Customer Discovery involves three phases:
- Preparation before leaving the building
- What I’m supposed to do when leaving the building?
- What should I do with the information I have captured?
Phase 1: Before leaving the building
- Pre-plan contacts:
- Plan in advance who you want to contact and come up with at least 100 names so you have plenty of opportunities to validate your ideas.
- Organize the contacts to be face-to-face or through Skype so you can get additional information from body language and have the possibility or answering questions from your contact.
- Make a last open question “What should I have asked you?”; this will allow the other person to provide you with valuable hints regarding the problem you’re trying to solve.
- On trick to get meetings with people is starting with a line like “Hi, my name is X, and I’ve been told you’re the smartest guy in the business, could I take 20 minutes of your time?”.
- Practice with your co-founder or employees the Customer interviews so you master them before addressing the real customers.
- Discovery is for Founders:
- Customer interviews must be done by the founders, because you’re not only trying to validate the hypothesis surrounding your ideas but also during the course of the interviews you will have the chance to iterate or pivot if the information provided by the Customer indicates you should pursue a different direction.
- Pass / Fail experiments:
- Prepare pass / fail experiments to validate your hypothesis making bets to yourself regarding the results you will get from the Customer interviews e.g. I bet the ideal customer is a woman between 30 – 40 years with two children.
Phase 2: Outside the building
- Be aggressive:
- You must be aggressive in the Customer interviews so you can push them to release valuable information.
- Conducting a Customer interview:
- Introduce yourself and state what you are looking for.
- Explain that the main goal for you is to understand how their business works and how you can improve it.
- Keep it casual to make it less formal and more open.
- Customer interview flow:
– Let the conversation flow, take care that you’re covering your key questions but allowing Customer to take control of the conversation and address other topics which could be useful or interesting.
- Sizing the opportunity and market size:
– The key goal of the customer discovery is to validate the hypothesis behind the product/market fit i.e. to check that we really know what the Customers are and that our value proposition covers their needs.
– Seize the opportunity: it is important that we estimate properly the market size so assuming everybody in the market buys our product, how big is that?
– What are our competitors in the market? If we are in a market where there are competitors we need to understand how we will differentiate ourselves from them. If there are no competitors that means that there are not yet any customers.
- Finding patterns:
– You need to find hints in the information received from the interviews as there may be hidden patters that you can exploit in your product / service.
– Perform interviews until you start hearing the same patterns / information once and again; that would mean that you’ve already understood the real problem.
- Looking for insights:
– When talking to Customers you have to grasp the insights of the market e.g. too bad you’re not doing X, Y, Z because none of the competitors do that.
Phase 3: Returning to the building
- Finding Early evangelists:
– In Customer discovery you’re looking for early evangelists, people who see your product even better than you do.
- Communicating your discoveries:
– Before communicate to your development team you need process the insights and make clear what the messages are.
– Communicate regularly with your development team on the collected data to get feedback from your team.
In order to achieve market disruption we need to apply strategy innovation to the way we approach the development of competitive strategies, business models and process.
Traditional strategy development is not enough if we want to achieve something more than linear growth.
Traditional strategy development uses a basis for its definition our mission and vision and analyzes external and internal environments to define the targeted position for the organization.
This approach focus on what others have done in the past or are planning to do, which doesn’t help to define an innovative approach.
We need radical changes if we want to find uncontested market spaces (Blue Ocean) and new breakthrough strategies and business models.
Design principles for Strategy Innovation
We can use existing design principles and processes to create new strategies that provide us a competitive advantage over other firms.
Design is not linear, so the approach to be followed is a dynamic process with different iterations:
- Collect information: the main goal in this phase is to collect market data, insigths from customers, competition and our own organization. This data will allow us to formulate the problem our organization is trying to solve.
Ideation: this phase involves several cycles of a) create models, prototypes and rough plans and b) validate the result against the problem we identified in the phase 1.
