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Customer Development: a Method for Creating a Product

What is Customer Development? Creating a business model in 9 steps. Target audience interviews. What’s the point of CustDev?

Customer Development is an approach to promoting a startup or business that is based on creating a product according to the identified customer needs. It consists of several steps, where the development of the product is prefaced with surveys of potential consumers.

Customer Development is often contrasted with Product Development where a startup or business is built around an existing product without preliminary research of the target audience.

To put it briefly:

  • Customer Development: “Let’s find out what our clients need first.”
  • Product Development: “Let’s develop a product first.”

Why You Need CustDev

According to Fortune, 90% of startups fail. Hackermoon disputed the statistics as the criteria for success are usually set by investors, so the main factor is whether they can sell the company for a large amount. 

CB Insights calculated that 42% of failures were due to low product-market fit. It means that the products and/or services did not resonate with the market. 

This fate can be avoided by checking the level of the product’s potential demand before developing it. Actually, if you start using methods of Customer Development, the chances of failure are almost halved.

Note. In the CIS countries, the term custdev usually refers to specific actions, while in American and European markets, Customer Development is understood as a whole methodology of a business approach.

History of Customer Development

Californian entrepreneur from Silicon Valley and founder of eight successful startups, Steve Blank was the first one to speak about Customer Development. He recognized that startups were not scaled-down versions of companies, but independent phenomena that required their own tools different from bigger businesses.

The CustDev methodology first appeared in the 1990s. Its key idea was that in order to achieve commercial success, startups and companies must have a closer look at the needs of potential customers. Steve Blank coined the first rule of Customer Development: “There are no facts inside your building, so get outside.”

Later, Customer Development formed the basis of the Lean Startup concept, developed by Blank’s student Eric Ries. Here are the main tools of Lean Startup:

  • 9-step business canvas — developing hypotheses about a new startup;
  • Customer Development — testing these hypotheses on the target audience (outside the building);
  • agile — flexible methods of creating a product to test its product-market fit.

How to Create a Business Model

A business model is how a company makes money (or is going to make money). It has become especially relevant in the age of startups as young projects are looking for modern innovative business models. This also prompts industry leaders to move away from traditional methods. 

Swiss business theorist Alexander Osterwalder identified nine business model blocks (or nine hypotheses) that help with formulating the most complete picture of the company.

  1. Value proposition. What is the value of the product for the client? What pain point does it resolve? What needs does it satisfy?
  2. Customer segments. What segments of the target audience are affected by this value? Which customers are the most important?
  3. Communication and distribution channels. How to connect with a customer, how to offer them product value, and how to do it daily, efficiently, and inexpensively.
  4. Customer relationships. How to acquire, retain and expand your customer base, and how much it costs. 
  5. Key resources. What do you need to implement a business model?
  6. Key activities. What steps need to be taken to implement the business model.
  7. Key partnerships. Who are the key suppliers? What key resources do you get from them? What key actions are taken by the partners themselves?
  8. Revenue streams. What value of the product are consumers willing to pay for? What is the pricing policy?
  9. Cost structure. What are the most costly key resources and/or actions? What are the most necessary costs in this business model?

CustDev: Launching a New Product From Hypothesis to Sale

Steve Blank identifies four stages of launching a new product using a Customer Development approach:

  1. Finding a product. At this stage, you consider new ideas, develop a business model, discuss new concepts, and keep brainstorming.
  2. Consumer interviews. This is the stage of idea validation. You look for your product’s target audience and conduct surveys to analyze the pain points and the demand for possible solutions.
  3. Product development. If the concept is accepted, the development begins.
  4. Start of sales. Product launch.

Customer Development is an iterative process. That’s why it might remind you of Lean. Get prepared to repeat the first and second steps as many times as you need to create a product of high demand.

Steve Blanc coined another rule of CustDev: “No business plan survives first contact with a customer”. This means that as you are conducting interviews, you will reveal unsuccessful, unwanted ideas that need amendments before you start implementing them. It can take more than one or two pivots before the concept is validated to move on to the third stage. 

Note. Pivot is a significant change in one of the nine components of the business model. It does not necessarily lead to a complete reinvention of the product. Among unicorn startups, the vast majority had to pivot at least once in their lifetime.

Recommendations for Customer Interviews

Although Customer Development methods are associated with building startups and companies, this approach can be used by existing companies. They can utilize it for developing new products, adding new features, and so on. These processes also follow the above-mentioned CustDev steps.

You can communicate with your customers in various ways, such as surveys, interviews, or Google Forms. But we advise you to lean towards face-to-face meetings. Here are the main advantages of such a format:

Общение с покупателями можно осуществлять различными способами: через опросы, интервью, «Google Формы». Мы советуем склоняться к очным встречам с клиентами. Основные характеристики таких интервью:

  • you can collect some very comprehensive information in advance; 
  • you notice the client’s non-verbal response (emotions, body language, etc.); 
  • the explanations and answers are more detailed and extended; 
  • there is more control over how you obtain new information;
  • you get to learn the customer’s language and their way of thinking.

Please note that interviews are conducted without pitching. While conducting the survey, the company should not advertise its product, name the trademark, or in any way try to convince the consumer that they need this product. Your main goal here is to listen to everything that your customers have to say about their needs, pain points, and your competitors.

Advantages and Disadvantages of Customer Development 

Advantages of CustDev

Disadvantages of CustDev

It allows founders to assess the potential of their idea before investing significant resources

Preference is given to more popular business ideas, which leads to higher rates of developing commercial projects, rather than social, humanitarian, etc.

It removes high expectations from unverified decisions and allows you to make decisions based on facts and logic. The company won’t “fall in love” with a new idea.

The motto of any startup team should say, “We only know that we know nothing.” However, when working with industry experts, your attitude stops being so open-minded.

When you research your target audience, it signals to investors that they can take this business very seriously.

It becomes harder to keep your plans under the radar. But some companies value secrecy and want to avoid spreading such information.

You can focus on the actual pain points and needs of consumers instead of how your company interprets (and misinterprets) them.

Multiple iterations of finding and validating a product can delay the entire process of development.

Customer Development is cheap, affordable, and easy. You can find questions for customer interviews on the Internet.

CustDev never ends. Ideally, each and every action of your startup should be validated.

Results

Customer Development is a valuable methodology that allows you to check the level of demand long before the product launch. The main steps include:

  1. Creating a hypothesis about the product; 
  2. Validating this hypothesis (customer interviews).

If the concept is accepted, these two steps follow with:

  1. Product development; 
  2. Creating a company.

The steps of hypothesis creation and validation can be repeated until the startup comes up with an actionable business plan. Each new cycle should include a pivot, i.e. a significant change in the product’s concept.

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