notes-books-fourStepsToTheEpiphany

Notes on Four steps to the epiphany by Steven G. Blank

Introduction

" Every company has some methodology for product development, launch and life-cycle management. These processes provide detailed plans, checkpoints and goals for every step in getting a product out the door; sizing markets, estimating sales, developing marketing requirements documents, prioritizing product features. ...[but]... 9 out of 10 of new products are failures. "

"Products developed with senior management out in front of customers early and often - win. Products handed off to a sales and marketing organization that has only been tangentially involved in the new Product Development process lose."

" The reality for most companies today is that existing product introduction methodologies are focused on activities that go on inside a company own building. While customer input may be a checkpoint or “gate” in the process it doesn’t drive it. "

" ...companies need a parallel process to product development; one dedicated to bringing customers and their needs head first into the new product introduction process – before the product is ever launched or shipped.

...The lesson is clear: by listening to potential future customers’, by going out into the field and investigating potential customers needs and marketsbefore being inexorably committed to a specific path and precise product specs – the difference between the winners and losers – and that’s the Customer Development Process described in this book. "

Chapter 1: The Path to Disaster: The Product Development Model

Concept/Seed -> Product Dev -> Alpha/Beta test -> Launch/1st ship

Concept/Seed: " What is the product or service concept? Is it possible to build? Is further technical research needed to ensure that the product can be built? What are the product features and benefits? Second, who will the customers be and where will they be found? Statistical and market research data plus potential customer interviews determine whether the ideas have merit.

Step three probes how the product will ultimately reach the customer and the potential distribution channel. At this stage that companies start thinking about who their competitors are, and how they differ. They draw their first positioning chart and use it to explain the company and its benefits to venture capitalists.

The distribution discussion leads to some basic assumptions about pricing. Combined with product costs, an engineering budget, and schedules, this results in a spreadsheet that faintly resembles the first financial plan in the company’s business plan. "

Product Dev:

" Engineering focuses on building the product; it designs the product, specifies the first release and hires a staff to build the product. It takes the simple box labeled “product development” and makes detailed critical path method charts, with key milestones. With that information in hand, Engineering estimates delivery dates and development costs.

Meanwhile, Marketing refines the size of the market defined in the business plan (a market is a set of companies with common attributes), and begins to target the first customers. In a well- organized startup (one with a fondness for process) the marketing folk might even run a focus group or two on the market they think they are in and prepare a Marketing Requirements Document (MRD) for Engineering. Marketing starts to build a sales demo, writes sales materials (presentations, data sheets), and hires a PR agency. In this stage, or by alpha test, the company traditionally hires a VP of Sales. "

[more specifics from a case study (webvan)] " the planning began for a marketing and promotion program designed to strengthen the Webvan brand name, get customers to try the service in the first target market, build strong customer loyalty, and maximize repeat usage and purchases. The plan was to build Webvan’s brand name and customer loyalty through public relations programs, advertising campaign, and promotional activities. "

Alpha/Beta test: " Engineering works with a small group of outside users to make sure that the product works as specified and tests it for bugs. Marketing develops a complete marketing communications plan, provides Sales with a full complement of support material, and starts the public relations bandwagon rolling. The PR agency polishes the positioning and starts contacting the long lead-time press while Marketing starts the branding activities.

Sales signs up the first beta customers (who volunteer to pay for the privilege of testing a new product), begins to build the selected distribution channel, and staffs and scales the sales organization outside the headquarters. The venture investors start measuring progress by number of orders in place by first customer ship.

