Customer Development Manifesto: Market Type (part 4)

This series of posts of the “Customer Development Manifesto” describes how the failures of the Product Development model for sales and marketing led to the Customer Development Model. In future posts I’ll describe how Eric Ries and the Lean Startup concept provided the equivalent model for product development activities inside the building and neatly integrates customer and agile development.

13. Not All Startups Are Alike
There’s an urban legend that Eskimos-Aleuts have more words to describe snow than other cultures. While that’s not true, it is a fact that entrepreneurs only have one word for “startup.”  This post points out that the lack of adequate words to describe very different “types” of startups can lead not only to confusion in execution but also at times to disaster.

The product development model treats all startups like they are in an Existing Market – an established market with known customers. With that implicit assumption, startups hire a VP of Sales with a great rolodex and call on established mainstream companies while marketing creates a brand and buzz to create demand and drive it into the sales channel (web, direct salesforce, etc.)

Most startups following the Product Development Model never achieve their revenue plan and burn through a ton of cash not knowing what hit them.

They never understood Market Type.

Why does Market Type matter?
Depending on the type of market it enters, a startup can have very different rates of customer adoption and acceptance and their sales and marketing strategies would be dramatically different. Even more serious, startups can have radically different cash needs.  A startup in a New Market (enabling customers to do something they never could before,) might be unprofitable for 5 or more years, (hopefully with the traditional hockey stick revenue curve,) while one in an Existing Market might be generating cash in 12-18 months.

Handspring in a Existing Market
As an example, imagine it’s October 1999 and you are Donna Dubinsky the CEO of a feisty new startup, Handspring, entering the billion dollar Personal Digital Assistant (PDA) market.  Other companies in the 1999 PDA market were Palm, the original innovator, as well Microsoft and Hewlett Packard.  In October 1999 Donna told her VP of Sales, “In the next 12 months I want Handspring to win 10% of the Personal Digital Assistant market.”  The VP of Sales swallowed hard and turned to the VP of Marketing and said, “I need you to take end user demand away from our competitors and drive it into our sales channel.”  The VP of Marketing looked at all the other PDAs on the market and differentiated Handspring’s product by emphasizing its superior expandability and performance.  End result?  After twelve months Handspring’s revenue was $170 million.  This was possible because in 2000, Donna and Handspring were in an Existing Market.  Handspring’s customers understood what a Personal Digital Assistant was. Handspring did not have to educate them about the market. They just need to persuade customers why their new product was better than the competition – and they did it brilliantly.

Palm in a New Market
What makes this example really interesting is this: rewind the story 4 years earlier to 1996. Before Handspring, Donna and her team had founded Palm Computing, the pioneer in Personal Digital Assistants. Before Palm arrived on the scene, the Personal Digital Assistant market did not exist. (A few failed science experiments like Apple’s Newton had come and gone.) But imagine if Donna had turned to her VP of Sales at Palm in 1996 and said, “I want to get 10% of the Personal Digital Assistant market by the end of our first year.”  Her VP of Sales might had turned to the VP of Marketing and said, “I want you to drive end user demand from our competitors into our sales channel.” The VP of Marketing might have said, “Let’s tell everyone about how fast the Palm Personal Digital Assistant is and how much memory it has.”  If they had done this, there would have been zero dollars in sales.  In 1996 no potential customer had even heard of a Personal Digital Assistant.  Since no one knew what a PDA could do, there was no latent demand from end users, and emphasizing its technical features would have been irrelevant. What Palm needed to do first was to educate potential customers about what a PDA could do for them. In 1996 Palm was selling a product that allowed users to do something they couldn’t do before. In essence, Palm created a New Market. In contrast, in 2000 Handspring entered an Existing Market. (“Disruptive” and “sustaining” innovations, eloquently described by Clayton Christensen, are another way to describe new and existing Market Types.)

The lesson is that even with essentially identical products and team, Handspring would have failed if it had used the same sales and marketing strategy that Palm had used so successfully. And the converse is true; Palm would have failed, burning through all their cash, using Handspring’s strategy.  Market Type changes everything.

Market Type Changes Everything
Here’s the point. Market Type changes how you evaluate customer needs, customer adoption rate, how the customer understands his needs and how you should position the product to the customer. Market Type also affects the market size as well as how you launch the product into the market. As a result different market types require dramatically different sales and marketing strategies.

As a result, the standard product development model is not only useless, it is dangerous. It tells the finance, marketing and sales teams nothing about how to uniquely market and sell in each type of startup, nor how to predict the resources needed for success.

