Customer Development

What is customer development?

Customer development was devised by an entrepreneur called Steve Blank in the 1990s while he was writing his memoir having worked in Silicon Valley.

He effectively came to notice that startup businesses are not just reduced versions of larger and more established companies and therefore needed an adapted approach.

The customer development process

There are four principal stages of the customer development process:

1. Customer discovery

This is essentially the formulation of one or more business models. Overlapping with the business model design part of the lean startup strategy, the customer discovery phase should see the creation of inferences, hypotheses, and concepts that can be tested.

2. Customer validation

This is the stage where testing is conducted in order to assess whether or not the business model, project, or product, is viable.

Aspects typically considered are market fit, scalability, feasibility, and repeatability.

3. Customer creation

Here, consumer demand in the form of end-users begins construction. Product awareness through sales and marketing avenues are grown. This is the starting phase of the execution of the project.

4. Company building

In this phase, the business implements the transformation from the ‘startup’ mindset.

The business model will proceed in scaling upwards as well as the organization’s resources and infrastructure.

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Although the process should encompass all departments, the chief responsibility for driving it tends to fall to the product management and marketing teams as they normally have more direct involvement with customers, analyzing any feedback potentially harvested, and converting it into product or project requirements.

Customer development is singularly important in injecting real-world data into the project.

Authentic input from consumers will counteract any bias or incorrect assumption that has made its way into the business model.

This input will take the shape of observations or direct contact with customers, or interaction with the marketplace, and should be treated as invaluable.

Why use the customer development concept?

Customer development gives a business the ability to conduct a thorough assessment of the business model before operations kick into full swing.

If this were not to happen, concept-based mistakes at the beginning could escalate into highly damaging results much further down the line.

The framework provides a threshold by which to delay financing and resourcing until all inferences, hypotheses, and bias can be rationalized. The final product should then be well molded to the marketplace and the consumer.

Customer development also counterbalances excessive emotion about the product or project.

A business can be charged with excitement over the prospects of a product they believe is not just going to perform well, but be revolutionary.

Although enthusiasm should always be encouraged, it should not trump the sober judgment of the limitations of the product and by introducing realistic data into the concept of the product at an early stage, customer development achieves this.

Using the customer development framework enables a business to preserve its financial outlay and afford further money-generating activities in the long run-up to project execution.

Finding financial interest in the project is also easier to achieve when the model has been forged in the customer-feedback furnace: reasoning and rationale are easier to sell and a product will be more appealing.

Ultimately, the product that makes it into the marketplace is typically more honed and athletic.

This is a reflection of having an in-depth knowledge of the market in which the business is immersed: a benefit of using the framework.

Consumer needs and market volatility can be better anticipated through the development of the product.

Some drawbacks to the customer development approach

There are some disadvantages to using the framework.

Firstly, it can lengthen the amount of time the product takes to reach the marketplace.

Especially at the customer validation phase. To refine the model can mean sending it backward in the process to the hypothetical phase multiple times in order to distill out assumptions and flaws.

Additionally, a delay here can turn into a rethink, especially if a model - first thought to be a good idea and viable - cannot stand up to consumer scrutiny. Equally, a product that requires concealment before it reaches the market can become exposed in the long run-up. Interacting with customers to glean data to be fed back to the business can tip-off the customers as to the product’s existence.

Sometimes, when consumer data is examined, it can be counterintuitive. This may be difficult for marketplace experts within the business’ workforce to absorb, especially if it means they have to change their working practices.

A person in the product manager role, for example, could find themselves meeting significant resistance from staff who have a long history of developing products in a certain manner.

While these issues are solvable, it can slow the product’s journey from concept to marketplace.

Customer development as a concept should be employed and then re-employed. It is an ongoing process that requires constant vigilance and application.

A business may lose sight of this or lack the inclination to keep investing resources to maintain it. The result can be a product that was initially market-fit but has become skewed as the marketplace evolved.

Even more than this, judging when to press on with product development rather than constantly refining it can cause workplace disputes. Once again, these issues can be overcome but may cause a delay in the product’s advancement.

Integrating customer development into product lifecycle management

Successful customer development is integrated into different product lifecycle stages to help organizations save money and time. Creating features and functions customers don’t need or want can waste valuable resources. As customer development encourages idea vetting and validation early in the process, teams know the product they’re working on has value. 

However, continuous customer feedback can influence product iterations even after release. It’s essential to continually gather feedback before, during, and after product development. If your latest product is almost ready to hit the market, you can still start incorporating customer development at any stage. 

Quantitative and qualitative data in customer development

You’ll collect two types of data during customer development, and both are equally valuable. 

Quantitative

Quantitative data shows you the state of your product and your business. You can use various metrics and analytics to interpret customer data, including:

• Average revenue per account: This is the revenue each customer generates monthly or annually. This can reveal how much value customers place on specific products. 

• Net Promoter Score (NPS): Here, you ask customers how likely they are to recommend your product or organization, usually with a score of between 1 and 10. Ideal for measuring customer satisfaction with a product or update. 

• Customer lifetime value: This is the amount of revenue you will make from one customer throughout your seller-buyer relationship. It helps highlight your most valuable customers so you can focus on strengthening your relationship with them. 

• Customer churn rate: This is the number of customers you retain based on how many have stopped subscribing or closed their accounts. You can use churn rate to determine when products fail to satisfy customers.

Qualitative

Qualitative data can help you understand your quantitative data. It gives you insight into the numbers and the reasons behind them. Examples of qualitative data include:

• Responses to interviews and surveys: A simple, effective way to gather customer feedback. Ask open-ended questions that prompt detailed responses rather than multiple-choice ones. 

• Customer support tickets: Support tickets can show you the most common issues customers experience with a product or feature. That makes prioritizing updates easier. You can use your public portal for this.

• Notes from focus groups: Focus groups provide feedback with different perspectives and experiences. They can illustrate how specific audience segments respond to a product. 

• Comments from usability testing: These help you observe how users interact with a product and how easily they can complete a specific goal. Usability testing helps teams pinpoint issues that could affect a customer’s experience.

Great customer development examples and case studies

Dropbox

The first case study will be Dropbox. Dropbox remains a very popular product and one of Silicon Valley's greatest success stories. But that success wasn’t easy. 

Dropbox had a team full of great engineers but didn’t know all that much about marketing — leading them to spend way too much on various marketing channels. At one point, they were spending hundreds of dollars per customer acquisition on a product that cost, at most, $99. 

Then Dropbox started focusing on customer development and left traditional marketing approaches behind. They began to focus on working with their customers, and they were able to successfully use word-of-mouth marketing.

Groove

Groove is an online-based help desk solution for businesses. Early on, Groove was able to find success as a subscription-based service.

However, Groove had a churn problem — they could get new customers but coudln’t keep them. At 3%, their churn rate was high, and even after surveying customers remotely, they couldn’t figure out what was causing this churn. 

After learning about customer development, Groove decided to rethink its strategy. They spent more time getting to know customers and helped their customers get to know Groove. 

This new approach helped Groove cement its space in the industry. They also narrowed their  net to target SMBs and provided a more personal experience to Groove users.

These small changes helped dramatically reduce its churn rate.