Entrepreneurship: Customer Development – Preventing Business Failure
Most businesses fail from a lack of customers rather than from the lack of product development. Which is exactly why it is so important to find out what customers are looking for. By testing your product or service with the customers every step of the way, you can avoid this issue. This process is called the customer development process and consists of four stages: customer discovery, customer validation, customer creation and company building.
Customer Development Model
1. Customer Discovery
The customer discovery stage can be further broken down into four phases:
The first phase of customer discovery involves stating your hypothesis and drawing out the Business Model Canvas or BMC. The second phase of customer discovery involves testing the problem. You will need to test your understanding of the customer’s problem or need, and decide how you will go about building the prototype. The third phase of customer discovery involves testing the solution.
Once you have built your prototype you will need to test it to further your understanding of the customer’s problem and whether your solution addresses that problem. If it does, then you have established a product-market fit. The fourth and final phase of customer discovery is establishing whether or not people truly believe that the problem you are solving is of high value. The customer discovery process is not necessarily a one time process. In fact as you continue to test your hypothesis you will go through this process multiple times before having something that matches customer needs. Then you can move on to the next step.
2. Customer Validation
Once you have established product-market fit, you will need to prepare to sell your product. This requires setting up a sales process and is essential for scaling a business. This step is intended to help you create the map that you need to reach your target customers. Every step in the customer development model requires you to test and repeat the previous process as necessary. So if customer validation isn’t working, you go back to customer discovery and revise your working.
3. Customer Creation
The third step in the customer development model is customer creation. In this step, you will need to determine if:
- You are entering a pre-existing market
- You are entering a completely new market
- You are entering the existing market as a lower cost alternative
- You are carving a new segment in an existing market and creating a niche.
It is also quiet possible that you will be entering a market that is a hybrid of the four. This step encourages acquiring customers before significantly spending on marketing. This way you are prevented from spending on markets and customers that do not exist and will nor be created.
4. Company Building
The fourth and final step in the customer development model is company building. This step marks the transition from an “informal learning experience to a fully-fledged department” that works to benefit from any early success that the company may have received in its respective market. In this step, the business can also begin to spend more money on marketing activities to increase customer sales. This is also the step during which a business can scale itself without putting the company in a vulnerable financial position.
The customer development model is iterative. It is practically designed with failure in mind. It is expected and okay to fail several times before getting it right. One assumption that the model makes is that:
You will move back and forth between the first step which is customer discovery and the second step which is customer validation at least two times before moving on to the third step which is customer creation.
Failing in the early stages is better than failing in the later stages because in the early stages you stand less to to lose. Failure that isn’t recognized until it is too late is the kind of failure that ruins a business. By using the customer development model, you can fail in the early stages, recognize your short-comings and reduce your chances of failure in the later stages.
