Customer Discovery: in 4 steps from Idea to Validated Product [Guide]

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Customer Discovery

You have an idea for a business.

But…

You don’t want to build a business based on assumptions. Instead, you want to build a business based on validated assumptions so you’re not just going to throw money away.

I’m going to explain to you how the Customer Discovery phase of the Customer Development Process can be used to validate your idea:

Customer Discovery Process
Customer Discovery Process

The Customer Discovery Process comes from The Four Steps to The Epiphany by Steve Blank which is the precursor to the Learn Startup written by Eric Ries.

Let’s start with the fundamental components:

Foundations

Before you begin the Customer Discovery phase, it is important to have approval from all key stakeholders to follow the Customer Development Process.

In addition, in this step you can also formulate your mission, vision and core values.

1. Customer Discovery: Formulate hypothesis

The second step you are going to take is documenting your assumptions. You are going to refer back to them often and reflect on them, so it is important to have them clearly written down somewhere.

It is important that your assumptions:

Are testable: your assumption must be testable, it must have a true or false outcome based on evidence.

  • Wrong: We believe that restaurants are understaffed.
  • Right: We believe that restaurant occupancy is lower during the week than on weekends.

Are specific: make sure your assumptions include what, who and when.

  • Wrong: We believe that restaurants are running low on sales.
  • Right: We believe that restaurants have about 40% lower occupancy Monday through Thursday per day than Friday through Sunday.

Are specific: your assumption describes only one thing.

  • Wrong: We believe that restaurants are understaffed.
  • Right:
    • We believe that restaurants have 80-100% occupancy from Friday through Sunday.
    • We believe that restaurants have a 30-60% occupancy from Monday through Thursday.

Types of hypothesis

There are 3 types of assumptions you can make:

Feasible (can we do this?): this is about components such as scalability, key resources, key activities or key partners.

Desirable (do they want this?): everything concerning customers, are they waiting for this, is the market too small or maybe the value proposition does not match the customer.

Viable (should we do this?): this is about everything regarding costs and revenue.

If you work with sticky notes you can assign a color to the 3 types of assumptions.

Product

The assumptions about your product contain 6 parts:

  • What features the product contains and which features are the most important.
  • What the benefits are and how big these benefits are.
  • Parts that might be patented. In short, your intellectual property.
  • The dependence of your product on perhaps external parties, legislation, trends or standards.
  • The delivery dates on which you will add which features to your product or service.
  • Total cost of ownership (TCO) of your product or service.

Customer

Make assumptions about your customers, components that could help you with this:

  • Describe your types of customers and who your customers are influenced by, this can be done through the decision-making unit.
  • Make assumptions about the problems you think the customer has, these problems can be divided into 3 variants:
    • Latent: the customer understands that it has a problem.
    • Active: the customer recognizes the problem and is actively looking for a solution.
    • Vision: the customer recognizes the problem and may have already tried to build some kind of solution themselves.
  • Try to understand what a day in the life of your customer looks like.
  • Make assumptions about the organizational structure and the customer influence map.
  • Sketch scenarios to calculate the Return on Investment (ROI) and make assumptions about them.
  • Describe assumptions about the minimum feature set the customer needs or expects.

Channel and pricing

When choosing sales channels and a pricing strategy, you are bound to have assumptions. Write down your assumptions so you test them later. Consider, among other things:

  • The revenue model you want to apply.
  • How you are going to set the price for your product or service.
  • Which sales channels you are going to use.
  • The complexity of your product or service.

Demand creation

Your product or service will eventually need to have a scalable and repeatable sales funnel, set up assumptions that contain:

  • Where do your customers normally get to hear about products or services like yours?
  • Which people exert a lot of influence in your target market?
  • What are marketing techniques you could possibly apply?

Market

Depending on the market you’re going to be in, you’re going to set up assumptions. You can enter 3 different types of markets with your product:

  • New market
  • Existing market
  • New segment in an existing market
New Lanchester Strategy

One strategy for determining the type of market is the New Lanchester Strategy:

  1. One company holding more than 74% of the market is a monopoly, this is the most difficult market to enter.
  2. If the combined market share of the market leader and the second largest company is greater than 74% and the first company is 1.7 times the share of the second then it is a duopoly.
  3. A company with a 41% market share that has at least 1.7 times the market share of the second largest company then that means there is a market leader. In this type of market you could introduce a new segment.
  4. If the company with the largest market share has a share of at least 26% then anything is still possible.
  5. If the company with the largest market share has less than 26% of the market then there is no real market leader, you can easily enter this market.

Existing market

When you enter an existing market, you have to make sure that you are going to do something better than your competitor. Perhaps you will be cheaper, faster or offer significantly higher quality.

If you have great competition it means that the market is validated, but the competition is also your biggest risk.

New segment in an existing market

Instead of challenging the market leaders in an existing market you could also enter the market by focusing on a new segment. So for example instead of copying your competitors you start focusing on a niche or maybe become the cheapest.

A competitive diagram is very useful here:

Competitive Diagram
Competitive Diagram

New market

Entering a new market is nice on the one hand, because you don’t have any competition to consider. On the other hand, you will have to create your own market and educate the market.

Competition

If you are entering an existing market or re-segmenting an existing market, it is important to know the following:

  • What do customers consider important when choosing such a product or service?
  • What is are bad and best practices about the existing products or services?

Important to note here is that companies that solve the same problem are also competitors of yours, so don’t just look at your direct competition.

Prioritize

After you’ve set up all your assumptions, it’s time to add some structure to the chaos. You could do this by creating a Risk Assumption matrix:

Risk Assumption Matrix
Risk Assumption Matrix

You will prioritize which assumptions are most important to validate.