Hopefully, somewhere around this point the investors are happy with the company’s product and its progress with customers, and the investors are thinking of bringing in more money. The CEO refines his or her fund-raising pitch and hits the street and the phone searching for additional capital. "

Product Launch and First Customer Ship: " Product launch and first customer ship is the final step in this model, and what the company has been driving for. With the product working (sort of), the company goes into “big bang” spending mode. Sales is heavily building and staffing a national sales organization; the sales channel has quotas and sales goals. Marketing is at its peak. The company has a large press event, and Marketing launches a series of programs to create end-user demand (trade shows, seminars, advertising, email, and so on). The board begins measuring the company’s performance on sales execution against its business plan (which typically was written a year or more earlier, when the entrepreneur was looking for initial investments). Building the sales channel and supporting the marketing can burn a lot of cash. Assuming no early liquidity (via an IPO or merger) for the company, more fund raising is required. "

What's wrong with the Producd Development model? Actually, it works fine when developing a new product for a known market with known customers. But otherwise:

1. Where Are the Customers?

" Startups don’t fail because they lack a product; they fail because they lack customers and a proven financial model. "

2. The Focus on First Customer Ship Date

" Using the Product Development model forces sales and marketing to focus on the first customer ship date. Most competent sales and marketing executives look at the first customer ship date, look at the calendar on the wall, and then work backwards figuring out how to do their job in time so that the fireworks start the day the product is launched.

The flaw in this thinking is that the “first customer ship” is only the date when Product Development thinks they are “finished” building the product. The first customer ship date does not mean that the company understands its customers or how to market or sell to them. "

After first customer ship date: " Sure, Sales may have found a couple of “beta” customers, but were they representative of a scalable mainstream market? (A mainstream market is where the majority of people in any market segment reside. They tend to be risk-averse, pragmatic purchasers.) Time after time, only after first customer ship do startups discover that their early customers don’t scale into a mainstream market, or that the product doesn’t solve a high value problem, or that the cost of distribution is too high. While that’s bad enough, these startups are now burdened with an expensive, scaled-up sales organization that is getting frustrated trying to execute a losing sales strategy and a marketing organization desperately trying to create demand without a true understanding of customers’ needs. And as Marketing and Sales flail around in search of a sustainable market the company is burning through its most precious asset—cash. "

3. 3. An Emphasis on Execution Instead of Learning and Discovery

" In startups the emphasis is on “get it done, and get it done fast.” So it’s natural that heads of Sales and Marketing believe they are hired for what they know, not what they can learn. They assume their prior experience is relevant in this new venture. Therefore they need to put that knowledge to work and execute the sales and marketing programs that have worked for them before.

This is usually a faulty assumption. Before we can sell a product, we have to ask and answer some very basic questions: What are the problems that our product solves? Do customers perceive these problems that as important or “must have?” If we’re selling to businesses, who in a company has a problem that our product could solve? If we are selling to consumers how do we reach them? How big is this problem? Who do we make the first sales call on? Who else has to approve the purchase? How many customers do we need to be profitable? What’s the average order size?

Most entrepreneurs will tell you “I know all the answers already. Why do I have to go do it again.” It’s human nature that what you think you know is not always what you know. "

" If you really do know the answers to the customer questions, the Customer Development process will go quickly and it will reaffirm your understanding. "

 4. The Lack of Meaningful Milestones for Sales, Marketing and BusinessDevelopment

" The one great thing you can say about the product development methodology is that it provides an unambiguous structure with clearly defined milestones. The meaning of alpha test, beta test, and first customer ship are pretty obvious to most engineers. If the product fails to work, you stop and fix it. In stark contrast, sales and marketing activities before first customer ship are adhoc, fuzzy, and absent measurable, concrete objectives. They lack any way to stop and fix what’s broken (or even to know if it is broken, or how to stop at all).

What kind of objectives would a startup want or need? That’s the key question. Most sales executives and marketers tend to focus on execution activities because at least these are measurable. For example, in sales, the number one thing that matters is revenue. Sales uses revenue as its marker of progress in understanding customers. Some startup sales execs also believe hiring the core sales team is a key objective. Others focus on acquiring early “lighthouse” customers (prominent customers who will attract others.) Marketers believe creating corporate presentation, data sheets, and collateral are objectives. Some think that hiring a PR agency, starting the buzz and getting on the cover of magazines at launch are objectives.

In realitynone of these are true objectives. Simply put, a startup should focus on reaching a deep understanding of customers and their problems, discovering a repeatable road map of how they buy, and building a financial model that results in profitability.

