Lesson: Customer Development with Steve Blank

Step #5 PM Fit: Product fits markets when users are adopting and finding value

In today's lecture, we're going to cover Value Proposition. What is it you're building and for who? What pains and gains are you creating for what customer segments? More importantly, what's the minimum viable product that results from all of this knowledge?

You're all familiar with the business model canvas. Hopefully by now, you've actually taken a shot and tried to fill out the canvas for your own idea and your own start-up. But today, we're going to talk about the first box, Value Proposition.

Value proposition is just a fancy word in the business model canvas for what is it that you're building? What product or service are you building? By the way, we're going to ask later, for who are you building it and what exactly does it solve for those people? So let's take a look at value proposition.

As I said, it's not just about your idea or product. One of the things that's hard for founders to realize is there's actually a customer at the other end. While you're thinking this is the greatest thing since sliced bread, the whole idea about customer development is to get you out of the building and tell me whose need or problem you're solving.

It's about satisfying a customer need. Not just you thinking, "What a great idea." That can't be repeated enough. So today while we're talking about value proposition, value proposition works hand-in-hand with who your customers are which we'll be talking about in the next lecture.

Understand that this relationship between what you're building, the value proposition, and the customer is what makes start-ups succeed or fail on day one right there. We give those two boxes, those two relationships, a special name. We call that Product Market Fit.

When you hear the phrase product market fit, just simply visualize the canvas and go that's another fancy word that says, "Is what I'm building needed, wanted, or passionately desired by a set of customers on the other end?" If I don't have that, then the good news about the customer development process is it allows us to keep searching without going out of business.

So what you'll find is we'll be iterating back and forth doing things called "pivots" and "iterations" as we kind of discover what customers really want versus what we think we're building for them.

So, let's take a look at value proposition. Now, value proposition is not something you're building in isolation. While the value proposition is about solving a customer problem or need it really consists of three components.

The easy one for most entrepreneurs to talk about is what product features you have or what product services you're providing. But there's actually two more important components to value proposition. What gain are you creating for customers? What pain are you solving for them?

Alexander Osterwalder, when he drew the business model canvas, really emphasized this. It's not just about your product. Especially if you come from a technical background it's really easy to say, "Oh, look at all of these features."

If you find yourself doing that you need to complete the sentence and say, "Yes. But here's what we make people be able to do better, and here are the problems we solve for them." So the real goal of you figuring out the value proposition is understanding what we call the minimal viable product.

You're trying to figure out, now that I kind of understand my product and service and what I'm gaining for customers, what pain I'm solving, what's the smallest possible feature-set I could be shipping on day one that solves these pains and creates gains for them?

This really is an interactive process because there's no way, no possible way, sitting in your office that you could figure this out. The default for great engineers and great entrepreneurs is, "Oh, I understand customer's problems and needs so don't worry about it, we'll just spec the entire product on day one."

Your real goal here is to figure out what's the smallest thing you could build and develop that actually gets your users, your sales, or whatever and get out to market as quickly as possible.

So the goal of you getting out of the building for value proposition is understanding gains and pains so you can figure out what's the MVP, or minimum viable product?

So let's take a look at the value proposition in a little more detail and expand on those three components. The first one is your product. And as we said earlier, you need to understand, what's your part of your value proposition? Is it just hardware, software, or bits?

Or are there going to be some manufacturing goods, some commodities? Are you going to have intangible products that are a part? Copyrights and licenses that are part of your value proposition?

Are you going to have any financial products, that is guarantees, insurance policies, your maintenance contracts or are you going to add some digital features as well?

The only point here is to realize that your product and service is not just the bits or hardware, it's actually the whole product. The entire package that you're going to be delivering.

A value proposition for a company that's selling services is kind of the same. You just need to ask what are the core services that are part of your value proposition? Consulting, hair-cut investment advice?

If you're selling software or hardware you could have separate services that are part of this whole product. Pre- and post-sales services, finding the right solution, financing, and free delivery.

Amazon makes a great business because in fact they could do one-day delivery or they could do two-day premier service. That is services that sometimes might seem to be ancillary or kind of add-ons, actually make your products look better than their competitors.

Then what are after-sale services? Free maintenance, disposal, etc. So all of these add up, again, to what is it that your product features do?