The Customer Development process is the way startups quickly iterate and test each element of their business model, reducing customer and market risk. The first step of Customer Development is called Customer Discovery. In Discovery startups take all their hypotheses about the business model: product, market, customers, channel, etc. outside the building and test them in front of customers.
At least that’s the theory. Helping out some friends I got to see firsthand the consequence of skipping Customer Discovery.
It’s A Marketing Problem
After I retired I would get calls from VC’s to help with “marketing problems” in their portfolio companies. The phone call would sound something like: “We have a company with great technology and a hot product but at the last board meeting we determined that they have a marketing problem. Can you take a look and tell us what you think?”
A week later I was in the conference room of the company having a meeting with the CEO.
We Have a Marketing Problem
“So VC x says you guys have a marketing problem. How can I help?” CEO – “Well, we’ve missed our sales numbers for the last six months.” Me – “I’m confused. I thought you guys have a marketing problem. What does this have to do with missing your sales plan? CEO – “Well our VP of Sales isn’t making the sales plan and he says it’s a marketing problem, and he’s a really senior guy.”
Now, I’m intrigued. The CEO asks the VP of Sales to join us in the conference room. (Note that most VP of Sales’ have world-class antenna for career danger. Being invited to chat with the CEO and an outside consultant that a board member brought in creates enough tension in a room to create static discharge.)
No One is Buying Our Product
“Tell me about the marketing problem.” VP of Sales – “Marketing’s positioning and strategy is all wrong.” Me – “How’s that?” VP of Sales – “No one is interested in buying our product.”
If you’ve been in marketing long enough you recognize the beginning of the sales versus marketing finger pointing. (It usually ends up bad for all concerned.) Sales’ is on the hook for making the numbers and things aren’t looking good.
Six is a Proxy for Burn Rate
“How many salespeople do you have?” VP of Sales – “Six in the field, plus me.” Later I realized six salespeople without revenue to match was a proxy for an out of control burn rate that now had the boards serious attention.
There’s Always One in Boston
“Is there a salesperson in Boston?” VP of Sales – “Sure.” Me – “What sales presentation is he using? VP of Sales – “The corporate presentation. What else do you think he’d be using?” Me – “Let’s get him on the phone and ask.”
Sure enough we’d get the sales person on the phone and find out that he stopped using the corporate presentation months ago. Why? The standard corporate presentation wasn’t working, so the Boston sales rep made up his own. (I asked for the Boston sales rep because in the U.S. they’re furthest from the Silicon Valley corporate office and any oversight.)
We call the five other sales people and find that they are also “winging it.”
Early Orders Were a Detriment
I learned that the founders received their initial product orders from their friends in the industry and through board members personal connections. These “friends and family orders” made the first nine months of their revenue plan. With that initial sales “success” they began to hire and staff the sales department per the ”plan.” That’s how they ended up with seven people in sales (plus three more in marketing.)
But now the bill had come due. It turned out that these “friends and family orders” meant the company really hadn’t understood how and why customers would buy their product. There was no deep corporate understanding about customers or their needs. The company had designed and built their product and assumed it was going to sell well based on their initial early orders. Marketing was writing presentations and data sheets without having a clue what real problems customers had. And without that knowledge, sales essentially was selling blind.
Advice You Don’t Want to Hear
My report back to the VC? Missing the sales numbers had nothing to do with marketing. The problem was much, much worse. The company had failed to do any Customer Discovery. Neither the CEO, VP of Sales or VP of Marketing had any idea what a repeatable sales model would look like before they scaled the sales force. Now they had a sales force in Brownian motion in the field, and a marketing department changing strategy and the corporate slide deck weekly. Cash was flowing out of the company and the VP of Sales was still hiring.
I suggested they cut the burn rate back by firing all the salespeople in the field, (keeping one in Silicon Valley,) and get rid of all of marketing. The CEO needed to get back to basics and personally get out of the building in front of customers to learn and discover what problems customers had and why the company’s product solved them.
