This post makes more sense if you read part 1 of the Customer Development Manifesto.
This post describes how the traditional product development model distorts startup sales, marketing and business development. In the next few posts that follow, I’ll describe how thinking of a solution to this model’s failures led to the Customer Development Model – that offers a new way to approach startup sales and marketing activities. Finally, I’ll write about 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.
8. The Lack of Meaningful Milestones for Sales, Marketing and Business Development
The one great thing about the product development methodology is that it provides an unambiguous structure with clearly defined milestones. The meaning of alpha test, beta test, and first customer ship are pretty obvious to most engineers. In contrast, sales and marketing activities before first customer ship are adhoc, fuzzy, and don’t have measurable, concrete objectives. They lack any way to stop and fix what’s broken (or even to know if it is broken.)
What kind of objectives would a startup want or need for sales and marketing? Most sales executives and marketers tend to focus on execution activities because at least these are measurable. For example, some startup sales execs believe hiring the core sales team is a key objective. Others focus on acquiring early “lighthouse” customers (prominent customers who will attract others.) Once the product begins to ship, startup sales execs use orders and revenue as its marker of progress in understanding customers. (Freemium models have their own scorekeeping.) Marketers believe creating a killer web presence, corporate presentation, are objectives. Some think that hiring a PR agency, starting the buzz and getting coverage in hot blogs or on the cover of magazines at launch are objectives.
While these objectives provide an illusion of progress, in reality they do little to validate the business plan hypotheses about customers and what they will buy. They don’t help a startup move toward a deep understanding of customers and their problems, discovering a repeatable road map of how they buy, and building a financial model that results in profitability.
9. The Use of a Product Development Model to Measure Sales
Using the product development diagram for startup sales activities is like using a clock to tell the temperature. They both measure something, but not the thing you wanted.
Here’s what the product development diagram looks like from a sales perspective.
A VP of Sales looks at the diagram and says, “Hmm, if beta test is on this date, I’d better get a small sales team in place before that date to acquire my first ‘early customers.’ And if first customer ship is on this date over here, then I need to hire and staff a sales organization by then.” Why? “Well, because the revenue plan we promised the investors shows us generating customer revenue from the day of first customer ship.”
I hope this thinking already sounds inane to you. The plan calls for selling in volume the day Engineering is finished building the product. What plan says that? Why, the business plan, crafted with a set of hypotheses now using the product development model as a timeline for execution. This approach is not predicated on discovering the right market or learning whether any customers will actually shell out cash for your product. Instead you use product development to time your readiness to sell. This “ready or not, here we come” attitude means that you won’t know if the sales strategy and plan actually work until after first customer ship. What’s the consequence if your stab at a sales strategy is wrong? You’ve built a sales organization and company that’s burning cash before you know if you have demand for your product or a repeatable and scalable sales model. No wonder the half-life of a startup VP of Sales is about nine months post first customer ship.
“Build and they will come” is not a strategy, it’s a prayer.
10. The Use of a Product Development Model to Measure Marketing
The head of Marketing looks at the same product development diagram and sees something quite different.
For Marketing, first customer ship means feeding the sales pipeline with a constant stream of customer prospects. To create this demand at first customer ship, marketing activities start early in the product development process. While the product is being engineered, Marketing begins to create web sites, corporate presentations and sales materials. Implicit in these materials is the corporate and product “positioning.” Looking ahead to the product launch, the marketing group hires a public relations agency to refine the positioning and to begin generating early “buzz” about the company. The PR agency helps the company understand and influence key bloggers, social networks, industry analysts, luminaries, and references. All this leads up to a flurry of press events and interviews, all geared to the product/web site launch date. (During the Internet bubble, one more function of the marketing department was to “buy” customer loyalty with enormous advertising and promotion spending to create a brand.)
At first glance this process may look quite reasonable, until you realize all this marketing activity occurs before customers start buying—that is, before the company has had a chance to actually test the positioning, marketing strategy, or demand-creation activities in front of real customers. In fact, all the marketing plans are made in a virtual vacuum of real customer feedback and information. Of course, smart marketers have some early interaction with customers before the product ships, but if they do, it’s on their own initiative, not as part of a well-defined process. Most first-time marketers spend more of their time behind their desks inside the building then outside talking to potential customers.
This is somewhat amazing since in a startup no facts exist inside the building – only opinions.
Yet even if we get the marketing people out from behind their desks into the field, the deck is still stacked against their success. Look at the product development diagram. When does Marketing find out whether the positioning, buzz, and demand creation activities actually work? After first customer ship. The inexorable march to this date has no iterative loop that says, “If our assumptions are wrong, maybe we need to try something different.”
11. Premature Scaling
The Product Development model leads Sales and Marketing to believe that by first customer ship, come hell or high water, they need fully staffed organizations leads to another disaster: premature scaling.
Startup executives have three documents to guide their hiring and staffing; a business plan, a product development model and a revenue forecast. All of these are execution documents – they direct the timing and hiring of spending as if all assumptions in the business plan are 100% correct. As mentioned earlier there are no milestones that alert a startup to stop or slow down hiring until you have proven until you understand you customers. Even the most experienced executives succumb to the inexorable pressure to hire and staff to “plan” regardless of the limited customer feedback they’ve collected to this point in Alpha and Beta test.
Premature scaling is the immediate cause of the startup Death Spiral. More on this in the next post.
Part 3 of the Customer Development Manifesto to follow.