Coffee With Startups

I’ve just met four great startups in the last three days.

An Existing Market
All four were trying to resegment an “Existing Market.” An existing market is one where competitors have a profitable business selling to customers who can name the market and can tell you about the features that matter to them. Resegmentation means these startups are trying to lure some of the current or potential customers away from incumbents by either offering a lower cost product, or by offering features that appealed to a specific niche or subset of the existing users.

Some of the conversations went like this:

Startup 1
Entrepreneur -“I’m competing against Company x and have been following the Customer Development process and I’ve talked to lots of customers.”
Me – “Have you used Company x’s product? Do you know have they distribute their product? Do you know how they create demand? Do you know how many units they are selling? Do you know the archetype of their customers?
Entrepreneur -“Well no but my product is much better than their product and I have this great idea….”

Rule 1: In an existing market Customer Development means not only understanding potential customers, but your competitors in detail – their product features, their sales channels, their demand creation strategy, their business model, etc.

Startup 2
Entrepreneur -“I’m competing against Company x and we are going to offer a lower-cost, web-based version. We’re about to ship next week.”
Me –“That’s a great hypothesis, do customers tell you that they’d buy your version if it was cheaper or on the web?
Entrepreneur -“Well no but my product is much cheaper and everyone’s on the web and I have this great idea….”

Rule 2: In an existing market Customer Development means understanding whether your hypothesis of why customers will buy match reality. This is easy to test. Do this before you write code you may end up throwing away.

Startup 3
Entrepreneur -“I’m competing against Large Company x and we solve problems for a set of customers – I’ve talked to many of them and they would buy it.”
Me – “So what’s the problem?”
Entrepreneur – “We just started letting early customers access the product and adoption/sales isn’t taking off the way we thought it would. We only have 20 customers, and Large Company x has millions.”
Me – “How are you positioning your product?”
Entrepreneur – “We tell potential customers about all our features.”

Rule 3: In an existing market directly compare your product against the incumbent and specifically describe the problems you solve and why Company x’s products do not.”

Startup 4
Entrepreneur -“I have something really, really new. No one has anything like it.”
Me – “Isn’t it kind of like Twitter but better?”
Entrepreneur – “You don’t get it.”

Rule 4: You may want to think twice positioning as a New Market. If customers immediately get an analogy for your product, don’t dissuade them. Save the “New Billion Dollar Market” positioning for the investors, not customers.

Lessons Learned

  • Deeply understand the incumbents that make up the Existing Market
  • The “hypotheses tested to lines of code written” ratio ought to be high
  • Position against the incumbents weaknesses – their customers will tell you what they are
  • Existing Markets adoption rates are measured in % market share gained, New Markets have adoption rates which may occur in your company’s lifetime

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10 Responses

  1. Re: Rule 4

    We launched Postling 2.5 weeks ago, positioning it as a tool designed to help small businesses effectively manage their social media efforts. The problem is that our messaging on the home page shouts “Write Once, Publish Everywhere”. So while we do talk about how we save you time (5X faster to blog / tweet / upload a photo using Postling, which is equal to 8 minutes per or 3 hrs a month or saving you $3 for every $1 you spend) and how we aggregate comments to your posts regardless of platform and how we have a smart workflow that puts you in control…. customers don’t pick it up. They see the big “Write Once, Publish Everywhere” and immediately think “this is ping.fm or posterous, but you have to pay for it”.

    So we are in the process of redesigning the homepage to better point out how we solve problems, save time, and better communicate our positioning.

  2. Rule 4: Custormer compares our product to a big comapny say BC they start to ask why should we use your product insted of BC. Even though out product is targeted to a niche audience(female in our case) and have many unique features for niche audience.
    How should one position the product in this case ?

    • Selecting a niche shouldn’t be your opinion of what segment of an existing market _should_ want your product. If you’ve gone out and talked to customers early, by the time your product launches your positioning should match the attributes _customers have already told you_ they want. In your case you may not have a positioning problem but a Customer Discovery problem. Make sure you’re positioning includes the key attributes customers have told you matter.

  3. I especially like Rule #4. One of the biggest mistakes I see entrepreneurs making is getting so caught up in their vision that they fail to listen to the voice of the market.

    It’s a tough balance to strike, because as Steve Jobs has proven, the market doesn’t always know what it wants in advance, so you can’t just allow your customers to dictate your product strategy.

    But if it was easy, everyone would be a successful entrepreneur.

  4. Steve,

    Whilst agreeing with your views on customer product validation, I’m still not convinced your advice is applicable in all cases. Sometimes customers don’t realize they need a product until you give it to them.

    I would be very curious to hear the (hypothetical) suggestions you would have given to twitter’s founders, for example.

    Thanks.

    • David,

      No advice is applicable in all cases.
      Startups are – and will remain – an art, not a science. That’s why early stage companies aren’t run by accountants with spreadsheets.
      That said, the Customer Development process is just one of many ways to optimize the “hypothesis – feedback iteration loop.”
      Most successful entrepreneurs do this by instinct without having a formal process. The Customer Development process was a way of simply documenting _one_ path through the process.

      I think if you look at the history of what became Twitter, Paypal, and others you’d see a form of an iteration loop without a formal methodology.

      In summary, the Customer Development process is there as a tool for those who feel that’s it’s improvement over having no roadmap.

      steve

  5. Dear Steveblank,

    Having read this blog I thought you may be interested in this forum for start-ups…it is call the microFunding Exchange and connects inventors with business managers with investors through the network…it is really interesting and currently helping a lot of people; by either get their ideas noticed (inventors), giving managers fabulous ideas to work with and prove commercially viable (business managers), or by Creating reduced risk, commercially proven, investment opportunities (investors)…hope you find it of interest!

    Helena

  6. [...] to look at: when the plan (or process!) is clearly defined, but we fail to follow it.  In reading Coffee with Startups (by Steve Blank) I couldn’t help but think about the fact that Steve has outlined a clear [...]

  7. [...] installment on what the Pasadena Angels look for in company pitches, I came across a good post from Steve Blank about sufficiently understanding your customer and target markets and decided to use that instead. [...]

  8. What is the most effective way to get the word out about a new product?…

    The tactics you can use to create demand for a new product differ significantly when you operate in a new vs. existing market.  Make A New Market If you are creating a new market, I’d start by watching a few instructional videos. The first is Dave McC…

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