling into the second and third categories), they don't have a clue where their customers are. In addition, startups face enormous pressure from their investors to become profitable. Sometimes, to get funded, these new ventures make unrealistic financial assumptions (about market size, growth, or by simply ignoring the consequences of the Market Type they have chosen). These optimistic expectations become the plan of record, forcing execution toward unrealistic and unachievable goals.
Since the four types of startups have very different rates of customer adoption and acceptance, their sales and marketing strategies differ dramatically. Even, each Market Type has radically different cash needs. A company creating a new market might be unprofitable for five or more years, while one in an existing market might generate cash in 12-18 months. As a result, the Product Development Model is not only useless, it is dangerous.
So What's The Alternative?
The Technology Life Cycle Adoption Curve
Developed by Everett Rogers and popularized with Geoff Moore's notion of the "chasm". It introduces five thought ideas:
1. Technology is adopted in phases by distinct groups: technology enthusiasts, visionaries, pragmatists, conservatives, and skeptics.
2. The first two groups (tech enthusiasts and visionaries) are the early market. The next two groups (pragmatists and conservatives) are the mainstream market.
3. The shape of the overall market for any product approximates a bell curve. The early market starts small and grows exponentially into the mainstream market.
4. There is a "chasm" between each of the different groups, with the largest chasm between the early and mainstream markets. These chasms are caused by the different product needs and buying habits of each group.
5. The biggest problem in crossing the chasm is that few of the hard-won early marketing and selling lessons and successes can be leveraged into the mainstream market, as mainstream customers do not find early adopters to be credible customer references. Therefore, completely new marketing and sales strategies are necessary to win over this next, much larger group of customers.
Customer discovery --> Customer Validation --> Customer Creation --> Company Building
The Customer Development model is not a replacement for the Product Development model, but a companion to it.
by Steve Blank
Chapter 1: The Path to Disaster: The Product Development Model
... for the gate is wide and the road braod that leads to destruction, and those who enter through it are many. -- (Matthew 7:13)
The product development model: Concept --> Development --> Testing ---> Launch
To see what's wrong with using the product development model to building a startup, let's look at the model stage-by-stage.
Concept & Seed Stage
In the concept and seed stage, founders capture their passion and vision and turn them into a set of key ideas, which quickly becomes a business plan. Next, issues to be defined: what is the product or service concept? it is possible to build? is further technical research needed? what are the product features and benefits? who will the customers be and where will they be found?
Next step probes how the product will reach the customer and the potential distribution channel? At this stage companies start thinking about who their competitors are and how they differ.
They draw their first positioning chart and use it to explain the company and its benefits to venture capitalists.The distribution discussion leads to some basic assumption about pricing. If the startup is to be backed by venture capitalists, the financial model has to be alluring as well as believable. If it's a new division inside a larger company, forecasts talk about return on investment. Creative writing, passion, and shoe leather combine in hopes of convincing an investor to fund the company or the new division.Product Development
In this stage, everyone stops talking and starts working. The respective departments go to their virtual corners as the company begins to specialize by functions. Engineering designs the product, specifies the first release and hires a staff to build the product, estimates delivery dates and development costs. Meanwhile, marketing refines the size of the market and begins to target the first customers, hires a PR agency, hires VP of Sales. At the same time, planning began for a marketing and promotion program designed to strengthen the brand name, get customers to try the service in the first target market, build customer loyalty, and maximize repeat usage and purchases.
Alpha/Beta Test
In this stage, engineering works with a small group or outside users to make sure the product works as specified and tests it for bugs. Marketing develops a complete marketing communications plan, provides Sales with a full complement of support material, and starts the public relations bandwagon rolling. The PR agency polishes the positioning and starts contacting the long lead-time press while Marketing starts the branding activities.
Sales signs up the first beta customers (who volunteer to pay for the privilege of testing a new product), begins to build the selected distribution channel, and staffs and scales the sales organization outside the headquarters. The venture investors start measuring progress by number of orders in place by first customer ship, hopefully, if they are happy with the progress, then they are thinking of bringing in more money. CEO refines his fund-raising pitch, hits the street searching for additional capital. At the same time, the marketing buzz started with a PR blitz as hundreds of articles appeared.
Product launch and first customer ship
This stage mark the final step in this model and what the company has been driving for. With the product working, the company goes into "big bang" spending mode. Sales is heavily building and staffing a national sales organization; the sales channel has quotas and sales goals. Marketing is at its peak. The board begins measuring the company's performance on sales execution against its business plan. Since building the sales channel and supporting the marketing can burn a lot of cash, more fund raising is required. CEO looks at the product launch activities and the scale-up of the demand without a true understanding of customer's needs. And as Marketing and Sales flail around in search of a sustainable market, the company is burning through its cash.
An Emphasis on Execution Instead of Learning and Discovery
Before we can build and sell a product, we have to answer some very basic questions: what are the problems our product solves? Do customers perceive these problems as important or "must-have"? If we're selling to businesses, who in a company has a problem our product could solve? If we are selling to consumers how do we reach them? 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?
A company needs to answer these questions before it can successfully ramp up sales.
It's human nature that what you think you know is not always what you know. Your past experience may not be relevant.
For startups in a new market, these are not merely execution activities; they are learning and discovery activities critical to the company's success or failure.
