Customer Development Posts

Investors often dismiss startups with the refrain, “That’s a feature, not a product.” I do the same. They usually mean that the feature, by itself, will not be adopted by consumers — the value proposition is too simple or narrow.

But sometimes the feature is the product.

Was Twitter a feature or a product? Google? PayPal?

They’re obviously products now. But before they were adopted by millions. Feature or product? Isn’t Twitter “just” the status message feature from Facebook? Isn’t Google “just” the search feature from Yahoo?

Sometimes the feature is the product

This isn’t surprising if you know a little bit about Eric Ries’ pivots:

“In a feature pivot, we select out a specific feature from our current product and reorient the whole company around that. A good example is Paypal realizing that their customers were gravitating to the email-payments part of their original solution, and ignoring the complex PDA-based cryptography solution. In order to do this kind of pivot, you need to pay close attention to what customers are really doing, not what you think they should do. It also requires abandoning the extra features that make it hard for new customers to discover what’s really valuable about the new, simplified solution [emphasis added].”

Or if you know about Sean Ellis’ gratifying experiences:

“The majority of our project focus at 12in6 recently has been helping startups find their core user perceived value and exposing it in messaging optimized for response. Your objective should be to remove complexity from the initial user experience and messaging in order to highlight this core user perceived value. Often this means burying or even completely eliminating features that don’t relate to this gratifying experience [emphasis added].”

How can you tell if a feature is really a product?

You can wait for customers to start adopting it, see if they love it, and then try to jump in as an investor or an employee.

What if you don’t want to wait for customers to love it? Then you’ve got two options:

  1. Invest in lots of startups like Y Combinator or Ron Conway — expect most of them to fail and a few to succeed wildly.
  2. Work with a team that knows how to implement the theories of Eric Ries, Sean Ellis, and Steve Blank. Bet on the team and plan to pivot your way to product/market fit. Needing to seem certain about the future, so you can recruit and raise money, works against this approach.

Those are the only ways I know how.

What other features were really products? Posterous comes to mind.

Image Credit: Jack Dorsey

If you’re trying to implement customer development at your startup, you’ll learn more from these 3 case studies than anything else I’ve seen. I consider each of these a “must-read”. I’ve quoted some great bits from each case study, but make sure you click through and read each one in full.

1. Using an LOI to get customer feedback on a minimum viable product:

“We decided from the get-go that, while we clearly saw the benefits and necessity of our concept, we would remain fiercely skeptical of our own ideas and implement the customer development process to vet the idea, market, customers etc, before writing a single line of code.

“My partner was especially adamant about this as he had spent the last 6 months in a cave writing a monster, feature-rich web app for the financial sector that a potential client had promised to buy, but backed out at the last second.  They then tried to shop the app around, and found no takers.  Thousands of lines of code, all for naught — as is usually the case without a customer development process. (See Throwing away working code for more on this unfortunate phenomenon. – Eric Ries)

“We made a few pencil drawings of what the app would look like which we then gave to a graphic designer.  With that, the graphic designer created a Photoshop image. We had him create what we called our “screenshots” (which suggests that an app actually existed at the time) and had him wrap them in one of these freely available PS Browser Templates. Now armed, with 4 “screenshots” and a story, we approached our target market, some of which was through warm introductions, and some, very literally, was through simple cold-calling.

“Once we secured a meeting, we told our potential customers that we were actively developing our web app (implying that code was being written) and wanted to get potential user input into the development process early on.  Looking at paper print-outs of our “screenshots”, no one could tell that this was simply a printout of a PSD, and not a live app sitting on a server somewhere. We walked them through what we thought would be the major application of our product.  Most people were quite receptive and encouraging…

“On the third visit, we pressed those who saw merit in the idea to sign a legally non-binding Letter of Intent.  Namely, that they agree to use it free of charge if we deliver it to them and it is capable of X, Y and Z.  And not only do they agree to use it, but that they intend to purchase if by Y date at X price if it meets their needs.”

The author of this case study is currently looking for a technical co-founder.