Testing: implement / execute the strategy and compare its results with the expected outcomes to evaluate its performance. In this phase it is important to apply the seven rules for sucessful strategy execution:
- Keep it simple: clearly describe what the company will and won’t do
- Challenge assumptions: ensure that the market and environment information is accurate
- Speak the same language: agree on a common framework to assess the performance
- Discuss resource deployment early: allocate resources to implement the strategy when needed
- Identify priorities: state clearly the strategic priorities
- Continuously monitor performance: track results against the plan
- Develop execution ability: make selection and development of managers a priority
A company has a market competitive advantage when it ouperforms its competitors.
Companies can achieve a sustainable competitive advantage by two means:
- By implementing a resource-based strategy resulting from the deployment or access of unique resources which allows improving effiency and effectiveness.
By having a privileged market position where competitors have no incentives to access the marketdue to the impossibility of replicating existing competitors’ setup in a profitable way. This is the case when firms have committed during a long time to: expand their production capacity, brand proliferation strategies for their products, or investing in intangible properties.
Companies must clearly identify what is the real source of their above-normal results so they can take better decisions on how to exploit and protect their market advantage.
Resource based strategies
In order to get a competitive advantage from resources, they must be unique and have to be acquired at a price below their discounted net present value.
Sustaining a resource based competitive advantage depends on how difficult is for competitors to build a similar resource position. Different factors such as property rights to scarce resources, geographical location and information assymetries can help to protect this competitive advantage.
Privileged market position strategies
In this case, the advantage is the result of the impact of strategic commitments that have long-term impact and are difficult to reverse as in general involve important sunk costs.
There are different sources of privileged market positions:
– Absolute cost advantages: consequence of long-term investments which allow reducing produciton costs.
– Network externalities: benefit derived from the use of a product increases with the number of consumers purchasing compatible products.
– Proliferation of product varieties: dominant firms can crowd a product space in order to gain market share at the expense of their rivals by producing several products adapted to specific product characteristics, locations or brands.
A business model describes the rationale of how an organization creates, delivers, and captures value.
The nine building blocks
The Business Model canvas contains 9 building blocks:
- Customer Segments: an organization serves one or several Customer Segments.
Defines the different groups of people or organizations an enterprise aims to reach and serve.
Customer groups represent separate segments if:
Their needs require a different offer
Are accessible through different distribution Channels
Require different types of relationships
Have substantially different profitabilities
Are willing to apy for different aspects of the offer
From whom are we creating value?
Who are our most important Customers?
Types of Customer Segments
- Mass market: there is no distinction between different Customer Segments. Same Value Propositions, Distribution Channels and Customer Relationships for a large group of customers with similar needs and problems.
Niche market: specific / specialized Customer Segments. The VP, DC and CR are all tailored to the specific requirements of the niche market.
Segmented: similar Customer Segments with slightly different needs and problems. The VP, DC, and Revenue Streams are slightly different for each segment.
Diversified: different group of customers with very different needs and problems. Totally different VP, DC and CR are required.
Multi-sided markets: two or more interdependent Customer Segments
Value Propositions: it seeks to solve customer problems and satisfy customer needs with value propositions.
Describe the bundle of products and services that create value for a specific Customer Segment. It is an aggregation of benefits taht a company offers customers.
What value do we deliver to the Customer?
Which one of our customer’s problems are we helping to solve?
Which Customer needs are we satisfying?
What bundles of products and services are we offering to each Customer Segment?
A Value Proposition creates value for a Customer Segment through a distinct mix of elements which may be quantitative (e.g. price, speed of service) or qualitative (e.g. design, customer experience). The following elements can contribute to customer value creation:
- “Getting the job done”
- Brand / status
- Cost reduction
- Risk reduction
- Convenience / usability
- Channels: value propositions are delivered to customers through communication, distribution and sales channels.
Describe how a company communicates with and reaches its Customer Segments to deliver a Value Proposition.
Channels serve several functions:
- Raise awareness among customers among a company’s products and services
- Help customers evaluate a company’s Value Proposition
- Allow customers to purchase specific products and services
- Deliver a Value Proposition to customers
- Provide post-purchase customer support
Through with Channels do our Customer Segments want to be reached?
How are we reaching them now?
How are our Channels integrated?
Which ones work best?
Which ones are most cost-efficient?