The appropriate milestones that measure a startup’s progress answers these questions: How well do we understand what problems customers have? How much will they pay to solve those problems? Do our product features solve these problems? Do we understand our customers’ business? Do we understand the hierarchy of customer needs? Have we found visionary customers, ones who will buy our product early? Is our product a must-have for these customers? Do we understand the sales road map well enough to consistently sell the product? Do we understand what we need to be profitable? Are the sales and business plans realistic, scalable, and achievable? What do we do if our model turns out to be wrong? "

 5. The Use of a Product Development Methodology to Measure Sales" Using the product development diagram for Customer Development activities is like using a clock to tell the temperature. They both measure something, but not the thing you wanted.

Figure 1.2 shows what the product development diagram looks like from a sales perspective. A VP of Sales looks at the diagram and says, “Hmm, if beta test is on this date, I’d better get a small sales team in place before that date to acquire my first ‘early customers.’ And if first customer ship is on this date over here, then I need to hire and staff a sales organization by then.” Why? “Well, because the revenue plan we promised the investors shows us generating customer revenue from the day of first customer ship.”

I hope this thinking already sounds inane to you. The plan calls for selling in volume the day Engineering is finished building the product. What plan says that? Why, the business plan, which uses the product development model to set milestones. The consequence is that selling isn’t predicated on discovering the right market or whether any customers will shell out cash for your product. Instead you use product development to time your readiness to sell. This “ready or not, here we come” attitude means that you won’t know if the sales strategy and plan actually work until after first customer ship. What’s the consequence if your stab at a sales strategy is wrong? You’ve built a sales organization that’s burning cash, "

 6. The Use of a Product Development Methodology to Measure Marketing

" The head of Marketing looks at the same product development diagram and sees something quite different (see Figure 1.3). For Marketing, first customer ship means feeding the sales pipeline with a constant stream of customer prospects. To create this demand at first customer ship, marketing activities start early in the product development process. While the product is being engineered, Marketing starts creating corporate presentations and sales materials. Implicit in these materials is the “positioning” of the company and product. Looking ahead to the product launch, the marketing group hires a public relations agency to refine the positioning and to begin generating early “buzz” about the company. The PR agency helps the company understand and influence key industry analysts, luminaries, and references. All this leads up to a flurry of press events and interviews, all geared to the product launch date. (During the Internet bubble, one more function of the marketing department was to “buy” customer loyalty with enormous advertising and promotion spending to create a brand.)

At first glance this process may look quite reasonable, except for one small item: all this marketing activity occurs before customers start buying—that is, before Sales has had a chance to actually test the positioning, marketing strategy, or demand-creation activities in front of real customers.

In fact, all the marketing plans are made in a virtual vacuum of real customer feedback and information. Of course, smart marketers have some early interaction with customers before the product ships, but if they do, it’s on their own initiative, not as part of a well-defined process. Most first-time marketers spend a large part of their time behind their desks inside their building. This is somewhat amazing, since in a startup no facts exist inside the building, only opinions. Yet even if we get the marketing people to get out from behind their desks into the field, the deck is still stacked against their success. Look at the product development diagram. When does Marketing find out whether the positioning, buzz, and demand creation activities actually work? After first customer ship. The inexorable march to this date has no iterative loop that says, “If our assumptions are wrong, maybe we need to try something different.” "

 7. Premature Scaling" Having Sales and Marketing believe that by first customer ship, come hell or high water, they need fully staffed organizations leads to another disaster: premature scaling.

Startup executives have three documents to guide their hiring and staffing; a business plan, a product development model and a revenue forecast. All of these are execution documents – they document spending and hiring as if success is assured. As mentioned earlier there are no milestones that say “stop or slow down hiring until you understand customers.” Even the most experienced executives succumb to the inexorable pressure to hire and staff to “plan” regardless of early customer feedback. "

 8. Death Spiral: The Cost of Getting Product Launch Wrong

[this one isn't really an independent problem, just a story of what happens when it goes badly]

" Premature scaling is the immediate cause of the Death Spiral. Premature scaling causes the burn rate to accelerate. Sales, salaries, facilities, infrastructure costs, recruiting fees, and travel expenses start cutting into the company’s cash flow. The pressure for revenue grows exponentially. Meanwhile the marketing department is spending large sums on creating demand for the sales organization. It is also spending “credibility capital” on positioning and explaining the company to the press, analysts, and customers.

