Startup Series: Part III — Customer Validation & Growth
Along the journey we commonly forget its goal.
– Friedrich Nietzsche
In the first and second part of the Startup Series, The Founder’s blueprint and Customer Discovery, we touched on the overall process of establishing a venture. This last article from the main series will focus on the missing piece of Customer Validation & Growth — it involves the missing and crucial area of hypotheses validation and sheds some light on scaling.
The following questions continue from the second article and deal with the following:
· User acquisition: have we fully gained transparency over the process?
- Can we recreate it?
- Do we possess proof for the repeatability?
- Is it possible to target these orders/users with our current product?
- Distribution channels: sufficient levels of testing with regards to sales?
- Scaling: orders/users into a profitable business?
- Positioning: both, product and the company?
From Validation To Execution
The basic idea behind this stage is the validation of hypotheses about your customers. In order to do that, you will shift into a mode of serial pass/fail testing to practice sales at each stage along the journey. Your objective here is the determination of a robust product/market fit that sets the foundation for scaling your sales and marketing department and spending.
In order to test your product, you will engage your potential customers to test your product continuously. By doing so, you are putting your entire business model to the test — here starts the most serious and interesting section of your journey. Note that you are no longer moving along specific sections of your business model canvas — you are testing the entire complex.
Especially with regards to the approach of sales as part of engaging customers, you will feel great disorientation to what is commonly known in big traditional corporations that sell physical products — you might wonder why that is the case? The reason is clear: the combined set of rules that exist in physical channels don’t apply for Startups, even more critically put — they are positively detrimental.
Now what are the implications for Customer Validation then?
First off, here’s what you are not going to do/see before your customer is not known and every single hypothesis validated:
- Hire of sales team
- Sales strategy execution
You simply don’t know enough at this moment in time to perform these actions. Even if you already hold firm hypotheses at your disposal about the buyer, her/his motivation and the levels of willingness to pay — you still need the full validation and this comes proof comes in as customer orders (until then you remain with in a mode of great guesses with a lot of investments into development work — good luck!).
Canvas Sales Feed
As you will remembers, you have early run the habit of testing your business model hypotheses during Customer Discovery and you did great — ideally you dealt already with the following:
· Value proposition: user test affirmation
· Customer Segments: hypothesis creation on archetypes of customers
· Customer Relationships: testing on gain, retention and growth of customers
· Channels: understanding of key partners and incoming interest
· Revenue streams: your idea how to earn money with the product
When you are ready, you will need to develop a sales roadmap that incorporates all insights you have gained during the Customer Discovery stage in order to serve the need for a sales funnel tailored to your venture.
Here’s what counts:
· Sales strategy: how do we approach the consumers? Solution sale?
· Budget-setting: sourcing of resources to purchase your product?
· Frequency: how many calls necessary to land one sale?
· Duration: average sale to conduct from initial contact?
· Influencing: origin of recommendations
· Role-setting: decisions-making? Economic buying? sabotage?
· Customer problems: simple and concise formulation
· Earlyvangelists: how are they defined? Definition of personas?
· Traffic determination: is it sticky?
· Viral effects: strong perception for your product foreseeable?
If you cannot answer all the aforementioned aspects, your sales efforts are likely to fail. Your salespeople commonly believe they will be able to acquire the missing information while executing sales and closing orders — that won’t work! Your sales roadmap is already a part for the search after a viable and profitable business model and therefore it can only be executed after it’s built.
First discover and learn — then execute.
Sales Force Versus Sales Roadmap
Continuous Discovery and validation are key and you will confront this rhythm right from day one (get used to a day one attitude, day two is stasis!). You are running out of time right from the beginning so be mindful and flexible to move.
“Starting a company is like jumping off a cliff and assembling an airplane on the way down; being resource-efficient lets “you” glide to minimize the rate of descent, giving you the time to learn things about your market, technology, and team before you hit the ground.”
Blitzscaling, Reid Hoffmann/Chris Yeh
You will be very tempted to concentrate your efforts around speed, formalizing in increased cash burnt for customer acquisition. Why won’t that work out? In most cases it will slow you down.
Your number one priority now is a sales roadmap to get a deeper understanding about the identification and repeatability of sales (product/market fit in execution). Just after completing this plan, you can move on to establish your sales department.
Channel Validation Priority
The overall process of Customer Validation is identical across all channels but for digital startups it comes in far more quickly than you could every gather feedback face-to-face. The reason is the dynamic approach to agile digital environments that gives it a relative edge as compared to physical channels and goods. At the same time digital products are more complex in nature (UX, Databases, Business Logic, Interfaces etc.)
Crucial to the initiation of Customer Validation is the prioritization of your business model components. Startups are comparably small and very individual complex systems that consist of endless interrelated parts — of course there is no way you could ever verify every single part and their effects on each other.
Working with your Lean or Business Model Canvas, you should primarily keep an eye on value proposition, customer relationships, channels and your revenue streams.
The emphasis in Customer Validation is clearly on the accumulation of customer feedback in order to set priorities to product functionality. You, as the passionate entrepreneur with, will put an emphasis on vision when conducting Customer Development (considering no existing data in new markets!). You rely on everything you can get from the beginning while listening to your instincts and you will exactly know by instinct when to continue, ignore and proceed.
A Word About Scaling
Once your venture has survived all this work and you are proudly standing on top of your efforts, you may think about the transition to a scale-up. The topic itself is massive and I would like to lose some words about it only briefly now (Scaling to be discussed in another article later).