2. proof that we’re not (completely) crazy:

“The few customers we talked to had little in common except for the core problem we were solving. Two had very similar job titles, (let’s call them Ditch Diggers), so we ran a facebook ad with the job title at the top of thead, which was roughly, “Ditch Digger? Feeling spread thin? Click here to complete a survey and tell us about it.” Facebook ads were the easiest because we could pick types of people — we have yet to create an effective adwords campaign. We offered $10 Amazon gift cards to complete a 15 minutephone interview.

“What followed next was absolutely amazing. When we talk to a Ditch Digger it’s like every response has an exclamation point. “Yes, that’s me exactly!”, “I can’t believe you’re building a tool for this, thank you!”, “Here are 5 emails of other people that will want this!”, “It’s only (number that was so high we had to force each other to ask)/month? Great deal!”

3. How I built my Minimum Viable Product:

“I filled out a set of hypothesis worksheets in Steve Blank’s book on product, customer, channel pricing, demand creation, market type, and competition. I would recommend everyone formalize this process. My initial scan of the worksheets made me believe I already knew all the answers. I involved Sasha in the process, and discussions that I thought would be 30 minute conversations turned into 2 hour discussions as she questioned almost all my assumptions… Yes, I still love her after that… The biggest mind shift following a customer development process is from thinking you know something to testing everything you know.

“We built out our initial customer problem presentation and decided to target people just like us – busy parents with young kids.

“Our top 3 problems where:

  1. Sharing lots of photos and videos is a hassle
  2. A lot of services downsize the images so the quality is poor
  3. Notifying family and friends of updates was manual and a chore

“We were able to find the initial batch through friends and daycare, and subsequent batches through follow-on referrals. I’ll add that it is very important to talk to complete strangers to keep objectivity in check. Family and friends can be too kind sometimes and really lead you down the wrong path. We debated paying for their time with gift cards or doing a DSLR camera raffle and in the end decided to just lay out our objectives and ask for 30 mins of their time. That was enough.…

“During the interview, we were particularly interested in learning what their sharing workflow was like. We set up the stage and let them tell us everything they did with their photos/videos taking them from camera to shared, what they wished they could change, and the magical pricing questions: Would they use a solution like the one we were envisioning if it were free? Would they use it if it were $X/yr? X changed from customer to customer but we kept it as real as we could.

“We talked to enough people until their answers started sounding the same…

“Our revised top 3 problems were:

  1. Sharing lots of photos and videos is a hassle (stayed the same)
  2. Requiring visitors to signup is annoying
  3. Photo gallery design was too busy or complicated

If you’re crazy for case studies, I’ve found at least a billion at the Lean Startup Circle. Let me know if you find any good ones there.

Thanks to Atlas Venture for supporting Venture Hacks this month. This post is an interview of Fred Destin — one of Atlas’ general partners — by David Woodward, a journalist and blogger. If you like it, check out Fred’s blog and tweets @fdestin.

A few days ago, I had an interesting chat with Fred Destin, Atlas Venture‘s ebullient technology partner. Atlas bought a stake in the property website Zoopla at the beginning of 2008, which wasn’t exactly a fun time to be involved in the property game. It was also a pretty difficult period to source capital in any sector — all in all an investment climate fit to make even the coolest of VCs twitch. Destin, who has a seat on Zoopla’s board, adds that at that stage, his firm’s investment was in “two people and some PowerPoint slides”, hardly an invulnerable guarantee of success.

It is often said of European VCs that they lack the gumption of the Sand Hill road mob — the kind of formalised chutzpah that turns garage upstarts into grade A businesses. European investors, it is said, need data, data and more data, followed by proof of concept, before they are willing to stump up any capital. And to some extent that remains true. But Destin added an interesting spin.

The problem with European investors, he told me, was that even when faced with unmistakeable proof of concept, they tend to undercapitalise, thus hampering their investment’s ability to scale to its full potential. Put it this way: not many US VCs get accused of undercapitalising a potential winner.