—–

Next: Part 5 of the Customer Development Manifesto – why your goals and those of your venture investors may not be the same –  the last post on what’s broken in the Product Development Model.

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26 Responses

  1. Steve,

    Thanks for these posts; they are really helping me in getting our CEO to understand the importance of getting outside the building.

    A couple of quick questions:

    1.) It seems that sometimes an existing market undergoes a change so discontinuous that it is almost a “new market” exercise (the WalkMan was here well before the iPod, for instance). Is there some defining factor that easily distinguishes the difference?

    2.) When talking to prospective customers during customer development, what methods do you recommend for not biasing their responses through your queries? I think a lot of entrepreneurs speak with such enthusiasm about thier own ideas that they may inadvertently illicit invalid responses.

    Thanks!

    KC

    • Ken,
      1. The existing/new distinctions for me have been:
      – have customers heard about this market? can I compare it to existing products along some axis and win?
      – do customers understand how they would use/or need this product? (how long does adoption take – instant or long term education.)
      – do I have to “push” the product into the market via education and evangelism?
      – or will customers get it and will they “pull” it from me if I position it next to existing suppliers

      Sometimes you invent something that is truly new and you have to slog through the adoption process. The mistake I used to make is deciding to position a product as “new” when resegmented made more sense. (I liked the fact that in New I had no competition.) No one will stop you when you do this, it just means you need a much larger marketing budget than if you are in an existing market or are resegmenting an existing market. It may be better to position as existing or resegmented. This is all about strategy.

      2. What I remind my students is that in Customer Discovery you leave your slide deck at home. You leave the building (physically or virtually) and are out testing hypotheses – extremely difficult for a passionate entrepreneur.

      steve

  2. There’s a fun corollary to this: If you’re creating a new market, you WANT competitors, because they’ll share the cost of educating your target market. If you’re lucky, you can ride in their slipstream and let them do all the work.

    In 1989, if we wanted people to join AOL, we had to first explain what a modem was, and bulletin boards, and e-mail. In 1991, it was easier: “You know Prodigy? Like that, but better”. What made it so easy? Prodigy spent $50 million on advertising and in-store displays.

    Oh, and the really fun part: When you’re in a new market, your competitors may not realize they’re your competitors. For the first few years, one prominent Prodigy advertiser was America Online.

  3. Steve,

    Your definition of a New Market has always been confusing to me and your previous comment is highlighting my confusion. You say it is “enabling customers to do something they never could before.”

    I think a better definition of a New Market is “enabling customers to do an existing job with a new product”.

    1. What’s an “existing job”?

    Customers want to do a “job”. And Christensen taught us that trying to get customers to embrace new jobs is an “uphill death march through knee-deep mud.” Customers very rarely adopt new jobs.

    Customers have a job of communicating with their kids and they’ve used Facebook, cell phones, land lines, telegrams, and horses to do it. Cell phones didn’t let customers “do something they never could before.” They could always communicate with their kids.

    2. What’s a “new product”?

    A cell phone was a new product that let customers do an existing job. It wasn’t a better version of an existing product. It wasn’t a cheaper or niche version of an existing product. It was a new product.

    Perhaps you can determine whether a product is new by asking customers to name the competition. If they can’t name anything, you’ve got a new product that you can position in a new market (or in non-new market by comparing your product to substitutes (there are no direct competitors in this case)).

    What do you think?

  4. [...] shoes in order to deduce possible competitors’ moves and anticipate customer needs. In an existing market this is where you ask yourself, “If I were my own competitor and had its resources, what would my [...]

  5. [...] é o processo de geração de oportunidades de negócio (leads) do seu produto? – Tipo de Mercado (Market Type): O produto se encaixa em um novo mercado (não há nada parecido hoje), em um ambiente competitivo [...]

  6. [...] a new market, which means it will take much longer to reach main stream adoption From Steve Blank (summarized/amended): A new market is one in which you need to create the market to sell your [...]

  7. [...] What is it that your business is bringing to the market? Are you bigger, faster, cheaper? Knowing this will help you understand how competitors will react and how you can out-fox them! Steve Blank has some good material on this topic [...]

  8. I just read your book with great interest and ended up here trying to find a way to identify the market type in which I am.

    I have one question remaining open:

    As Nivi was just pointing at, do you consider your market as a new market when the technology is disruptive enough to bring behavioral changes ? For example: Excel sheet => Desktop Software (bringing process automation) => SaaS (bringing the service layer).

