Customer Development/Lean Startup 012610 Class 2

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Customer Development in High Tech: Sales, Marketing & Business Development in a Startup

MBA & EMBA 295-F

Three Types of Markets

Steve Blank and Eric Ries

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Class 2: Agenda

  Scalable Startups   Case: In N Out   Market Type

  Definitions   Examples   Risks

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Scalable Startup

Small Business vs. Scalable Startup

  Small business = reasonable risk and return   Scalable startup = unreasonable risk and return

  Vision of large market or new market   Willing to make a large bet of time and money   Reality Distortion field

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Scalable  Startup  

Small  Business  

Startup  

Large  Company  >$100M/year  

Small  Business  vs.  Scalable  Startup  

Scalable  Startup  

Small  Business  

Startup  

Large  Company  >$100M/year  

Small  Business  vs.  Scalable  Startup  

-­‐  Business  Model  found  -­‐  Profitable  business  -­‐   ExisEng  team  <  $10M  

-­‐   Total  Available  Market  >  $500m  -­‐   Company  can  grow  to  $100m/year  -­‐   Known  business  model  -­‐   Focused  on  execuEon  and  process  

Scalable  Startup  

Company  TransiEon  

Scalable  Startup  to  Company  The  TransiEon  

Scalable  Startup  

Company  TransiEon  

-  Business Model found -  Product/Market fit

- Repeatable sales model - Managers hired

Scalable  Startup  Exit  Criteria  

Scalable  Startup  

Company  TransiEon  

-  Business Model found -  Product/Market fit - Repeatable sales model - Managers hired

- Cash-flow breakeven - Profitable - Rapid scale - New Senior Mgmt ~ 150 people

TransiEon  to  Company  Exit  Criteria  

What  is  a  Startup:  DefiniEon  

a  startup  is  an  organiza-on  formed  to  search  for  a  repeatable  and  scalable  

business  model.  

Scalable  Startup  

Company  TransiEon  

-  Business Model found -  Product/Market fit - Repeatable sales model - Managers hired

- Cash-flow breakeven - Profitable - Rapid scale - New Senior Mgmt ~ 150 people

What  is  the  Purpose  of  a  Startup?  

The Search for the Business Model The Execution of the Business Model

What is a Scalable Startup: Definition

A  startup  is  an  organiza-on  formed  to  search  for  a  repeatable  and  scalable  

business  model.  

So  what’s  a  Business  Model?  

tomorrow’s organization. today.

VALUE PROPOSITION

COST STRUCTURE

CUSTOMER RELATIONSHIP

TARGET CUSTOMER

DISTRIBUTION CHANNEL

VALUE CONFIGURATION

CORE CAPABILITIES

PARTNER NETWORK

REVENUE STREAMS

gives an overall view of a company's bundle of products and services

portrays the network of cooperative agreements with other companies

describes the channels to communicate and get in touch with customers

describes the arrangement of

activities and resources

explains the relationships a company

establishes with its customers

sums up the monetary consequences to run a

business model

describes the revenue streams through which

money is earned

describes the customers a company wants to

offer value to

outlines the capabilities required to run a

company's business model

INFRASTRUCTURE CUSTOMER

OFFER

FINANCE

Business  Model  =    Keeping  Score  in  a  Startup  

Company  TransiEon  

Customer Development

Hypotheses, Experiments

, Insights

Data, Feedback,

Insights

Agile Development

Scalable Startup

Where  Does  this  Class  Fit?  

Company  TransiEon  

Customer Development

Hypotheses, Experiments

, Insights

Data, Feedback,

Insights

Agile Development

Scalable Startup

Where  Does  this  Class  Fit?  

This is what our class is about

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In-N-Out Case

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In-N-Out Secret Menu

  X by Y   X meat patties and Y slices of cheese

(for example, a 3 by 3 or a 2 by 4)   Double Meat

  Two meat patties without cheese.   Triple Meat

  Three meat patties without cheese.   Animal Style

  A mustard cooked beef patty served on a bun with pickles, lettuce, tomatoes, extra spread and grilled onions. Any burger (including veggie and grilled cheeses) may be made this way.

  Flying Dutchman   Two meat patties, two slices of melted

cheese and nothing else.   Protein Style

  Instead of a bun, the burger is wrapped in lettuce. Any burger (including veggie and grilled cheeses) may be made this way.

  Veggie Burger (Wish Burger)   A burger without the meat and cheese.

  Grilled Cheese   Two slices of melted cheese, tomato,

lettuce and spread on a bun, with no meat.   Extra Everything

  Adds extra spread, tomato, lettuce, and onions (regular or grilled).

  Fries "Light"   Almost raw fries that are cooked for less

time.   Fries "Well" (aka "Wellies")

  Fries that are cooked longer to be extra crisp.

  Cheese Fries   Fries with two slices of melted cheese

placed on top.   Animal Style Fries

  Fries with cheese, spread, and grilled onions.

  Neapolitan Shake   All three shake flavors (strawberry, vanilla

and chocolate) combined in one shake.