He also did a great job of making early-stage investments sound very much like sticking it all on red and preying to the gambling gods for clemency. Destin says he actually prefers working with unknowns. He says:

“Our job is to manage risk proactively. We don’t think about it as a casino at all. We scrutinise and think about it very hard. But it’s our job to take these shapeless risks. I am early-stage, my natural DNA is around early-stage. It’s tough to make investment decisions without much data, [but] that’s what makes it exciting. Your average market practitioner does not how to deal with that level of risk. You take data away and they panic.”

Conversely, Destin says he revels in a vacuum of information.

I profess ignorance and I use that as a tool. I can assess market attractiveness. I can assess the management team. We then make absolutely no assumption as to what’s going to work because if you do, you lock yourself into a strategy that you haven’t [yet] proven. You tend to be internally led rather than market led. This is where the risk may seem inconsiderate because you’re willfully declaring ignorance about the market you’re addressing.”

But ignorance allows you to

“…force yourself to be smart. You use what you know in terms of company building, supporting entrepreneurs, discovering the market. We will design the product around what the market needs with an intuition, but then we’ll go and test it. We don’t want to be smarter than the market we are entering.”

And here’s Destin’s view on Europe’s investment weakness. There are, he says, three stages involved in readying a start-up for potential greatness:

“At Atlas we call it ‘prove-build-scale’. You spend very little at the prove stage. You have 6-15 people, spend as little as you can proving the hypothesis. The build stage is [about] scaling up the management team, adding talent, putting in place the technology you need to accelerate. Only when you’re ready can you understand how to scale properly, go into a big investment round and hit the accelerator.

“I think that Europe usually fails on the third category: we tend to undercapitalise the businesses that are doing well. And this is where we get a competitive disadvantage to the US. They have a tendency to overcapitalise early, but when they scale they scale well because they are able to raise repeat large rounds of money to really capture an opportunity.”

If you like this post, check out Fred’s blog and his tweets @fdestin. If you want an intro to Atlas, send me an email. I’ll put you in touch if there’s a fit. Finally, contact me if you’re interested in supporting Venture Hacks. – Nivi

I recently re-connected with an up-and-coming venture capital Associate who thanked me for introducing her to the masterworks of Steve Blank and Eric Ries. I told her to check out Sean Ellis’ blog, and mentioned that I’ve learned just as much from Sean.

Later that night, she sent me a note: “Sean Ellis is awesome. Thanks so much.” Let me tell you why Sean is awesome.

First, Sean lead marketing from launch to IPO filing at LogMeIn and Uproar. He later worked with Xobni (Khosla Ventures, First Round Capital), Dropbox (Sequoia Capital), Eventbrite (Sequoia Capital), Grockit (Benchmark Capital), Flexilis (Khosla Ventures), eduFire (Battery Ventures)…  the list goes on. So all of his theory is backed by a wealth of experience across a broad range of startups.

Second, his startup pyramid changed my life and increased my bench press by 75 lbs. This is the best model I’ve seen on how to build a startup. Read it.

Finally, he shares a lot of his knowledge for free on his blog. Here are extracts from a few of his posts. Make sure you click through and read all of them in full. I read his blog from front-to-back when I first discovered it (start with the newer stuff).

When Should a Startup Start Charging?

“I’ve recently changed my long held belief that all startups should charge immediately upon the release of a new product.  I now believe that non-enterprise targeted startups should only charge once you have achieved product/market fit.  As explained in this earlier post, I define product/market fit as at least 40% of your active users saying they would be “very disappointed” if they could no longer use your product…

“For startups targeting enterprises, it actually does make sense to charge before reaching product/market fit.  This is the best way to help the enterprise figure out how to get value from your product (somebody on the inside will be motivated to work with you to unlock value since they’ve already spent the budget).  If you haven’t charged anything, your attempts to engage the customer and find value are likely to be perceived as an aggressive sales annoyance rather than genuinely helpful…

“Startups often delay implementing a business model claiming “we’re focused on growth right now.” But once you’ve achieved product/market fit, most startups will grow faster with a business model (I wrote a post on this earlier).  A business model gives you rational constraints within which you can execute very aggressively – otherwise you are held back by fear that you may be wasting money on paid marketing programs.”

