What does it take to create a successful startup? Thousands of new startups are created around the world every year. The vast majority of them fail. Failure rates of both new entrepreneurial ventures (and big corporate innovation efforts) range between 75–90% depending on which study you’re looking at. Yet the business world doesn’t talk much about how to meaningfully reduce that failure rate. What if we could? How can you as an entrepreneur increase your new venture’s odds of success?
The good news is that you can. We’re seeing many of the world’s best-managed startups utilizing a process called customer discovery, in which the company methodically fine-tunes the business model and customer value proposition. This early refinement of strategy can make a tremendous impact on the odds of initial success, as well as a long-term success if the practice of discovery is continuous throughout the company’s lifecycle.
You’ve likely heard of customer discovery from books like the Startup Owner’s Manual, or from movements like the lean startup. This post will help you take the next step by understanding these concepts in greater detail and learning how to put them into daily practice at your startup.
What is customer discovery?
Customer discovery is the first phase of a four-phase process called customer development. The phases of customer development are:
- Customer Discovery
- Customer Validation
- Customer Creation
- Company Building
In Customer Discovery, the objective is to take the startup founder’s vision and list out the assumptions that must be proven true in order to successfully execute. By listing and then prioritizing the assumptions, the team can decide which are the most critical ones that need to be tested first. They can conduct research and design experiments to test hypotheses and gather real-world evidence.
From here, the goal is to get to product/market fit (PMF). PMF is a crucial inflection point in the lifecycle of a business. The well-known venture capitalist Marc Andreessen is credited with coining the term. He defines it as “identifying a compelling value hypothesis” or “being in a good market with a product that can satisfy that market.”
A good indicator of PMF is when your customers are paying money for product or service and are satisfied with their purchase. Customer churn is relatively low. Customer acquisition is happening at a quick enough pace and large enough scale that the founders are confident that if they further refine product/service, operations, brand positioning, business model, and sales and marketing funnel, the business will hit escape velocity.
Through this stage, the funding is usually “sweat equity”, “friends, family, and fools”, angel/seed investors, or perhaps a Series A round.
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In Customer Validation, the objective is to refine product/service, operations, brand positioning, the business model, and the sales and marketing funnel, as mentioned above. Venture funding will usually be a Series A round here.
Customer Creation is about scaling execution, particularly with regards to sales and marketing. It’s at this stage when a company often looks to raise a Series B round of funding.
Finally, Company Building is about scaling the organization and operations. Here is where a company would be looking to raise a Series C or D round of funding.
Once a company has fully scaled up and growth in the core business begins to level off, that mature company will often begin another discovery process (usually “product discovery” or “market discovery”) to try and find the next big business unit. It’s important to note that discovery is not a one-and-done activity. Well-run startups are increasingly conducting extensive discovery work at every stage of the company’s development. It’s a practice known as “continuous discovery”.
The difference between product discovery and market discovery
Product discovery is the attempt to design a great new product for an established market. Think of Tesla introducing the first Roadster to the mature automobile market.
Market discovery is the attempt to create new markets. Think of Airbnb starting the home-sharing market or Uber starting the car-on-demand market.
How startups leverage customer discovery for success
For seasoned entrepreneurs and investors, it’s fairly easy to tell the difference between a startup that has done its homework and one that hasn’t. It’s telling, for example, that new research shows the average age of a successful startup founder is 45, much older than many people assume.
The deeper professional experience of a serial founder in their 40s provides insights from previous successes and failures. Part of that includes how to get to product/market fit more efficiently with discovery processes.
A founding team that has conducted a lot of customer discovery will already have a firm grasp on whether the market has validated their assumptions. They’ll have strong indicators, sometimes as powerful as a customer actually paying money upfront for the right to purchase the product when it gets released months later.
A great example of this is crowdfunding sites like Indiegogo. If a founding team can tell a great story on Indiegogo and demonstrate a working prototype, they can raise a lot of money. That essentially is their customer discovery phase.
Tactical tips for conducting customer discovery
One of the reasons that many startups still don’t practice continuous discovery is that it generates a lot of data, which can often get lost in disparate tools. If the data gets lost or doesn’t get pooled and synthesized in an intelligent way, it becomes very difficult for the startup team to get the full value out of the discovery activities.
Some actionable tips for implementing a healthy customer discovery process are:
- List out all the assumptions that underpin the founder’s vision.
- Distill the assumptions into falsifiable hypotheses.
- Gather research and evidence that either proves or disproves each hypothesis.
- Use a tool that helps you surface the insights from the data you collect and share the results with collaborators and stakeholders.
There aren’t many dedicated customer and product discovery software solutions out there, but GLIDR is one of them. Startup teams all over the world use GLIDR to organize and analyze their discovery efforts so that they can get better at separating real market signal from noise and ultimately make better startup and product decisions.
Common mistakes in customer discovery
- Confirmation bias in discovery interviews
- Over-reliance on the freemium model
- Feature creep
- Lack of market focus
Here’s how to avoid making these common mistakes.
Confirmation bias is the all-too-common tendency to interpret what you hear as confirming your preexisting beliefs. It also means that you’ve likely discounted or ignored signals that might disconfirm your preexisting beliefs. To help eliminate confirmation bias from discovery interviews, these five steps are hugely helpful:
- Avoid leading questions
- Ask open-ended questions
- Focus on the job the customer wants to do (not the job you have in mind)
- Interview a critical mass
- Follow up with a survey
The freemium pricing model has become increasingly popular, especially in software and services. It consists of a base edition or level of service that is free to use. The company then tries to up-sell to a paid plan with increased functionality. While this model has proven successful for many companies, there are pitfalls, such as annoying customers with overly aggressive upsell techniques, or providing too much functionality in the free version.
To avoid over-reliance on the freemium model, try charging for even the entry-level version of your product right from the start. If customers find true value in your base offering, they’ll happily pay some nominal amount for it. If freemium makes a lot of strategic sense for your business model, and you’re sure you want to stick with it, you can experiment with varying levels of functionality within your free tier so that you’re only providing just enough value to entice new customers.
Feature creep is deadly to a startup. It can both confuse your customers and distract your development and support teams. To avoid feature creep, apply the discovery process to your product development. It’s unsurprisingly called product discovery. Product discovery is all about validating the amount of value each new potential feature would add to the overall customer experience. It makes sure your team is only building the most important features.
To maintain market focus, remember that it’s far easier to expand outwards from a deeply satisfied niche customer segment than it is to narrow down a product that tried to appeal to a broad audience.
What comes next?
As we saw in the first paragraph, customer discovery is the first step of a four-step process. After a startup team has conducted extensive customer discovery, they’ll move into the customer validation phase. Ultimately, mature businesses will need to find new business by conducting product and/or market discovery.
As far as what comes next in how startup teams can better internalize and leverage customer discovery, the software market will continue to evolve. We’re beginning to see even software applications that had been focused on the delivery side of the discovery/delivery loop begin to incorporate more and more discovery capabilities.
As entrepreneurs improve their discovery processes, with the help of a maturing set of software tools, we should see the failure rate of new business ventures start to decrease. The key to leveraging discovery for entrepreneurial success is to make it a part of the culture. Practice continuous discovery within cross-functional teams and your odds of both initial and sustained commercial success will improve notably.
A contribution from GLIDR.io