Lesson: Customer Development with Steve Blank

Step #2 Testing: Test both the problem and your understanding of the customer need

One of the other interesting observations about customer development is this notion of the pivot. The pivot was a term that my best student ever, Eric Ries, coined when he noticed the arrow between customer invalidation and customer discovery, and he actually gave it a name which I think is incredibly accurate.

A pivot says, "What do you do when your hypotheses don't meet reality?" This is such a neat observation about start-ups and why what we now know is much different than before. What we now know, instead of firing executives when our business model doesn't match what's going on outside in the real world, we fire the model.

We simply say, "Hey, our hypotheses were wrong." So because we have been building the product iteratively and incrementally and keeping our burn-rate incredibly low, a pivot is the substant of change to one or more of the business model components. It just simply says, "Hey, this isn't our customer segment, our customer segment is really here."

Or, "Wait a minute, our revenue model shouldn't be freemium, we should be charging for it from day one." Or, "Wait a minute, we've been using the wrong distribution channel. We need a direct-sales force." Or, "Gee. We have the wrong partners." By the way, an iteration is a minor change to one or more of the business model components.

So for example, an iteration would be going from charging from $9.99 to $6.99. A pivot would be a change of, "Gee. Our pricing is going from freemium to subscription. That's a substant of change.

So the key idea here is a pivot allows you to get out and make changes. Remember typically only the founders could do pivots but it's actually the heart of what makes customer development radically different than what's come before.

The other thing to notice about pivots is that you want to keep them up at a constant speed and a constant tempo. You want your entire company operating with speed and tempo in decision making just like a metronome. All right. It's constant, it's consistent, and it's relentless.

Let's take a look at the first step of customer discovery. You're going to be living this for the next couple of weeks if you're doing this for real. Phase one is you state your hypothesis and you draw the business model canvas.

Again, you put the canvas on the wall, you and your team get around, and put up yellow stickies, but the next step is you get out of the building. You're going to test the problem. You're going to test your understanding of the customer's problem or need and you're going to figure out how to build the prototype.

The next thing is you're going to test the solution. You're going to test this solution, if you're on the web, by building a low-fidelity and then a high-fidelity prototype and you're going to again test your understanding of the customer's needs and whether your solution matches it.

This match, again, is called product market fit. That's the Holy Grail for entrepreneurs. Am I building something that people can't get enough of or are just willing to open up their wallets and empty it in front of you to get their hands on it?

The fourth phase in customer discovery is you verify your pivot. People agree that you're solving a high-value problem or need and you understand your business model enough to start test-selling which is the next step in customer-validation.

Now what's really depressing to most entrepreneurs is the answer most often the first time you go through this is, "Heck, no." You know? What's worse is, "Well they kind of sort of..." Well, "Kind of, sort of," is not a start-up. "Kind of, sort of," is people have been nice to you.

The only time you know that you have something that's worth investing your time and money in is if people are literally trying to force their money on you or can't use your product even in it's buggy, un-initialized form, enough. This is what you're looking for.

If you haven't found it yet, that's why the customer-development process is an iterative circle. It assumes you will be going through this multiple times. When you finally, finally think you do have something that matches customer needs you get to the next step which is customer validation.

Let's take a look at customer discovery one more time in just a different way. Again if you're using the start-up owner's manual you'll notice these two tracks. Remember, I said you have one track for physical, one track for web-mobile. All that is are the different tactics for one channel versus another.

But, the strategy is the same, state your hypothesis, test the problem, test the solution, pivot and proceed. Remember all of this is going on outside the building in front of customers.