The Startup Pyramid:

“Product/market fit has always been a fairly abstract concept making it difficult to know when you have actually achieved it…

“I’ve tried to make the concept less abstract by offering a specific metric for determining product/market fit. I ask existing users of a product how they would feel if they could no longer use the product. In my experience, achieving product/market fit requires at least 40% of users saying they would be “very disappointed” without your product. Admittedly this threshold is a bit arbitrary, but I defined it after comparing results across nearly 50 startups. Those that struggle for traction are always under 40%, while most that gain strong traction exceed 40%. Of course progressing beyond “early traction” requires that these users represent a large enough target market to build an interesting business…

“If you haven’t reached product/market fit yet it is critical to keep your burn low and focus all resources on improving the percentage of users that say they would be very disappointed without your product. Avoid bringing in VPs of Marketing and Sales to try to solve the problem. They will only add to your burn and likely won’t be any better than you at solving the problem. Instead, you (the founders) should engage existing and target users to learn how to make your product a “must have.” Sometimes it is as simple as highlighting a more compelling attribute of your product – but often it requires significant product revisions or possibly even hitting the restart button on your vision.”

To Pay Or Not To Pay To Acquire Users?

“I recently heard a VC say that startups “should spend the least amount of money possible on marketing.”  This is a healthier attitude than the opposite prescription of undisciplined land grab, but a better approach is pure ROI marketing.  Marketing opportunities that offer a fast payback with additional profit margin are a key component for reaching your startup’s full market potential…

“If your growth is accelerating, you will attract competition.  And this competition will likely be savvy enough to replicate the customer acquisition and monetization approaches that you worked hard to invent.  So it is important to make it as difficult as possible for them to get traction.  I know some of you are saying “but your recent post told us to ignore the competition.”  My point was not to ignore the competition forever, simply to ignore them while you are figuring out a repeatable, positive ROI way to acquire customers. Competition (especially those that are spending irrationally) will distract you from this critical task.

“But once you have optimized the first user experience and introduced a business model that generates sufficient revenue to fund user acquisition, it’s time to focus your marketing efforts to aggressively build new customer acquisition channels and scaling existing channels – both free and paid.”

I am a fan. And so can you.

Ash Maurya‘s new blog documents his journey through customer development. This is the most by-the-book application of customer development that I have ever seen. I am following this blog very closely; it’s thoughtful and well written. Some highlights:

Is AdWords the right MVP for your product?

“For Timothy Ferris, his MVP for testing new products that don’t yet exist (micro-testing) comprises of a landing page, signup page, and Google Adwords to drive traffic. However, this approach presupposes that:

  1. You can create a good landing page
  2. You can write good adwords copy
  3. Adwords is a viable distribution channel for your product

“Unlike a book title or some other other physical product, startups are usually characterized by products where the problem and solution are unknown and have not yet been validated which makes writing good landing page copy hard, and good Adwords copy even harder (you only get 25 characters for your headline!). At best, you can guess. But starting with that approach is a surefire way of dumping a lot of money on Google Ads fast. Plus the return on learning is low – When your click-through-rate is low, or the bounce rate high, you get zero visibility into why. Was it poor copy, poor product/market fit, or both? And don’t even get me started on how expensive CPCs have gotten in competitive markets.”

Have you ever stated or revised your problem hypotheses?

“Our top 3 [problem hypotheses] were:

  1. Sharing lots of photos and videos is a hassle
  2. A lot of services downsize the images so the quality is poor
  3. Notifying family and friends of updates was manual and a chore…

“During the interview, we were particularly interested in learning what their sharing workflow was like. We set up the stage and let them tell us everything they did with their photos/videos taking them from camera to shared, what they wished they could change, and the magical pricing questions: Would they use a solution like the one we were envisioning if it were free? Would they use it if it were $X/yr? X changed from customer to customer but we kept it as real as we could.

“We talked to enough people until their answers started sounding the same. At that point we had a pretty good idea of what our product’s unique value proposition should be, a list of other benefits, and a price to put on our signup page.

“Our revised top 3 problems were:

  1. Sharing lots of photos and videos is a hassle (stayed the same)
  2. Requiring visitors to signup is annoying
  3. Photo gallery design was too busy or complicated”

Have you ever collected feedback from your customers with, like, your ears?