By the time of first customer ship, if the company does not understand its market and customers, the consequences unfold in a startup ritual, almost like a Japanese Noh play. What happens when you fully staff sales and marketing and you haven’t nailed who your customers are and why they should buy your product? Sales starts missing its numbers. The board gets concerned. The VP of Sales comes to a board meeting, still optimistic, and provides a set of reasonable explanations. The board raises a collective eyebrow. The VP goes back to the field and exhorts the troops to work harder.

 Meanwhile, the salespeople start inventing and testing their own alternatives—different departments to call on, different versions of the presentations. Instead of a methodology of learning and discovering, the sales team has turned into a disorganized and disgruntled mob burning lots of cash. Back in the home office, the product presentation slides are changing weekly (sometimes daily) as Marketing tries to “make up a better story” and sends out the latest pitch to a confused sales organization. Morale in the field and in Marketing starts to plummet. Salespeople begin to believe “This product cannot be sold; no one wants to buy it.” Management fires the VP of Sales and a few salespeople leave. Then a new VP of Sales comes in and starts the process all over again.

By the next board meeting, the sales numbers still aren’t meeting plan. The VP of Sales looks down at his shoes and shuffles his feet. Now the board raises both eyebrows and looks quizzically at the CEO. The VP of Sales, forehead bathed in sweat, leaves the board meeting and has a few heated motivational sessions with the sales team. By the next board meeting, if the sales numbers are still poor, the writing is on the wall. Not only haven’t the sales numbers been made, but now the CEO is sweating the company’s continued cash burn rate. Why? Because the company has based its headcount and expenditures on the expectation that Sales will bring in revenue according to plan. The rest of the organization (product development, marketing, support) all started to burn more cash, expecting Sales to make its numbers. Now the company is in crisis mode. Here two things typically happen. First, the VP of Sales is toast. At the final board meeting no one wants to stand next to him. People are moving their chairs to the other side of the room. Having failed to deliver the numbers, he’s history. Whether it takes three board meetings or a year is irrelevant; the VP of Sales in a startup who does not make the numbers is called an ex-VP of Sales (unless he was a founder, and then he gets to sit in a penalty box with a nebulous VP title).

Next, the new VP of Sales is hired. She quickly comes to the conclusion that the company just did not understand its customers and how to sell to them. She decides that the company’s positioning and marketing strategy were incorrect. Now the VP of Marketing starts sweating. Since the new VP of Sales was brought on board to “fix” sales, the marketing department has to react and interact with someone who believes that whatever was created earlier in the company was wrong. The new VP of Sales reviews the strategy and tactics that did not work and comes up with a new sales plan. She gets a brief honeymoon of a few months from the CEO and the board. In the meantime, the original VP of Marketing is trying to come up with a new positioning strategy to support the new Sales VP. Typically this results in conflict, if not outright internecine warfare. If the sales aren’t fixed in a short time, the next executive to be looking for a job is not the new VP of Sales (she hasn’t been around long enough to get fired), it’s the VP of Marketing—the rationale being “We changed the VP of Sales, so that can’t be the problem. It must be Marketing’s fault.”

Sometimes all it takes is one or two iterations of finding the right sales road map and marketing positioning to get a startup on the right track of finding exuberant customers. Unfortunately, more often than not, this is just the beginning of an executive death spiral. If changing the sales and marketing execs doesn’t put the company on the right sales trajectory, the investors start talking the “we need the right CEO for this phase” talk. This means the CEO is walking around with an unspoken corporate death sentence. Moreover, since the first CEO was likely to have been one of the founders, the trauma of CEO removal begins. Typically, founding CEOs hold on to the doorframe of their offices as the investors try to pry their fingers off the company. It’s painful to watch and occurs in more than half of the startups with first-time CEOs.

