Killing Your Startup By Listening to Customers

The art of entrepreneurship and the science of Customer Development is not just getting out of the building and listening to prospective customers. It’s understanding who to listen to and why.

Five Cups of Coffee
I got a call from Satish, one of my ex-students last week. He got my attention when he said, “following your customer development stuff is making my company fail.” The rest of the conversation sounded too confusing for me to figure out over the phone, so I invited him out to the ranch to chat.

When he arrived, Satish sounded like he had 5 cups of coffee. Normally when I have students over, we’d sit in the house and we’d look at the fields trying to catch a glimpse of a bobcat hunting.  But in this case, I suggested we take a hike out to Potato Patch pond.

Potato Patch Pond
We took the trail behind the house down the hill, through the forest, and emerged into the bright sun in the lower valley. (Like many parts of the ranch this valley has its own micro-climate and today was one of those days when it was ten degrees warmer than up at the house.)

As we walked up the valley Satish kept up a running dialog catching me up on six years of family, classmates and how he started his consumer web company. It had recently rained and about every 50 feet we’d see another 3″ salamander ambling across the trail. When the valley dead-ended in the canyon, we climbed 30-foot up a set of stairs and emerged looking at the water. A “hanging pond” is always a surprise to visitors. All of a sudden Satish’s stream of words slowed to a trickle and just stopped. He stood at the end of the small dock for a while taking it all in. I dragged him away and we followed the trail through the woods, around the pond, through the shadows of the trees.

As we circled the pond I tried to both keep my eyes on the dirt trail while glancing sideways for pond turtles and red-legged frogs. When I’m out here alone it’s quiet enough to hear the wind through the trees, and after awhile the sound of your own heartbeat. We sat on the bench staring across the water, with the only noise coming from ducks tracing patterns on the flat water. Sitting there Satish described his experience.

We Did Everything Customers Asked For
“We did every thing you said, we got out of the building and talked to potential customers. We surveyed a ton of them online, ran A/B tests, brought a segment of those who used the product in-house for face-to-face meetings. ” Yep, sound good.

“Next, we built a minimum viable product.”  Ok, still sounds good.

“And then we built everything our prospective customers asked for.”  That took me aback. Everything?  I asked?  “Yes, we added all their feature requests and we priced the product just like they requested.  We had a ton of people come to our website and a healthy number actually activated.”  That’s great I said, “but what’s your pricing model?’  “Freemium,” came the reply.

Oh, oh. I bet I knew the answer to the next question, but I asked it anyway.  “So, what’s the problem?”

“Well everyone uses the product for awhile, but no one is upgrading to our paid product. We spent all this time building what customers asked for. And now most of the early users have stopped coming back.”

I looked at hard at Satish trying to remember where he had sat in my class.  Then I asked, “Satish, what’s your business model?

What’s your business model?
“Business model?  I guess I was just trying to get as many people to my site as I could and make them happy. Then I thought I could charge them for something later and sell advertising based on the users I had.”

I pushed a bit harder.

“Your strategy counted on a freemium-to-paid upgrade path. What experiments did you run that convinced you that 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 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 buisness 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 getting 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

Listen to the post here: Download the Podcast here

38 Responses

  1. Just following the steps does not a business model make (says Yoda.) Internalizing customer insight to mold the business model is an art, requires much legwork, and can’t be shortened. Congrats to the entrepreneur for executing as far as he could, and more congrats to seeking advice to get him to the next level!

  2. Steve, excellent post, as always! Business model thinking is something that none can forget, should wake up with it, take breakfast with it, lunch with it, sleep with it :-)

    A tech guy trend to focus on the tech details and solutions and all aspects related on how to optimize, before, as you say,forget to validate all nine building blocks. In the situation you described a fremium consist giving basic for free for casual users and charging for more features for heavier users and not giving everything they request, mainly for free :-(

    Changing a mindset of a person, from tech to business model, is a hard task, he must experience a fail in order to understand what was missing, the big picture.

    The cycle of hiphoteses apply mainly to the concept understanding: read bmgen,cust dev,lean, design thinking could help as well, start practicing, fail, read again, fail again, read again…

    My self and a partner started giving Bmgen+custdev+design thinking class here at a University, my personal goal is not the framework, but make them experience and change their mindset. That’s is a pleasure journey that we are also learning, failing and pivoting.