“By now we had also heard of the merits in listening to your users and decided to follow a release early/release often model. The only problem was we didn’t know how to listen. In the interest of efficiency and productivity, I generally avoided face to face meetings and phone calls and preferred email. Many people were struggling with the software (desktop apps are hard) but we didn’t know how to engage them. After they’d cancel their account, we would send them an email to learn why but many times it was too late.

“We were getting a lot of feedback over email but didn’t know the best way to qualify them. If more than one person asked for a feature and it sounded like a good idea, we built it. The reverse was also true, if the feature didn’t meet our model of “the vision”, we ignored it no matter how many people asked for it. And that’s how we kept busy for a while till I realized we still had a lot of leaky buckets despite all the listening we were doing.

“Determined to get to the bottom of this, I got an 800 number which I put on our website and also started calling on users directly. The findings were staggering. Most of our paying users were using a very small percentage of the application. We had built up a lot of bloated features or waste which had only taken time to build but also continued to create ongoing work with regression testing, feature dependencies, etc.

Thanks to Eric Ries for the link.

We’re spending more and more timing posting original content and links on Twitter at twitter.com/venturehacks. For example:

smartbear

vcmike

Once in a while, we post a summary of our tweets here on this blog — like this.

Do you like our tweet summaries? Hate them? Want more? Want us to stop? We want your feedback.

Click here to take our Twitter survey.

5 questions. 1 minute of your time. Your feedback: priceless. Thank you for sharing your thoughts and time.

There’s also an opportunity to join our customer development team at the end of the survey. Muchas gracias!

Almost every startup with an unfinished application puts up a page like this:

The customer development team at Grockit (Sean Ellis and Matt Johnson) takes a  more interesting approach:

Most startups just gather a list of email addresses. But Grockit measures the customer’s intent: “Why do you want to use our product?”

Consider asking these additional questions, perhaps on a second page:

  1. “Can our CEO contact you to learn more about your needs?” Now you’ve got a list of earlyvangelists you can talk to — an awesome asset for startups that are iterating with their customers to reach product/market fit.
  2. “How are you preparing for the LSAT today?” Now you know if customers are putting together a solution out of other parts.
  3. “Would you pay for Grockit if it met your needs?” Now you know if customers have a budget.

This is a customer development pattern that other startups should copy.

# And here’s Steve Blank‘s definition of an earlyvangelist — memorize it now.

In Steve Jobs does customer development, I asked readers to find a customer development lesson in Steve’s interview. There were a lot of good responses that I didn’t anticipate. But Reece came closest to the answer I was looking for:

“The subtler customer development point from Jobs is ‘We don’t need to add new stuff.’ He realized the feature set is fine — instead of cramming in new features that most users won’t touch, Apple can instead focus on positioning the product via marketing and pricing.”

In other words, Apple didn’t add a camera so they could deliver on their positioning (“lowest-cost way to the App Store”), increase market share (“everyone can afford it”), and maybe even increase revenue.

I think Reece made one small, important error; so let’s pick on him for the sake of our education.

“But if we just add feature X”

Reece implies that a camera is a feature “that most users won’t touch.” But adding a camera is probably a good idea. Maybe it’s the key to selling a billion more iPods. Who knows for sure?

Go to any group meeting at any startup and you’ll hear employees arguing for their own camera: “but if we just add feature X we’ll get more customers.” That’s a reasonable hypothesis. More people might buy the product with feature X. Should you build feature X?

Not necessarily. A startup’s cash-on-hand is shrinking every day. You want to add the features that will do the most to stop your losses. You don’t execute every random idea without prioritizing it.

The optimal plan may be to slow down product development, commit more resources to customer development, and find the right positioning for your product. The lesson here:

Once you reach a certain level of product/market fit, the best plan may be to add no new features, focus on positioning, make more money, and move up the startup pyramid — even though the team has a million obviously great ideas for new features that will make a buttload of money. You can improve the business without improving the product.