In flush economic times the company may get two or three iterations around a failed launch and bad sales numbers. In tougher times investors are tighter with their wallets and are making the “tossing good money after bad” calculations with a frugal eye. A startup might simply not get a next round of funding and have to shut down. "

 9. Not All Startups Are Alike

" ...startups fall into one of four basic categories:

• Bringing a new product into an existing market • Bringing a new product into a new market • Bringing a new product into an existing market and trying to resegment that market as a low-cost entrant • Bringing a new product into an existing market and trying to resegment that market as a niche entrant

....

Since the four types of startups have very different rates of customer adoption and acceptance, their sales and marketing strategies differ dramatically. Even more serious, is that each Market Type have radically different cash needs. A company creating a new market might be unprofitable for 5 or more years, while one in an existing market might be generating cash in 12-18 months. "

 10. Unrealistic Expectations[just a summary of the others]

" ...three unrealistic expectations: • That the product development diagram can be relied upon to guide activities that have nothing to do with product development—namely, finding customers, a market, and a viable business model. • That Customer Development will move on the same schedule as product development. • That all types of startups and all new products will achieve acceptance and deployment at the same rate, namely starting at First Customer Ship.

In addition to these three errors, there is one more. Startups face enormous pressure from their investors to become profitable. Sometimes, to get funded, these new ventures make unrealistic financial assumptions – about market size, growth or simply ignoring the consequences of the Market Type they have chosen. These optimistic expectations become the plan of record, forcing execution towards unrealistic and unachievable goals. "

aside: crossing the chasm

forget about "crossing the chasm". you'll probably fail before you even reach the chasm (when you're still selling to tech enthusiasts and visionaries, the two market segments before the chasm). if you make it to the chasm, worry about it then.

Customer Dev Process

the Customer Dev Process runs parallel to the Product Dev Process, it doesn't replace it.

the Product Dev Process has metrics. so does the Customer Dev Process.

the (first parts of the) Customer Dev Process is about learning, not execution

" The good news is that these customer and market milestones can be defined and measured. The bad news is that accomplishing these milestones is an art. "

Chapter 2: The Customer Development Model

Customer Discovery -> Customer Validation -> Customer Creation -> Company building

(in addition to the above, each node has a self-loop and Customer Validation has an arc to Customer Discovery)

" Customer Development focuses on understanding customer problems and needs, Customer Validation on developing a sales model that can be replicated, Customer Creation on creating and driving end user demand, and Company Building on transitioning the organization from one designed for learning and discovery to a well-oiled machine engineered for execution. As I discuss later in this chapter, integral to this model is the notion that Market Type choices affect the way the company will deploy its sales, marketing and financial resources.

Notice that a major difference between this model and the traditional product development model is that each step is drawn as a circular track with recursive arrows. The circles and arrows highlight the fact that each step in Customer Development is iterative. That’s a polite way of saying, “Unlike product development, finding the right customers and market is unpredictable, and we will screw it up several times before we get it right.”

"

" the Customer Development diagram says that going backwards is a natural and valuable part of learning and discovery. In this new methodology, you keep cycling through each step until you achieve “escape velocity”—that is, until you generate enough success to carry you out and into the next step.

Notice that the circle labeled Customer Validation in the diagram has an additional iterative loop going back to Customer Discovery. As you’ll see later, Customer Validation is a key checkpoint in understanding whether you have a product that customers want to buy and a road map of how to sell it. If you can’t find enough paying customers in the Customer Validation step, the model returns you to Customer Discovery to rediscover what customers want and will pay for.

An interesting consequence of this process is that it keeps a startup at a low cash burn rate until the company has validated its business model by finding paying customers. In the first two steps of Customer Development, even an infinite amount of cash is useless, because it can only obscure whether you have found a market. (Having raised lots of money tempts you to give products away, steeply discount to buy early business, etc., all while saying “we’ll make it up later.” It rarely happens that way.) Since the Customer Development model assumes that most startups cycle through these first two steps at least twice, it allows a well-managed company to carefully estimate and frugally husband its cash. The company doesn’t build its non-product development teams (sales, marketing, business development) until it has proof in hand (a tested sales road map and valid purchase orders) that it has a business worth building. Once that proof is obtained, the company can go through the last two steps of Customer Creation and Company Building to capitalize on the opportunity it has found and validated. "