Product development is a step-by-step, execution-oriented process. Each step happens in a logical progression with milestones and resources assigned to completing each step. Yet anyone who has ever taken a new product out to a set of potential customers can tell you a good day in front of customers is two steps forward and one step back. In fact, the best way to represent what happens outside the building is with a series of recursive circles -- to represent the iterative nature of what actually happens in a learning and discovery environment. Information and data are gathered about customers and markets incrementally, one step at a time. Yet sometimes those steps take you in the wrong direction or down a blind alley. You find yourself calling on the wrong customers. The ability to learn from those missteps is what distinguishes a successful startup from those whose names are forgotten among the vanished.
The Lack of Meaningful Sales, Marketing and Business Development Milestones
Most sales executives and marketers tend to focus on execution activities because there are measurable. A startup should focus on reaching a deep understanding of customers and their problems and discovering a repeatable roadmap of how they buy and building a financial model that results in profitability.
Premature Scaling
As customer behavior continued to differ from the predictions in business plan, the company might slowly realize that it has been overbuilt and over-designed. The business model may make sense only at the high volumes predicted on the spreadsheet. The average daily volume of orders might be significantly below the capacity the company needed to achieve profitability.
Death Spiral: The Cost of Getting Product Launch Wrong
Premature scaling is the immediate cause of the Death Spiral. Premature scaling causes the burn rate to accelerate. Sales, salaries, facilities, infrastructure costs, recruiting fees, and travel expenses start cutting into the company's cash flow. The pressure for revenue grows exponentially. Meanwhile the marketing department is spending large sums on creating demand for the sales organization. It is also spending "credibility capital" on positioning and explaining the company to the press, analysts, and customers.
The salespeople start inventing and testing their own alternatives, different departments to call on, different versions of the presentations. Instead of following a methodology of learning and discovering, the sales team has turned into a disorganized and disgruntled mob burning lots of cash. Back in the home office, the product presentation slides are changing weekly as Marketing tries to "make up a better story" and sends out the latest pitch to a confused sales organization. Morale in the field and in Marketing starts to plummet. Salespeople begin to believe "This product cannot be sold; no one wants to buy it."
Not All Startups Are Alike and Unrealistic Expectations
Startups fall into one of four basic categories:
1. Bringing a new product into an existing market
2. Bringing a new product into a new market
3. Bringing a new product into an existing market and trying to resegment that market as a low-cost entrant.
4. Bringing a new product into an existing market ant trying to resegment that market as a niche entrant.
The traditional Product Development Model at times succeeds in getting a product out the door into a known market with known customers (first category). However, since most startups are not going after known markets (falling into the second and third categories), they don't have a clue where their customers are. In addition, startups face enormous pressure from their investors to become profitable. Sometimes, to get funded, these new ventures make unrealistic financial assumptions (about market size, growth, or by simply ignoring the consequences of the Market Type they have chosen). These optimistic expectations become the plan of record, forcing execution toward unrealistic and unachievable goals.
Since the four types of startups have very different rates of customer adoption and acceptance, their sales and marketing strategies differ dramatically. Even, each Market Type has radically different cash needs. A company creating a new market might be unprofitable for five or more years, while one in an existing market might generate cash in 12-18 months. As a result, the Product Development Model is not only useless, it is dangerous.
So What's The Alternative?
The Technology Life Cycle Adoption Curve
Developed by Everett Rogers and popularized with Geoff Moore's notion of the "chasm". It introduces five thought ideas:
1. Technology is adopted in phases by distinct groups: technology enthusiasts, visionaries, pragmatists, conservatives, and skeptics.
2. The first two groups (tech enthusiasts and visionaries) are the early market. The next two groups (pragmatists and conservatives) are the mainstream market.
3. The shape of the overall market for any product approximates a bell curve. The early market starts small and grows exponentially into the mainstream market.
4. There is a "chasm" between each of the different groups, with the largest chasm between the early and mainstream markets. These chasms are caused by the different product needs and buying habits of each group.
5. The biggest problem in crossing the chasm is that few of the hard-won early marketing and selling lessons and successes can be leveraged into the mainstream market, as mainstream customers do not find early adopters to be credible customer references. Therefore, completely new marketing and sales strategies are necessary to win over this next, much larger group of customers.
Customer Development Model
The customer development model starts with a simple premise: learning and discovering who a company's initial customers will be, and what markets they are in, requires a separate and distinct process from product Development. The Customer Development model is intended to be everything the Product Development model is not. Where Product Development is focused on first customer ship, the Customer Development model moves learning about customers and their problems as early in the development process as possible. In addition, the model is built on the idea that every startup has a set of definable milestones no amount of funding can accelerate. More money is helpful later, but not now.
How narrow the gate and constricted the road that leads to life. And those who find it are few. (Matthew 7:14).
Most startups lack a process for discovering their markets, locating their first customers, validating their assumptions, and growing their business. The Customer Development Model separates out all the customer-related activities in the early stage of a company into their own processes, designed as four easy-to-understand steps: Customer Discovery, Customer Validation, Customer Creation, and Company Building.
Customer discovery --> Customer Validation --> Customer Creation --> Company Building
The Customer Development model is not a replacement for the Product Development model, but a companion to it.
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