The VC’s response? “Nah, it can’t be that bad, it’s a marketing problem.”
I’ll leave it to you to guess what the VC’s did six months later.
Lessons Learned
- Premature Scaling of sales and marketing is the leading cause of hemorrhaging cash in a startup.
- Scale sales and marketing after the founders and a small team have found a repeatable sales model.
- Early sales from board members or friends are great for morale and cash but may not be indicative of learning and discovering a business model.
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Filed under: Corporate/Gov't Innovation, Customer Development, Venture Capital |
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I have seen this behaviour and it is a typical sales force excuse. The problem, as you point out, is more that the CEO/senior management is just replicating a business model they have seen before without really understanding their market and customers. Changing management or re-inforcing it is a good step. Alongside the cost reduction you recommend.
Once again you have nailed it perfectly in the way you have laid it out. Much like in your book, this is the Death Spiral happening but only from the VC’s perspective.
It is unfortunate that many companies have went through this and it gets to a point where they have to make such aggressive adjustments just to stay alive.
The real unfortunate part is when the stakeholders feel that they have invested too much to even consider this type of radical course adjustment….but the reality is that anything else would simply be a band-aid on a gapping open wound. Often they just choose to stick their finger out and turn around in circles until it lands on someone new to point the blame towards.
In these cases, the lives of the salespeople, marketing staff, etc. have been changed forever. Sometimes people do not recover from this type of event because they feel like it was a failure on their part, however the reality is that the company was not built upon a solid foundation to begin with…so there is not much that the sales or marketing team could have done except try to return to the basics of getting out of the building and truly listening to customers, which is something that should have been done before building the company to the level it is at.
Thanks Steve for once again pushing to try and get this message out to folks. The more people that understand this, and adopt the Customer Development methodology, the better the companies become to be able to succeed in today’s economy. The better the companies become, the better the economy becomes. The better the economy…the better it is for all of us!
[…] It Must Be A Marketing Problem (steveblank.com) […]
“Now they had a sales force in Brownian motion in the field…” Hilarious!
Great post. The other thing I’ve noticed, in addition to the cycle you describe, is the market switch tactic. Exexcutives say, “we must have the wrong market and so we need to raise more money and find a different market” when really they may have the right market but, as you describe, don’t understand what customers want or the sales process for those customers.
Nathan,
Switching markets (sometimes called the Pivot) is not necessarily a bad thing. In the search for a profitable business model startups may pivot several times. The problem as you point out is premature scaling before you’ve found the right model. That means each pivot requires a new infusion of cash. (Or worse, you run out of cash.)
The key is ensuring that either a) you have found a business model that shows signs of growth so that increment “n” of sales and marketing results in some multiple of n. Or b) you and your board have decided that premature scaling is a conscious strategy.
steve
Thanks Steve. I agree 100% that the pivot is critical. But I’m empasizing cases where a pivot isn’t actually necessary–when the market actually exists but because the startup doesn’t understand their customer needs or how to connect to them, they stumble and suggest that the answer must be to find a new market when in fact they need to understand the market.
I think I saw this as an episode of “The Office”…
Nice post.
Steve – When is it a marketing problem?
I can sort of understand where the VC is coming from. With only a 6 month runway left you don’t really have time to re think the entire product. If you can figure out a good sales channel and the right marketing pitch for your product you can create a longer runway for the company.
Rishi,
“When is it a marketing problem?” gets to the heart of what Customer Development is about. The problem is that sales and marketing are the wrong answer to the question. Neither sales or marketing should be hired or taking place before Customer Discovery. The company needs to have customer data that says, “yes we believe we understand our business model (Customer Discovery.) Now we are going to attempt to execute it (Customer Validation.)” If the company was wrong at least the cash burn rate was constrained.
Marketing gets more than one headcount and budget to burn when Validation occurs (Customer Creation.)
steve
Excellent post!
It amazes me how many people start in business without doing the very basic groundwork.
