Startups have two choices to introduce themselves in a market; they can follow the product development model or instruct the customer development model. The product development model is a product-centric process while the customer development model is a market-centric process. Steve Blank discusses that almost all of failed startups implemented the product development model. In the other hand, the customer development model is the key to success of startups as it investigates customer needs and then develop product based on the perceived needs before any cost burn. Below Figure compares the steps of each model.
The product development model has four steps:
(1) concept or seed stage is when the entrepreneur has a great idea that is articulated as a business plan. The company’s vision is shaped and customers and their needs are determined based on the founder’s idea and knowledge. Market research is done by using statistical data and pricing, distribution channels, costs and financial plan is developed.
(2) Product development is the second step when all functional departments are organized and the startup starts working. The engineering department focuses on production, marketing starts finding the first customer to sell the product and so on.
(3) Alpha/Beta test is the step that the startup tests the product features and application with the volunteer customers that accepted the risk of testing the new product. In the case of success in this step, the marketing plan, PR campaign and engineering documents are justified and the startup is ready for more fundraising.
(4) Product launch and first customer ship is when the new company is going to ramp up and sell to many customers.
Same as the product development model, the customer development model consists of four steps, however; in this model all customer-related actions are investigated before building the company and burning money.
(1) The first step is customer discovery, which simply is about finding customers who are ready to pay for the new product. This step is seeking to find answers for the questions about customers, needs, problems and product hypothesizes of the business plan. This step requires frequent interviews with potential customers and find out what their pain is and for what product the customer is willing to pay.
(2) Customer validation is the second step when the startup defines its unique value proposition and minimum viable product based on the data received from the first step. In this step the startup is going to sell the product to the potential customers and test their favors. The sales roadmap that will be used by sales and marketing teams is developed in this step. Completing this step successfully justifies the business model, identifies customers and market, and clarifies the perceived value of your product and help to determine pricing and distribution strategies.
(3)Customer creation is the third step where the startup has its set of initial customers and wants to lead more customers to the sales channels. Customer creation depends on the startup type and the market.
(4) The last step is company building that the startup transforms from informal activities and processes into a formal functional department.