This book by Steve Blank was recommended in The Personal MBA by Josh Kaufman. Steve Blank is an entrepreneur who also consult a variety of startups. Here are the things I noted while reading the book.
Product Development Model won’t work for most startups.
What is the Product Development Model? It’s the traditional cycle we all follow when starting a business. The cycle is something like this:
- Have an idea.
- Piece together funding.
- Start development.
- Test the product.
- Launch the product.
Sounds basic, right? But this model has a lot of flaws according to Steve Blank, especially when it comes to startups.
a. Customers.
Who are our customers? What is our market? We haven’t sold a single product while it was in the development or ideation stage. We have never interacted with a real customer (early enthusiast) who is ready to pay when the product gets to its prototype stage (paying customer, not tester). Instead of finding answers to questions, we just started development based on assumptions and opinions. This translates to having no factual data about our market.
b. Execution instead of Learning.
The Product Development Model emphasizes execution. We want to get our product launched as fast as possible. We don’t want to check if our assumptions about the market are right or wrong. Instead of learning and discovery activities that could help us gain valuable insights, we just want to get our product to a market that may or may not exist (we haven’t validated it yet).
c. Wrong Sales and Marketing.
Due to the lack of customer discovery data, our initial sales and marketing strategies might be wrong. This shortage of facts about our customers and markets can lead to marketing and sales routes that can jeopardize the company. Just imagine developing a niche product. We reach a consensus to market it to a general audience as we don’t have real customer data. When we find our marketing and sales departments bringing in less money than anticipated, we start to pour in more resources. Instead of finding the “why”, we go all in. This has happened plenty of times. Webvan is a prime example. If you haven’t heard about it, Webvan was an online grocery store that emerged in the dot-com boom and failed miserably.
Note that Product Development Model is not entirely wrong. This model has been used by entrepreneurs for generations and is still valid for products in existing markets (we will discuss about markets in next section). The argument put forward by Steve Blank is that most startups are either finding a new market or re-segmenting existing markets. They have an existential need to find their true market and business model (or figure out whether it even exists), instead of blindly following the Get Big Fast mantra. Only through finding a scalable business model can a company survive. This requires “learning and discovery” over anything else.
Before moving on to the Customer Development Model discussed throughout the book, let’s talk about four types of markets:
Types of Markets
There are four types of markets that a startup can be in. Identifying which market your company is in early on can be crucial to its success. Customer Discovery, long term strategy, sales and marketing routes, etc., differ in each market.
1. Existing Market
There is already a market for your product. You know this because there are products similar to yours being sold and bought. The great news about this type of market is that you don’t have to go through a rigorous customer discovery phase: you already know who the customers are. The Product Development Model we talked about earlier is perfect for this type of market.
The sad truth is that most startups won’t come under this category. It’s easy to enter this market since we don’t have to educate customers (but it’s not easy to get market share from established players). If there are dominant players in this market, we have to spend a lot of money relative to the dominant player’s sales and marketing budgets to gain entry. A common rule is to have 3x the resources of the market leader.
You can compete in this market using these strategies:
Positioning yourself based on product attributes like speed, price, quantity or quality. Think Apple iPhones. While smartphones were already there, iPhones were able to beat the key players through their superior user experience.
Better distribution channel. An example is Netflix during the Netflix vs Blockbuster days. Instead of going to a Blockbuster store, you could get DVDs of your favorite movies from Netflix through the mail.
Giving a better service. Remember those days of Zappos vs physical shoe stores. Not only could you buy the shoes online (distribution), but you could get free shipping both ways with a 365 day return policy. When people were worried about buying shoes online that might not fit them, this service became game changing for Zappos.
2. New Market
Discovering an entirely new market means that there will be no competitors in the initial phase. The startup should not consider this as a boon. Most of our time and effort will be spent educating customers. Instead of trying to grab market share, we should focus on market adoption.
A famous example of a company failing to realize it was in the new market is a startup called PhotosToYou. Founded in 1991, during the early days of digital cameras and the internet, they offered high quality printed photos right to your home. Very few people had an internet connection, and only a fraction of those owned a digital camera. Instead of focusing on market adoption, PhotosToYou decided to go with branding. They tried to grab the market share of a barely existing market. When the digital camera along with the internet finally started to get adopted, they couldn’t keep up with the competition and shut down. Blank argues that instead of spending heavily on acquiring customers early on, PhotosToYou should have made low cost attempts to educate them. Once the market became large enough, only then should they have focused on branding or better service.
The new market is all about long term strategizing. We cannot expect to make quick returns. I personally used to think otherwise, but a study from Stanford Business School shows that the first mover advantage isn’t sustainable in the long run. In their study of 50 product categories, more than half of the first movers failed. A well known example of this is Ford, which was the first company to mass produce automobiles. By 1921, Ford held a 60% market share while GM had just 6%. In 1931, however, GM was leading by 31% compared to Ford’s 28%. By the 60s, it was the latecomer, Toyota, who dominated. It’s not about who reaches the market first; it’s all about who sustains themselves over time through adapting and long term strategies. I had written some notes on Alfred Sloan’s memoir about GM here. In Sloan’s memoir, you can see how far ahead General Motors executives were thinking at that time. Instead of focusing on beating Ford, they were emphasizing long term goals.
3. Resegmenting Market: Low Cost
There is a new market and an existing market. What’s next? It’s a combination of both. Let’s talk about the first form of resegmentation: Resegmenting based on low cost. This is when a company positions itself as a low-cost option in an existing market. One prime example that comes to my mind is Ryanair, the Irish airline. By undercutting every major airline in ticket prices, they divided the industry into costly and cheap carriers. Then they dominated the cheap segment of that market. The interesting part is that after resegmenting the European airline market when they started, Ryanair have now become the largest airline in Europe. What they followed was the New Lanchester Strategy. Instead of going head on with major carriers, they divided the market, dominated their small segment and slowly started taking away market share of the big players. This is also known as a beach head strategy.
That’s how you win against dominant players. Focus your resources on a small area, turn it into a stronghold and slowly advance to the broader market.
4. Resegmenting Market: Niche
This is another way of resegmenting an existing market. Instead of dividing the market based on price, we divide it based on certain features. One example is Whole Foods. There are other dominant supermarket chains, but Whole Foods focuses on health conscious customers. Walmart is another great example. When other big box discount retailers were focusing on large cities, Sam Walton focused on small towns. Through the combination of this geographic niche and low prices, Walmart became not only the largest retailer, but the largest company in the world.
The book doesn’t end here. Steve Blank shares his valuable insights about the Customer Development Model and the steps that come with it. The major steps of this model are: Customer Discovery, Customer Validation, Customer Creation and Company Building. Each of these steps is iterative, not linear like the Product Development Model, which means you will have to come back to one step or repeat it several times. If I could summarize the Customer Development Model, I would say, it’s all about having insights from real customers in the early stages of the startup. Based on the information we can get from them, we iterate our strategy. We try to put ourselves in customer’s shoes, imagining their life with and without our product. Also note that there are various types of customers: earlyvangelists -> scalable customers -> mainstream customers. Our strategy for reaching each of these customer types should be different. Our company’s goal is to reach the mainstream market through a repeatable and scalable business model, and the early days should be utilized to figure this out.