2. Customer Discovery: Test problem hypothesis

Once you’ve documented all the assumptions, it’s time to start testing them.

You’re going to gain deep insight into your customer.

A list of customer contacts

You’re going to create a list of potential customers….

Steve Blank indicates that the list should include at least 50 potential customers.

These contacts can come from anywhere, think of:

  • Ssocial Media network (LinkedIn, Instagram, TikTok)
  • Personal network
  • Friends
  • Investors
  • Work colleagues
  • Partners

It is important to engage not just one type of customer, but multiple types of customers. By not focusing yourself on one type of customer you will end up with more insights.

Reference

It can be difficult to connect with people, but if you ask after a customer conversation:

“Who else do you think a conversation like the one we just had would be valuable with?”

Getting a reference from another person can help you get your foot in the door faster with the next person.

Customer problem presentation

The Problem Presentation is for presenting your assumptions in a concrete and organized way during client meetings.

It addresses:

  • The customer’s problems
  • Solutions that are currently being used
  • The solution you have in mind

In addition to actually validating the problems, it is also important to have an understanding of which problems are the most painful for the customer.

The Problem Presentation is absolutely not about making a sales pitch or selling your solution, you want insight about the customer’s problems and how they are currently solving them.

Tip 1: have customers explain to you why the problems are so painful.

Tip 2: try to get the problems into numbers.

In-depth understanding

In this phase, you want to find out as much as possible about your potential customer, which can include things like:

  • Whether they have money to solve the problem
  • Who are involved in the problem
  • Who feels what pain from the problem
  • What are the determining factors for your customer to proceed with purchase

I personally record in numbers how many customers had a particular problem. Via this way I know what percentage of interviewees experienced a particular problem.

Tip 1: use the experiment– and learning cards for your assumptions

Tip 2: Consider the Mom Test:

Market knowledge

If you understand the customer you could also start having conversations with key people in the market to get a better understanding of the market. Think about people like:

  • Writers at trade magazines
  • Companies with the same target group
  • Analysts
  • Representatives at trade fairs

3. Customer Discovery: Test product hypothesis

Once you’ve validated the problem, you can start validating the assumptions about your product.

You’re still not going to sell your product, but you’re going to get insights about your product.

But…

First, we’re going to do some reflection:

Reality check

The Customer Development Team is going to update the other teams on the findings of the problem validation.

In this phase you are also going to check if you can say that you have found a problem worth solving.

If you have a problem that is worth solving you can start presenting the solution.

Product presentation

To properly present your solution to your potential customer you are going to create a presentation. The product presentation has 2 purposes:

  1. To get confirmation again that your product solves a painful problem of the customer
  2. That the features of the product are actually features that the customer is waiting for


According to the book Business Model Generation, the value proposition of your product or service fits within 1 of 11 possible solutions:

  1. Newness: something that is not possible at the moment. You create a market and push the boundaries of what is currently possible.
  2. Performance: you are going to do something better or faster than the existing competition.
  3. Customization: personalizing an experience.
  4. Getting the job done: you focus on a sub-activity of the customer and you take this completely out of their hands.
  5. Design: if you respond to the form or functionality of your product, we talk about the design.
  6. Price: if you play on price then you focus on the segment in a market that is not willing to pay extra to your competitors. It is important that the market is large enough.
  7. Brand/status: if people want to show that they are wearing your brand, you play on brand and status.
  8. Cost reduction: you save the customer costs.
  9. Risk reduction: You reduce the risk of something for the customer.
  10. Accessibility: you provide access to something a customer previously had little to no access to.
  11. Convenience/usability: the convenience for a user or customer.

More testing

You are going to have customer conversations again. The goal here is not yet to start selling, but merely to gain insights about your product, its features and how the customer envisions the product.

Once you have processed all your insights, it is time to reflect again.

Second reality check

If all goes well, you have now found a problem worth solving and realized a solution that actually solves the problem.

You have a deep understanding of the customer’s problem and desired solution, then it is now time to share your findings with the rest of the company.

Your findings about the product probably fit into one of the following 4:

  • The customer likes our product, we don’t need to change anything.
  • The product is appreciated by the customer, but there is one more feature that they would really like
  • After a long explanation, the customer understands our product, but the customer was not very motivated to use/buy the solution
  • Customer did not see why they would need our solution

If the majority of the interviewees fall into the first classification then you can easily proceed to the next phase, but if not then you will have to do more validation and testing.

The most dangerous classification is number 2, make sure you don’t customize your product too much on one customer.

4. Customer Discovery: Verify

You have arrived at the end of the Customer Discovery phase, now you are going to verify everything.

You’re going to summarize and overview the customer’s problem, you do that by creating a problem statement:

“Our [target audience] is experiencing problems with [customer experience]. Based on [considerations], they are now solving it with [alternative solution]. The disadvantages of this are [complaints].”

In addition, you’re also going to verify the product and the business plan. Does the product actually solve the problem and can it become a profitable business?

Iterate or exit

If all goes well, you now have:

  • Found a painful problem with the customer that they want to solve
  • A product or service that solves the customer’s problem
  • Data that shows that the concept can become profitable

If you miss any of the above components you will walk through the Customer Discovery phase again, otherwise you can move on to the Customer Validation phase.

Conclusion

I went through the Customer Discovery phase myself and saved a lot of money, time and effort as a result.

What do you think of the Customer Discovery phase? I’m curious, let me know in a comment!

P.S. Would you like some help? Send an email to [email protected] or leave a comment.

Gust de Backer
Gust de Backer

I try to help business surpass their growth ceiling with my content.

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