Customer Development

Customer development is a formalized and iterative process for understanding customer needs and responding to them to arrive at a scalable and repeatable business model.

Most product managers appreciate a structured method to create workable strategies for their products. Customer development offers a compelling answer to this need. It asserts that assessing customer needs allows your company to find successful business models for your products.

In this entry, we’ll look at what customer development is, its history, and how it works. Furthermore, we discuss its benefits and pitfalls. Find out the four-step process you can use as a recipe for success at achieving product-market fit.

What is Customer Development?

Customer development is a formalized framework for building startups and new business ventures that is a part of the Lean Startup methodology. It typically occupies the middle step of the process:

  1. Business Model Development
  2. Customer Development
  3. Agile Engineering

While the third step, agile development, tackles the obstacles of not knowing the solution, customer development is helpful when you don’t know the problem. In other words, it allows you to:

  1. Understand the customer’s needs,
  2. Iterate on finding the right need to satisfy,
  3. Validate whether the business model that results from satisfying that need is repeatable and scalable,
  4. And then grow a product or business out of that validated model.

This iterative approach to problem identification stems from the experiences its creator, Steve Blank, had as an entrepreneur in Silicon Valley. In his memoir from the 1990s, Blank wrote that the startups he had worked with in the past followed common patterns.

Using the insight he derived from these observations, Blank realized that they are not simply smaller versions of larger companies. While larger organizations have an established business strategy they can execute on, startups are in a constant search for a business model that works for them.

Blank recognized that entrepreneurs could benefit from an approach that guides their search for “repeatable and scalable business models” in a systemized way. This recognition led to the development of his first book, The Four Steps to the Epiphany: Successful Strategies for Products that Win.

Years later, Blank started teaching classes on entrepreneurship at UC Berkeley and Stanford. Using his first book as the textbook helped to spur further refinements. These led to the birth of customer development as a formalized process and defined how it works.

How Does Customer Development Work?

Customer development works by iterating on the first step of the Lean Startup method. The business model, or the representation of how an organization or product creates, delivers, and captures value. Armed with the knowledge that companies or products in the startup phase don’t have a verified business model, customer development commits wholly to the search for the right one.

In line with the philosophy of finding the right business model, the customer development framework completely rejects the idea of a startup business plan. Blank famously holds to the mantra, “No business plan survives first contact with customers”. Here, a business plan is defined as an operating document that companies write to execute their verified business models.

The rejection of business plans in customer development stems from the reality that there are too many unknowns that stand in the way of a startup developing one that is successful. Because customers project their desires onto any business or product, contact with its target market necessitates changes to the static business plan.

To discover the right business model, the customer development process requires organizations to test different models in the real world. In the realm of product development, this involves developing and testing a Minimum Viable Product. You can then use this MVP to gather customer input and recommend necessary changes.

When using the customer development process, your job as a project manager involves driving the iteration of the MVP forward until you discover a successful, repeatable business model. To do this well, you need to take full advantage of the benefits of the process while avoiding its potential pitfalls.

What are the Benefits and Pitfalls?

Like any other framework for guiding the product development process, there are both strengths and drawbacks to customer development. We’ll explore both of them for you to keep in mind with your own startup.

Pros of Customer Development

Let’s start with the pros first and what they mean for a company that’s just starting out:

  • Customer development forces organizations to demonstrate that there is a justifiable and verified need for the product first. This requirement delays the investment of resources into building solutions. That is until you have the assurance that customers will benefit from the product.
  • If performed with an open mind and the willingness to accept that customer development can change more than the product, the process can lead to massively successful early pivots. Such as those experienced by YouTube, Slack, and Groupon.
  • If you commit to its iterative nature, the customer development process helps you maintain a healthy separation from your product. This distance helps you avoid the mistake of falling in love with your product without testing whether it truly provides the best approach to solving customer problems.
  • When done well, customer development is a relatively “cheap” pursuit. The use of MVPs to test business model hypotheses allows your organization to conserve cash or delay additional fundraising. Still while immersed in the process.

The Cons of Customer Development

On the other hand, there are also several cons to this process. For customer development in the product development space, these include:

  • The potential for committing too thoroughly to customer development, which can delay product development and increase time to market.
  • The chance of leaking your investigation of a particular market or area to competitors as you talk to customers. This ruins your chance to fly stealthily under the competition’s radar and catch them by surprise.
  • The need for your team to admit that they might not know everything. For highly experienced people, this may be difficult because they see themselves as subject matter experts.
  • The decrease in appetite for continually investing resources into customer development. This might be caused by finding a successful MVP in the initial round of research. This can lead to the competitiveness-compromising abandonment of the ongoing, iterative process.

If you want to sidestep these pitfalls, Blank’s four-step customer development process offers a proven solution.

The Four-Step Customer Development Process

While customer development was far from being fully fleshed out in Steve Blank’s first book, the four steps it defined continue to be the cornerstone upon which good customer development is built upon. The key advantage of basing a strategy on these four steps is the simplicity it provides. This simplicity makes it easier to avoid many of the common pitfalls we discussed earlier.

The four steps Blank recommends are:

  1. Customer Discovery

This step of the process involves capturing the vision of the business or product founder and turning it into a series of business model hypotheses. Armed with these hypotheses, you can develop a plan to test customer reactions to them and turn your findings into facts.

  1. Customer Validation

The customer validation step subjects each business model derived from discovery to validation tests that check whether it is repeatable and scalable. If none of the business models yields good results, the process returns to the previous discovery step.

  1. Customer Creation

The customer creation step marks the start of executing on a business model that passes customer validation. During this phase, your organization focuses on building end-user demand, which it can leverage into the sales channel to scale the product or business.

  1. Company Building

In the final company-building step of the process, the organization shifts away from the startup paradigm of validating business models. This transition progresses into developing a business plan based on the validated model. The process begins anew after this step to validate new models that can enrich the organization’s business plan.

Addressing Customer Needs Yields Relevant Products

By creating a product or business based on need, customer development promises to create products that resonate with their users. With this frame of mind, startups can improve their chances of not only surviving in a competitive market but also thriving. When used wisely, it can be the key ingredient for driving your product toward unprecedented success.