    Cheers from Brazil (I was with my father at Warthon SF in your lecture last October with Alex, on the weekend before the NSF program has started).

    Anxiously waiting for my copy of your book.

    Renato Nobre

  3. Steve, I find it extremely helpful to see how other business models are mapped to the business canvas. I would love to see more of that. Thanks.

  4. Your backyard sounds fantastic, about where are you located Steve? I had no idea any place existed like that in/near Silicon Valley.

  5. Steve, will the Startup Owners Manual be available in Kindle format (or any other e-book)? I want to pre-order but I only see the hard copy option.

  6. Thanks for the wonderful post, Steve! This post has impeccable timing. It provided some much needed clarity on the purpose of Customer Development as we had a lull period recently. I plan to pick your brain on this topic some more tonight. See you in class!

  7. Dear Yoda, I mean Steve… you’re insights are terrific. I love that you listen. My businesses tend to be small, so I’m not sure how my experience translate to growth businesses, but, I’ll share with you anyway.

    I learned the lesson of ‘firing my customers’ a few years back as I was shifting from B2B services (as a music producer whose customer was the artist and label) to selling directly to the consumer (high resolution downloads).

    In 2007 the music industry was all but dead as Walmart declared “all discs will be priced at $9.95″. We were just about to launch our label, Blue Coast Records. I told my distributor, let’s retail for $40, we’ll never be in Walmart anyway. He thought I was nuts.

    While Apple declared “all downloads will be $0.99″ we created a program for selling at $3-5 per single. Even I think it’s crazy, but it’s what we need to make our higher quality recordings and pay people. We don’t want to be the reason for people to walk into Walmart or see the Apple brand. We want customers who love quality.

    We now have more than 11,000 opted in members and are increasing that number at a 9-12% rate per month. In this order, these are the customers I fired…

    A) Friends and family who cheered me on, but never bought anything or tried a sample when sent something free. They weren’t even good as promoters.. :)
    B) Potential investors who were enamored by the latest iPhone app, loved we were making money, but never bought or tried to download our products.
    C) The artists and labels who just didn’t understand that they were making a bigger percentage from us and couldn’t figure out how to setup a link from their site.
    D) My distributors who couldn’t sell anything on their own and owe me a LOT of money. :) (Sorry, gang, I love you but this is not the way to do business… )

    I don’t know if what we’re doing will ever be a growth kind of business to interest investors, but our sales are double over last year. I’m happy with a smaller group of customers who are also promoting our products. They’re our best marketing tools and they don’t cost much except a couple of emails every month.

    Steve, our gang of eight is looking forward to your “lean launchpad” online class! Thanks for being an inspiration and telling it like it is.

    Cookie Marenco

  8. Terrific post, professor. Thank you for the didactic stroll through the ranch. It lead me right back to my customer development canvas to reevaluate the conversion to premium in our freemium model. It’s just nine easy steps back to the https://www.leanlaunchlab.com/. Lesson 6: Be the bobcat, not the gopher. Standing by for the Startup Owners Manual, have you considered context-sensitive help files?

  9. Really great post. We’re actively doing customer development and while we haven’t fired any of our customers yet, we haven’t given segmentation too much thought. For companies that have millions of potential customers, learning how to target the group that has the highest chance of conversion and focusing all of our sales and product development efforts on that single segment makes a lot of sense.

    Thanks Steve!

  10. Great read. Entrepreneurs are constantly pushed to get to that “huge” number of users and then hope those users convert to profits. This works for the big guys( FB, Google, Twitter) but for a more niche product, it is often best to focus on the exact market you want to attract, win them over, and make them your evangelists to get to bigger numbers later on.

  11. A lot has been said and blogged about on the topic of being markert driven.Your point about keping the business model or pricing center makes all the defference in the world.

    Product Management can be customer driven, but they must keep everything centered around the price strategy. Well done!

  12. Steve, I need to see this hanging pond that made Satish stop talking. (If it’s the same Satish in my mind) -Hany

  13. Great anecdote Steve! Also, although subtle, thanks for making the distinction between users & customers (users who pay – in single market systems). Too often are we fixated on treating our users as customers. Making a distinction will help startups/projects/etc to think about the cost structure of having to acquire both users AND customers. This will profoundly impact the approach in building an MVP and looking for repeatable/scalable models.

