Using Customer Development Methodology for Startups

Most entrepreneurs believe that they can set up a startup and build an advanced innovative IT product. However, most of the startup businesses fail due to the mistakes they make. The first mistake is that they want to lead and manage the startup in the same way a company is managed. They don’t know what a startup is, what its attributes are, and how it differs from the company. The startup is an organization in its earlier phase which tries to enter an existing market or sometimes open a new market with innovative products. It can become a company by creating valuable products or services. It has some specific attributes such as low departmentalization, a wide range of control, centralized authority and low formalism. Moreover, the startup usually will be funded by personal savings or bootstrap financing. The major difference between startup and company is in their top objectives. The company is driven by profitability and stable long-term value, while startups are focused on top-end revenue and growth potential. The startup’s owners usually confuse a business model and business plan with one another. A business model is a framework to understand the way an organization works, but a business plan understands the future strategy and performance of an organization in the future. The business model framework is the most appropriate solution for startup rather than a business plan because it understands the current business and defines a growing business roadmap. It is better for startups to dump the static business plan and adopt a flexible business model. A business model development can improve the focus and clarity of what the business is trying to achieve. Thus, a startup initiated to seek, effectively develop, and validate a scalable business model. To create a business model, product vision and strategy are essential. The product vision describes the intention with which the product is being created regardless of time, technology or trends. The product strategy is a sequence of products that are planned to deliver for achieving the vision. IT products without vision and strategy will fail. Except for the product, startups should also consider users. The failure occurs when startups are only focused on building products, rather than the customer. Usually, the startups build the product based on their original idea, but when they want to sell it, no one buys it. Because their idea fails to respond to market demand. Consequently, the business never takes off, and eventually fails to meet its objectives.

To avoid the above-mentioned problems, the Customer Development Methodology (CDM) was defined as a guideline for startups. CDM is designed by Steve Blank to offer repeatable and scalable business models. It is a combination of users’ research and product development to avoid business failure. The first phase of CDM is to create successful business strategies and to do so, the product vision will capture the business facts and turn into a set of business model hypotheses. Business hypotheses are all about ‘How a business should work’, ‘What the target market is’, ‘How much pricing is’, and ‘Who the competitors are’. Then, a startup can post the hypotheses about each component of the business model and then revise them as the founders gather facts. To understand that a business model is repeatable and scalable, the customer's reactions to those hypotheses should be tested. If the tested hypothesis is invalid, the customer must be rediscovered. Thoughtful testing and learning are essential to constructing and designing the tests. To create those test, it is necessary to ask “What insight do I need to move forward?”, “What is the simplest test I can run to get it?”, and “How do I design an experiment to run this simple test?” One of the things that engineering founders are looking for is that these tests must have real code, hardware, or real product. But, most of the time, you can mock-up, create a demo or physical prototype to elicit valuable learning. That can build end-user demand and drives it into the sales channel. In this case, when a startup finds a valid business model, the transfer of organizations from a startup to a company will occur.  

CDM is useless unless the product development to be iterative with speed and agility. Using traditional product development methodologies such as waterfall makes products process deaf and dumb. For this reason, Agile methodologies have taken over traditional ones. They are repeatedly taking customer feedback and deliver products that iterate willingly around a Minimum Viable Product (MVP). MVP support startups to search and find the right path using a lot of experiments. As a result, an entrepreneur should remind that failure is an integral part of the startup learning process. The learning process demands frequent, agile iteration, followed by testing of the iteration, which often leads to another iteration or pivot. Iteration involves minor changes like altering a product price and pivoting involves substantial changes like identifying a better target market. Therefore, making continuous iteration and pivots are important for all startups. The most important advantage of CDM is saving money when searching for a repeatable and scalable business model. To succeed at CDM, everyone on the startup team must understand that this process is different from running a static plan. Everyone should embrace the process and know that this is a smooth, non-linear search for a business model that can take years. Always remember that the main purpose of a startup is not to be a startup forever. It wants to get the right product for a good market and know how to consistently get new customers at a lower cost than the revenue they make. In the end, the art of CDM aids businesses to gain insights into potential customers, anticipate problems, and know which products to build that would do away with startup’s problems and make the life of customers easier. 

References:

• The Lean Startup - Eric Ries