Pitfall 1: sales induced premature scaling
Premature scaling is a serious issue to deal with relatively often when too many salespeople are burning cash in an effort to acquire new customers, but you have not even proven the validity of all your business model hypotheses.
Pitfall 2: expensive demand-creation
Your first priority is to understand who your customers are — this has the highest priority and should be the first step before sales-induced demand-creation takes place. Otherwise, the result is laying off employees from the sales department and terminating running marketing programs once your venture faces a pivot after scaling too early.
On the other end, you can expect certain delays in sales-and-marketing hiring before you have concluded your validation. This very fact is an indicator for the relatively high fail and iteration-rate.
Tipp: constrain yourself to heap sufficient cash resources in the bank to secure pivots and iterations along the path to startup glory.
As opposed to the conventional organic startup growth, fast-scaling for digital startups is an option that considers viral or network-effect drivers in case you possess the unique setup and hit the customer nerve as big technology companies did — if you do, then pedal to the metal all way!
From MVP To Orders
We are close — to finalizing Customer Validation but not before your venture can answer the following three magical questions:
1. Is scalability foreseeable? In more economic terms: will one dollar for customer acquisition translate into more than a dollar of incremental revenue?
2. Is your sales roadmap repeatable and scalable? Are actions mutually exclusive and collectively exhaustive actions involved known to deliver sales consistently?
3. Can we draw certain predictions from the sales funnel? Are the same sales programs and tactics applicable repeatedly to ensure a continuous flow of customers?
The Customer Validation Process
In order to provide some more detailed insights, here’s the entire Customer Validation process in all 4 steps:
Level 1 — Sales Preperation
For web/mobile venture we distinguish six activities:
· Product: your positioning is the bread and butter
· Activation and Acquisition: plans to establish targeting
· MVP: design and assembly thereof
· KPI and metrics: definition and steering
· Sales: hiring sales closer
· Advisory: board establishment
Congratulations — you hold some serious levers in your hands!
Level 2 — Field Research
During this exercise you will have to conduct field research to bulletproof your product (remember to act MECE) and here’s the interesting part: will your customer buy your product and validate the business model?
At this point you will try to sell a relatively unfinished product with unproven functionalities and qualities to customers (no available sales department yet).
Receiving feedback to extract insights is key now — within the physical channel startups do this with all sorts of marketing materials and many points of contact (e.g. meetings).
The following are useful:
· Mockups
· Product Demos
· PowerPoints
· Brochures
· Sales materials
The goal here is to refine the presentation of your product and improve the predictability of your sales funnel along with the validity of your business model and its repeatability, scalability and essentially, its profitability outside in the real-world.
· Digital startups are keen to quickly understand if their products work in the real world by addressing customers to refine existing plans tools to acquire them. It is now essential to measure and optimize acquisition and activation of customers.
· A startup performing in multi-sided markets (either physical or digital) depends on field research to test both sides of the market. Marketers involved first conduct user tests and then validate the different sets of hypotheses from the business model sections.
Level 3 — Positioning
As crucial as this step will come along it happens once and should occur once your venture has landed a sufficient number of customers. You can then move on to develop and refine your offering and overall positioning. The positioning itself should be discussed in meetings with industry experts, advisors and your extended customer audience.
Digital startups refine their get tactics and conduct initial product positioning before they move on to collect and process the customer behavior information from level 2. MVP feedback and the applicable effectiveness from acquisition tools is documented accordingly.
Level 4 — Verification
Verification provides you with enough time to verify from previous steps in order to undertake a detailed pivot-or-proceed analysis. At this point it is essential that your venture gathers the most up-to-date insights on all sections from the business model canvas and complete customer validation. Only then, you will have the necessary knowledge to scale your business.
The essence of this step is to evaluate whether the business is worth a) the investment and the effort in time, resources and necessary learning to execute. On the other hand, we want to get b) an understanding of foreseeable revenue, growth prospects as well as achievable goals for investors and founders alike.
You are unlikely to land your optimal version of the business model already before your second iteration to validation — this takes time and should be considered also in planning and communication (team motivation).
You can be sure that your work on Customer Validation has come to a successful end once you have realized your first incoming orders.
You have now realized a confirmation for MVP customer acceptance — this proves that your customer matches your business model and product and your hypotheses were in fact true. We now know how to reach them predictably an are capable to craft a scalable plan to target more customers. You have reached the so called “epiphany moment.”
Conclusion
With Customer Discovery you tested the hypotheses of your business model with a comparably small group of representative customers by request of insights (not yet orders!).
At this stage you were yet not in possession of the facts that would enable you to understand who would buy your products or how scalable the business could become.
Making the transition to Customer Validation you can now determine whether your product/market fit can be validated by orders or usage. Consequently, your MVP as well as your sales and marketing plans are to be developed further. Then, you will conduct field research (physically, virtually, or both) to test your MVP along with the hypotheses from your business model — you will do so, by requesting orders.
We left many other aspects and topics which I want to introduce in separate articles around topics like Human Capital, Establishing a Culture, Scaling and Funding among others.
Day two is stasis. What we strive for is day one attitude.
About: Alex Michael Pawlowski is a consultant and author who writes about topics around International Business.
For contact, collaboration or business inquiries please get in touch via lxpwsk1@gmail.com.
For more information please visit www.lxpawlowski.com.