  14. I still need to figure out who should be my customers. This article shines some light. Guess I won’t be listening to everybody after all.

    http://Www.unclebobtech.com

    Unclebob Robotics and Technology

  15. In a double-sided platform like social media – users create content and later on when there is significant traffic/ content we can have advertising. So would be wrong to just focus on improving the platform and customer experience to make it sticky instead of trying to make sales pitches to advertisers right from the very beginning even without having enough traffic/ content?

    • I think it depends on your product. It’s hard to get a serious investment these days without a proven model. For the advertising model to work, you have to have really broad appeal and the ability to get millions of users without much funding. If the cost of user acquisition is high, you have a chicken and an egg problem and it’s probably wise to seek different sources of revenue.. If the product has the potential to go viral on its own with limited funding, freemium or ad driven can always work.

  16. I found this so helpful, and I’m glad you explained the difference between “listening to your customers” and “understanding them.” Very important distinction!

  17. [...] Blank almost always has good nuggets to share on his blog, steveblank.com. “Killing Your Startup by Listening to Customers” is another one worth reading. An [...]

  18. I was once product manager for a company that did everything by the book – focus groups, early prototypes, surveys, etc. We had built a product that many people said they would buy if we built it – but not a single one did. When we came back with the product, the universal response was, “this is great, but I am not the guy to buy it. Go talk to Bob down the hall.” Of course Bob had no idea why we were knocking on his door. I learned a lot from that experience and have since done it right several times. Huge difference between listening and extrapolating to what customer really want. Nice piece.

  19. Thanks Steve for a very good blog. Showing how to listen to customers is key but listening for the right information is critical.

    I pre-ordered your book and can’t wait to receive it. Thanks!

  20. [...] is just getting the sense of who they are as people. My impression of Steve Blank is that he is very kind. He really cares about helping entrepreneurs learn and [...]

  21. [...] A great post from Steve Blank on why you shouldn’t try to please everyone. [...]

  22. That “Get Keep Grow” channel is the best description of a funnel I have ever seen. Love it, thanks!

  23. Steve, very useful and full of wisdom. Bought the book (on impulse), looking forward to its arrival.

    If you’re ever in Cape Town, South Africa. Let me know, people here could really use someone like you.

    Many thanks,

    JRM

  24. HI Steve,
    This was EXACTLY what I wanted you to elucidate when you visited Finland and e had a dialog about “Finding/searching for those insights”!!
    Now you have verbally articulated it very well: In the definition of “Innovation” which I define ” Any idea that can be Seizes a Critical insight and create(or capture) Real value ” where Value is The “benefits over price” for all in the value network.
    Ideas are overrated and so Only when we apply the Critical insight that we gather from dialog with prospective customers OR research prospective (create markets) markets, can the idea start to become a “Business idea”. Only when that business idea starts to create or capture real Value will that become an innovation ( Or a New business).

  25. [...] Killing Your Startup By Listening to Customers (steveblank.com) [...]

  26. [...] building out tests of those assumptions. On a really associated note, Steve Blank recently wrote a great post on disagreement a business indication methodology (and how to repair it). Heidi Allstop of Spill [...]

  27. [...] and building out tests of those assumptions. On a very related note, Steve Blank recently wrote a great post on misunderstanding a business model methodology (and how to fix it). Heidi Allstop of Spill shared [...]

  28. [...] highly reusable, such as Dave McClure's startup metrics for pirates or David Skok's SaaS Series, SG Blank's work or the Business Model Canvas.  But I never use them overtly.  I try to use common sense [...]

  29. [...] and building out tests of those assumptions. On a very related note, Steve Blank recently wrote a great post on misunderstanding a business model methodology (and how to fix it). Heidi Allstop of Spill shared [...]

  30. Excellent discussion all the way around from the content of the discussion to the scenic reflection of digesting the lessons learned on the customer feedback and business model cycle. Thank you for sharing the insights with the rest of us.

  31. [...] Blank almost always has good nuggets to share on his blog, steveblank.com. “Killing Your Startup by Listening to Customers” is another one worth reading. An [...]

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