How are we integrating them with customer routines?
Channels have five different phases (each channel can cover some or all these phases). We distinguish between direct / indirect channels and between owned / partner channels.
- Awareness: how do we raise awareness of our products / services?
- Evaluation: how do we help customers evaluate our organization’s Value Propostion?
- Purchase: how do we allow customers to purchase specific products / services?
- Delivery: how do we deliver a Value Proposition to customers?
- After sales: how do we provide post-purchase customer support?
- Customer Relationships: customer relationships are established and maintained with each Customer Segment
Describes the type of relationships a company establishes with specific Customer Segments
Customer relationships may be driven by the following motivations:
- Customer acquisition
- Customer retention
- Boosting sales (upselling)
What type of relationship does each of our Customer Segments expect us to establish and maintain with them?
Which ones have we established?
How costly are they?
How are tehy integrated with the rest of our business model?
There are several categories of Customer Relationships:
- Personal assistance: communication with a real customer representative to help during the sales process or after the purchase
- Dedicated personal assistance: a customer representative specifically dedicated to an individual customer
- Self-service: no direct relationship with customer (all necessary means for customers to help themselves are provided)
- Automated services: simulate a personal relationship by recognizing individual customers or characteristics
- Communities: use of user communites to facility the communication between community members
- Co-creation: value is created also by users (e.g. youtube)
- Revenue Streams: revenue streams result from value propositions sucessfully offered to Customers
Represents the cash a company generates from each Customer Segment
Two different types of Revenue Streams:
- Transaction Revenues resulting from one-time customer payments
- Recurring Revenues resulting from ongoing payments to either deliver a Value Proposition to customers or provide post-purchase customer support
For what value are our customers really willing to pay?
For what do they currently pay?
How are they currently paying?
How would they prefer to pay?
How much does each Revenue Stream contribute to overall revenues?
There are several ways to generate Revenue Streams:
- Asset sale: selling ownership rights to a physical product
- Usage fee: the more a service is used, the more the customer pays
- Subscription fee: revenue is generated by providing access to a service
- Lending/renting/leasing: revenue is generated by temporarily granting someone exclusive right to use a particular asset for a fixed period of time in return for a fee
- Licensing: revenue is generated by giving customers permission to use protected intellectual property in exchange for licensing fees
- Brokerage fees: revenue derives from the intermediation services performed on behalf of two or more parties
- Advertising: revenues result from fees for advertising a product, service or brand
Each revenue stream may have a different pricing mechanism:
- Fixed: prededfined prices based on static variables
- List price
- Product feature dependent
- Customer segment dependent
- Volume dependent
- Dynamic: prices change based on market conditions:
- Negotiation (price is negotiated betwee tow or more parties)
- Yield management (price depends on inventory and time of purchase)
- Real-time market (established based on supply / demand)
- Auctions (determine by the outcome of competitive bidding)
Key Resources: key resources are the assets required to offer and deliver the previously described elements…
Key Activities: … by performing a number of Key Activities
Key Parternships: some activities are outsourced and some resources are acquired outside the enterprise
Cost Structure: the business model element result in the cost structure
I’ve just completed Steve Blank’s course called “An Entrepreneur’s checklist” in Udemy. In this course Steve Blank outlines some points that require attention from an emerging business startup. You can see the whole course here, for free.
Below you will find just a summary of the checklist as can be seen in the video course:
- Opportunity: Where does the idea come from?
- Innovation: Where is the innovation? Is it technology innovation or market innovation?
- Customer: Who is the user? And more importantly who is the payer?
- Competition: Who are the competitors? Who are the complementors?
- Sales: What’s the channel to reach the customer?
- Marketing: How do you create end user demand?
- What does Biz Dev do?: Deals? Partnerships? Sales?
- Business / Revenue Model(s): How do we organize to make money?
- IP / Patents / Regulatory issues: How and how long?
- Time to Market: How long does it take to get to market?
- Product Development Model: How you engineer and develop it?
- Manufacturing: What does it take to build it?
- Seed Financing: How much? When?
- Follow-on Financing: How much? When?
- Liquidity: How much? When?