Quiz

Can you find other examples where Apple and Pixar did customer development?

stevejobs

Steve Jobs is the ultimate visionary. He has a vision, he implements it, and the world pays him tens of billions of dollars for it. He doesn’t ask customers what they want because they would ask for a faster horse, not a car. He knows what customers want before the customers do. He is the quintessent entrepreneur — the ideal that every founder strives to become.

Right? Wrong.

Even Steve Jobs does customer development:

David Pogue: “You put a camcorder on the iPod Nano. Why not on the iPod Touch?

Steve Jobs: “Originally, we weren’t exactly sure how to market the Touch. Was it an iPhone without the phone? Was it a pocket computer? What happened was, what customers told us was, they started to see it as a game machine. Because a lot of the games were free on the store. Customers started to tell us, “You don’t know what you’ve got here — it’s a great game machine, with the multitouch screen, the accelerometer, and so on.”

“We started to market it that way, and it just took off. And now what we really see is it’s the lowest-cost way to the App Store, and that’s the big draw. So what we were focused on is just reducing the price to $199. We don’t need to add new stuff — we need to get the price down where everyone can afford it.”

(From Q&A: Steve Jobs Snipes at Amazon, Praises Ice Cream)

Apple has changed the positioning of the iPod Touch twice. First, it was a multitouch iPod. Then it was a “game machine”. Now it’s the “lowest-cost way to the App Store.”

What does positioning have to do with customer development?

Refining the product’s positioning is the second step in Sean Ellis’ Startup Pyramid:

“Once you have achieved product/market fit, it’s time to accelerate through the next steps of the pyramid and then begin scaling your business. Here’s a brief description of what to do at each of the steps before scaling:

Promise: Highlight the benefits [positioning] described by your ‘must have’ users (those that say they would be very disappointed without your product).”

In this step, you use a combination of surveys and interviews to talk to your customers and ask questions like “In your opinion, what is the best reason for using our product?” If they say the best reason is playing games, start testing that positioning with new customers and see if it performs better than your current positioning.

How do you position a product? #

In Four Steps to the Epiphany (page 111), Steve Blank developed a model for positioning products based on market type:

Existing Market: Compare your product to your competitors. Describe how some feature or attribute of the product is better, faster — an incremental improvement.

New Market: It’s too early for customers to understand what your product’s features will do for them. Instead, describe the problem your product will solve and the benefits that the customers will get from solving it — a transformational improvement.

Resegmented Market: Compare your product to your competitors. If it’s low cost, describe price and feature set. If a niche, describe how some feature or attribute of the product solves the problem your customer has in a way comparable products do not. Describe the benefits that the customers will get from solving their problem this new way.”

The iPod was initially positioned in a resegmented market — it was a multitouch iPod. Then it was positioned in an existing market — portable game players. Now it’s positioned in a new market: a way to the App Store (although Steve Jobs probably should have said “pocket computer” instead of “way to the App Store” — pocket computer is the new copy at apple.com).

If Apple wants to create a new market of devices that access the App Store, they’ll have to educate prospective customers who don’t know what the App Store is — or why they would want to access it. New markets always require customer education. Fortunately, Apple has been bombarding us with “there’s an app for that” ads for some time now.

Quiz

Jobs makes a second, subtler, point about customer development in the quote above. Can you find it? The best correct answer gets a shout-out in our next post.

Read part 2 of this series: No new features.

Photo: Jeff Chiu/Associated Press

Here’s the fifth class of Steve Blank‘s customer development course. Make sure you listen to Steve’s story about how he funded IMVU at time 27:50. Steve is a master of using theatre to extract compliance from customers, investors, you-name-it.

This is wonderful material for entrepreneurs. I’ve already taken the class and I still subscribe to the Venture Hacks podcast and listen to the classes on my iPhone.

Administrivia: The sound quality of the lecture improves dramatically after the first few minutes. New students can catch up on Class 1, Class 2, and Classes 3 and 4. The readings for each class are listed in the syllabus. The main text for the class is Steve’s must-read book, Four Steps to the Epiphany.



Audio: Customer Development 5: IMVU (mp3)

You can find the second half of this class in How IMVU learned its way to $10M a year.

There are no slides for this class.