Killing Your Startup By Listening to Customers

2/27/12Follow @sgblank

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this was the right pricing tactic? Your attrition numbers mean users weren’t engaged with the product. What did you do about it?”

“Did you think you were trying to get large networks of engaged users that can disrupt big markets? ‘Large’ is usually measured in millions of users. What experiments did you run that convinced you could get to that scale?”

I realized by the look in his eyes that none of this was making sense. “Well I got out of the building and listened to customers.”

The wind was picking up over the pond so I suggested we start walking.

We stopped at the overlook a top of the waterfall, after the recent rain I had to shout over the noise of the rushing water. I offered that it sounded like he had done a great job listening to customers. And better, he had translated what he had heard into experiments and tests to acquire more users and get a higher percentage of those to activate.

But he was missing the bigger picture. The idea of the tests he ran wasn’t just to get data—it was to get insight. All of those activities—talking to customers, A/B testing, etc.—needed to fit into his business model: how his company will find a repeatable and scalable business model and ultimately make money. And this is the step he had missed.

Customer Development = The pursuit of customer understanding
Part of Customer Development is understanding which customers make sense for your business. The goal of listening to customers is not to please every one of them. It’s to figure out which customer segment served his needs—both short and long term. And giving your product away, as he was discovering, is often a going out of business strategy.

The work he had done acquiring and activating customers were just one part of the entire business model.

As we started the long climb up the driveway, I suggested his fix might be simpler than he thought. He needed to start thinking about what a repeatable and scalable business model looked like.

I offered that acquiring users and then making money by finding payers assumed a multi-sided market (users/payers). But a freemium model assumed a single-sided market—one where the users became the payers.

He really needed to think through his Revenue Model (the strategy his company uses to generate cash from each customer segment). And how was he going to use Pricing (the tactics of what he charged in each customer segment) to achieve that Revenue Model. Freemium was just one of many tactics. Single or multi-sided market? And which customers did he want to help him get there?

My guess was that he was going to end up firing a bunch of his customers – and that was OK.

As we sat back in the living room, I gave him a copy of The Startup Owners Manual and we watched a bobcat catch a gopher.

Lessons Learned

  • Getting out of the building is a great first step
  • Listening to potential customers is even better
  • Getting users to visit your site and try your product feels great
  • Your job is not to make every possible customer happy
  • Pick the customer segments and pricing tactics that drive your business model

Steve Blank is the co-author of The Startup Owner's Manual and author of the Four Steps to the Epiphany, which details his Customer Development process for minimizing risk and optimizing chances for startup success. A retired serial entrepreneur, Steve teaches at Stanford University Engineering School and at U.C. Berkeley's Haas Business School. He blogs at www.steveblank.com. Follow @sgblank

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  • http://www.kickofflabs.com Josh Ledgard

    Loved the line: “Your job is not to make every possible customer happy”

    We’d drive ourselves mad at http://www.kickofflabs.com trying to make all the people that try out our product happy.

  • http://linkedin.com/alexanderlumley Alex Lumley

    Very good post.

    The biggest thing that I got out of this was to look for insights. When doing customer development it is very easy to forget that you are not trying to check out a box, but actually understand what the customer wants and apply those insights.

    The other thing that I realized is that while customer development is a methodology, it is a fluid one, in the type of development, or insights that you are looking for, very much depend on the biggest assumptions you have on your business. In this case, one of the largest assumptions seemed to be the revenue model, well then the insights that came from customer development should have been geared towards learning about the customers and the revenue model.

    Awesome post and thanks again.

    Alex Lumley

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