How to Road-Test Your Business Model
Editor’s note: This post is part of a series featuring excerpts from the recently published book, The Startup Owner’s Manual, written by serial entrepreneurs-turned-educators Steve Blank and Bob Dorf. Come back each week for more how-tos from this 608-page guide.
Few elements of Steve Blank’s book Four Steps to the Epiphany “survived” in the 10-year transformation that resulted in the all-new Startup Owner’s Manual. But the core, foundational four steps themselves that spawned the Lean Startup revolution remain intact, now tested and proven through the experience of many thousands of entrepreneurs worldwide. Most of the power that drives a startup toward success—or reduces its likelihood of failure—is found in the first two of the four steps.
Read on to find out what they are—and how they can save you time and resources as you test your business model.
Step 1: Customer Discovery
Customer discovery is the process of translating a founder’s vision for the company into hypotheses about each component of the business model and creating a set of experiments to test each hypothesis. To do this, founders leave guesswork behind and get out of the building to test customer reaction to each hypothesis, gain insights from their feedback, and adjust the business model. Of all the lessons of Customer Development, the importance of getting out of the building and into conversations with your customers is the most critical.
Only by moving away from the comforts of your conference room to truly engage with and listen to your customers can you learn in depth about their problems, produce features to solve those problems, and learn what drives customers to recommend, approve, and purchase products. You’ll need these details to build a successful product, articulate your product’s unique differences, and propose a compelling reason why your customers should buy it.
Customer Discovery is not about collecting feature lists from prospective customers or running lots of focus groups. It includes two outside-the-building phases:
- Testing customers' perception of the problem and need to solve it. Will the right product drive significant numbers of customers to buy or engage with the product?
- Showing the customers the product for the first time. This step tests that the product (usually a minimum viable product or MVP at this point) elegantly solves the problem or fills the need well enough to persuade lots of customers to buy. When customers enthusiastically confirm the importance of both the problem and the solution, customer discovery is complete.
Pivots may happen in the customer discovery phase. Failure will happen. It’s a normal part of the startup process. You might also get some key assumptions wrong: who your customers are, what problems they need to solve, what features would solve them, how much customers would pay to solve them, etc. Pivots respond to these mistakes. A pivot is not a failure. In fact, embracing the fact that startups regularly fail and pivot along the way is perhaps one of the greatest insights in this book.
Step 2: Customer Validation
Customer validation proves that the business tested and iterated in customer discovery has a repeatable, scalable business model that can deliver the volume of customers required to build a profitable company. During validation, you test your ability to scale (i.e., product, customer acquisition, pricing, and channel activities) against a larger number of customers with another round of tests, that are larger in scale and more rigorous and quantitative.
During this step, you develop a roadmap for the sales and marketing teams (to be hired later) or validate the online demand creation plan. Simply put, does adding $1 in sales and marketing resources generate $2+ of revenue (or users, views, clicks, or whatever the metric may be)? The resulting roadmap will be field-tested here by selling the product to early customers.
In web/mobile apps, customer validation calls for the deployment of a “hi-fidelity” version of the MVP to test key features in front of customers. Customer validation proves the existence of a set of customers, confirms that customers will accept the MVP, and validates serious, measurable purchase intent among customers.
How? Depending on the business model, validation is measured by “test scales” that get customers to hand over their money (or become actively engaged with the product). In a single-sided market (one where the user is the payer), a steady stream of customer purchases validates the concept far more solidly than lots of polite words. There’s no surrogate for people paying for a product. In a “two sided” or ad-supported business model, a customer base of hundreds of thousands that’s growing exponentially usually implies that the company can find a set of advertisers willing to pay to reach those users.
In essence, the first two steps in the Customer Development model—customer discovery and customer validation—refine, corroborate, and test a startup’s business model. Completing these first two steps verifies the product’s core features, the market’s existence, locates customers, tests the product’s perceived value and demand, identifies the economic buyer (the person who write the check to buy the product), establishes pricing and channel strategies, and check out the proposed sales cycle and process. Only when an adequately sized group of customer and a repeatable sales process that yields a profitable business model are clearly identified and validated is “escape velocity” achieved. At that point, it’s time to move on the next step: scaling up, also known as customer creation.
Want to know more? Check out more excerpts from The Startup Owner's Manual below or go here.
STEVE BLANK | Columnist | Founder, E.piphany, Convergent & Zilog
Steve Blank is a retired Silicon Valley serial entrepreneur turned educator who developed the Customer Development methodology that changes the way startups are built. His book The Four Steps to the Epiphany launched the Lean Startup movement.
BOB DORF | Columnist | Co-author, The Start-up Owner's Manual
Bob Dorf is co-author with Steve Blank of The Start-up Owner?s Manual. He?s founded seven companies and invested in or advised more than a score of start-ups. He teaches Customer Development at Columbia Business School.