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In-N-Out Meat Factory

Further Reading

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Market Type Who Cares?

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So Why Are We Talking About This?

Existing Market Resegmented Market

New Market

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Type of Market Changes Everything

  Market   Market Size   Cost of Entry   Launch Type   Competitive

Barriers   Positioning

  Sales   Sales Model   Margins   Sales Cycle   Chasm Width

Existing Market Resegmented Market

New Market

•  Finance •  Ongoing Capital •  Time to Profitability

•  Customers •  Needs •  Adoption

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Definitions: Three Types of Markets

  Existing Market   Faster/Better = High end

  Resegmented Market   Niche = marketing/branding driven   Cheaper = low end

  New Market   Cheaper/good enough can create a new

class of product/customer   Innovative/never existed before

Existing Market Resegmented Market

New Market

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Existing Market Definition

  Are there current customers who would:   Need the most performance possible?

  Is there a scalable business model at this point?   Is there a defensible business model

  Are there sufficient barriers to competition from incumbents?

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Existing Market

Perf

orm

ance!

Existing!Companies!

Our Company!

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Oops, forgot about Time

Perf

orm

ance! Our Company!

Existing Company Performance Growth

Time!

Existing!Companies!

Today!

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Existing Market Risks

  “Better/Faster” is an engineering driven axiom   Incumbents defend high-end, high-margin

businesses   Factor in:

  Network effect of incumbent   Sustaining innovation of incumbent   Industry (or you own) “standards”

  “They’ll never catch up” is not a business strategy   Established companies almost always win

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Resegmented Market Definition (1) Low End

  Are there customers at the low end of the market who would:   buy less (but good enough) performance   if they could get it at a lower price?

  Is there a business profitable at this low-end?   Are there sufficient barriers to competition from

incumbents?

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Low-end Resegmentation “Good Enough” Performance

Perf

orm

ance!

Our Company!At the Low-end!

Time!

Existing!Companies!

Today!

Existing Company Performance Growth

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Resegmented Market Definition (2) Niche

  Are there customers in the current market who would:   buy if it addressed their specific needs   if it was the same price?   If it cost more?

  Is there a defensible business model at this point?   Are there barriers to competition from incumbents?

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Niche Resegmentation “Branding” has its place

Perf

orm

ance!

Time!

Existing Company Niche for a New Company Niche for a New Company

Existing Customers! New Niches!

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Resegmented Market Risks

  “Cheaper” is a sales-driven axiom   Incumbents abandon low-end, low-margin

businesses   For sometimes the right reasons

  Low-end must be coupled with a profitable business model   Up migration

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New Market Definition

  Is there a large customer base who couldn’t do this before?   Because of cost, availability, skill…?

  Did they have to go to an inconvenient, centralized location?

  Are there barriers to competition from incumbents?

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New Market Customers That Don’t Yet Exist

Perf

orm

ance!

Time!

Existing Company

Existing Customers! New Niches!

New Market

New Customers!New Markets!

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New Market Risks

  “New” is a marketing-driven axiom   New has to be unique enough that:

  There is a large customer base who couldn’t do this before

  They want/need/can be convinced   Adoption occurs in your lifetime

  Company manages adoption burn rate   Investors are patient and have deep pockets

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Hybrid Markets

  Some products fall into Hybrid Markets   Combine characteristics of both a new

market and low-end resegmentation   SouthWest Airlines   Dell Computers   Cell Phones   Apple IPhone?

Market  Type    

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New Product Conundrum

  New Product Introduction methodologies sometimes work, yet sometimes fail   Why?   Is it the people that are different?   Is it the product that are different?

  Perhaps there are different “types” of startups?

tomorrow’s organization. today.

VALUE PROPOSITION

COST STRUCTURE

CUSTOMER RELATIONSHIP

TARGET CUSTOMER

DISTRIBUTION CHANNEL

VALUE CONFIGURATION

CORE CAPABILITIES

PARTNER NETWORK

REVENUE STREAMS

gives an overall view of a company's bundle of products and services

portrays the network of cooperative agreements with other companies

describes the channels to communicate and get in touch with customers

describes the arrangement of

activities and resources

explains the relationships a company

establishes with its customers

sums up the monetary consequences to run a

business model

describes the revenue streams through which

money is earned

describes the customers a company wants to

offer value to

outlines the capabilities required to run a

company's business model

INFRASTRUCTURE CUSTOMER

OFFER

FINANCE

Business  Model  ExecuEon  Differs  by  “Market  Type”  

tomorrow’s organization. today.

Lean  Startup  ExecuEon  Differs  by  “Market  Type”  

Customer Development

Hypotheses, Experiments,

Insights

Data, Feedback,

Insights

Agile Development

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Next Week   Read

  CASE: E.Ink and E.Ink 2005   Boyd – OODA Loop PowerPoint slides   Fast Company : The Strategy of a Fighter pilot   McGrath & MacMillan: Entrepreneurial Mindset

Chapter 10 pages 231-245

  Blank – Four Steps to the E.piphany Chapter 2