    Do you consider SaaS as a re-segmented market or a new market ?

    Thank you for your great book.

  9. [...] Steve Blank so eloquently says, when you are creating a new market, you have no idea how long the flat part of the hockey [...]

  10. [...] make-or-break.  I’m going to point you to Steve Blank’s Repositioning SuperMac and Market Type posts, but there is a lot more he’s written about [...]

  11. So if it’s an existing market you’re going into, it may seem like you don’t need to spend time interviewing users for customer development, just make a knock off of the market leader and add a few more bells &whistles. Sounds like handspring. Yet handsprings CEO and prod dev team must have had to spend some time with potential customers talking to them to find out what they didn’t like about palm and figure out what they would pay for to have these things in a new product, in an existing market, etc. I’m sure they didn’t just make something and then leave it up to marketing to figure out how the hspring could be positioned differently. Unless the CEO of spring is a unique genius. And maybe those r the only startups that actually survive and succeed

  12. [...] of existing technologies, or what Steve Blank & Bob Dorf call a resegmented market. The main approach here is to find an approach that is “slicker, quicker, or better” [...]

  13. [...] you’ve read Steve Blank’s book on Customer Development follow his work on Market Type, this type of innovation is best for adding new products to existing [...]

  14. [...] One of the important insights in The Four Steps to the Epiphany is the understanding of the magnitude of investment required to enter different types of markets. As an example, we’ve had success in scaling several products in the realm of monitoring and evaluation and reporting within MoFA. In each case we built a product that was simply better than the existing system. It was easy to scale because our MoFA understood the purpose of our product and the existing alternative it was replacing. AAB on the other hand is a completely new market. While developing farmer-based organizations has always been part of MoFA’s mandate, in many cases there was little focus on long-term investment outside of the concept of creating groups to access development projects. A program to simply build strong groups for the groups’ sake is a foreign idea, and hence will take a much longer period of investment to see it catch on. When we evaluate the ideas we want to invest in it is important to have a strong understanding of the market type we are entering and hence the resources required to reach scale (in the best scenario). This one warrants it’s own post as well, or you can check out Steve’s blog post on market types at http://steveblank.com/2009/09/10/customer-development-manifesto-part-4/. [...]

  15. [...] esse último tem a ver com o conceito de Market Type do Steve [...]

  16. Hi Steve, I have just received your Startup Manual and what I am reading so far is awesome. :-) I work with entrepreneurs and today we talked about market types. It was an interesting discussion and it became quite apparent that I am still unsure of distinguishing between a “new market” by lowering the costs to create a new class of users, an existing market competing on doing sth cheaper and re-segmenting an existing market based on providing sth good enough at a lower price. Would you be able to enlighten me please as I havent found any more information on this in your book yet (Though I have to admit, I haven’t read the whole manual yet). Thanks

  17. [...] management software: London entrepreneurs are 2x more likely to build this than Silicon Valley Market Type:Silicon Valley: 13 % more likely to tackle new markets than London entrepreneurs whereasLondon: 21 % [...]

  18. [...] education is not an existing market. There just isn’t enough data to pick what is the correct “overarching [...]

  19. [...] education is not an existing market. There just isn’t enough data to pick what is the correct “overarching [...]

  20. [...] of the most powerful concepts that Steve Blank introduces is Market Type(Pages 112–124). It is #11 Customer Development Manifesto , not a high number, but it is very [...]

  21. [...] you can choose if you are in a re-segmented market or a new one, this is well explained in this other article by Steve [...]

  22. [...] Building a market is different from entering one. When the Apple I launched, there was no PC market. When the iPhone launched, there was a mobile phone market, and there was also a smartphone market, and both were plenty crowded. If you enter an existing market, you need a new business model or a 10X performance improvement to succeed. If you’re building a market, you’re also building a business model that work for it. Steve Blank makes this point strongly in his books, and here is how he puts it: [...]

  23. [...] is your market type? Steve Blank writes well about market type as a part of his Customer Development Manifesto. Does your product enable people to do something they couldn’t do before? Or is your product [...]

  24. Respected Steve

    i have gone through you books a four steps to epiphany and videos from youtube. I do have some queries and hope you would answer it.
    I would like to know if the customer development method that you have taught in your video is only for the high tech new product for new market or can it be applied for non high tech new product existing market ?

    Can the method applied in the service industry such as tourism industry

  25. [...] Steve Blank identifies three kinds of markets–existing, resegmented, new–there are probably thousands, or at least fine gradations if [...]

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