I once had a client that had invested substantial amounts of personal savings & a bank loan into building their product, when I started working with them, they were 70% of the way to completing the product & had run out of funds. I was brought in to assist with developing a business plan to be used as part of an application for a government grant.
When I asked who their customers were, it quickly became apparent that they had never done ANY market research! None at all.
They had invested a 3 figure sum into a product that they had no idea if anyone had any interest in buying. What shocked me even more is that they weren’t aware of any other companies already providing similar products.
This is why I strongly suggest anyone starting a business to hire a Business Coach/Consultant as their very first step.
If you don’t have VC money you don’t set up a company without figuring out who to sell to. This kind of burn rate is the curse of easy capital.
Great post.
I think sales should drive the hiring of salespeople, rather than vice versa. Don’t hire more salespeople until the first salesperson (the CEO as you point out) can’t handle anymore calls/follow ups/orders. That way you know you have demand as the driver rather than having the salespeople come up with “creative” ways to to try drive non-existent demand to meet their numbers.
Would you be able to comment on how you’ve seen this dynamic play out in the B2C world as well?
Dave,
Someone else pointed out that the equivalent for B-to-C was “the analog to this is turning on a wide-scale Google adwords campaign with no site optimization, no keyword optimization, and no idea about what your customers/potential customers want, and watching Google charge you $2000 in a week.”
I couldn’t have said it better.
steve
Great post – making a sale is all about understanding what the client wants, and providing a solution for this. Without complete knowledge of this need, you have to just shoot and hope that you’re lucky enough to find someone who wants exactly what your image offers!
Tailoring your approach works both on the large scale that you’ve described, and in a smaller one to one setting. No matter how wonderful your product or service is, if a potential client can’t see that he needs it, it won’t result in a sale.
The truth hurts, pure and simple. What annoys me the most is from the head to the tail has no idea what is happening. The truth of sales is in the numbers. The head must see proper analytics to keep the sales team honest. The sales manager surly knew what was up.
Why fool yourself, see a problem, smack it hard and improve your sales plan at least every quarter.
Excellent observation. Too many either: hire a CMO whose really just a gap filler or whose bounced from a similar company.
Get sucked into PR : resulting in being fooled onto thinking they have penetration. Hire an Ad firm that doesn’t connect to the true customer.
Marketing now requires metrics, accountability, compelling brand and messaging with a highly flexible execution platform not restricted to any medium: print, video, web, DR, social networking and pr.
As this is a $500,000 engagement and few if any start up ever budgets enough for it–the situation ends up as you suggest. When a business invests 7-10% of captal or gross revenue toward actually introducing, promoting, educating and converting customers- the results are a no-brainer. Too bad it’s not standard practice. More tradical thougts at. http://m4blog.com
I can’t help but wonder if you’re talking about my company (some details are different, but some … uh … aren’t), but chances are a lot of other people are wondering the same thing, and you’re describing an amalgam.
What’s really absurd is the sales guy’s attitude that there couldn’t possibly be anything wrong with sales, because you just aren’t a real proper dignified company without a real sales force, and the hostility with which they respond to any suggestion that they might actually have to start justifying some of their expenditures.
Couldn’t help but smile reading this. It’s amazing how easy it is for the root cause to be ignored and for the fingerpointing to set in. I’ve seen it many times, and if you are serious about running a business and also have external responsibility you must dig until you fund where the issue is coming from. The problem that stands in your way in 90% of the cases is internal politics. This is the true bane of business sense and logic.
[…] burn through all that funding you worked so hard to get. Steve Blank’s latest post entitled, It Must Be a Marketing Problem is a cautionary tale about a company that continued to scale up without knowing the needs of their […]
Oh I love it! Rather than writing a lengthy comment and preaching to the choir, I’ll just say for now: Bravo Steve Blank! To be sure, I’ll reference this in my future posts. Timely, relevant, succintly written, and so true.
LOL @ idiot VCs who fund such companies
No wonder the industry has negative 10-year returns (compared to market indices) now that dotcom bubble is out of the picture. They deserve to go down the drain.
The real tragedy is that returns from the successful ventures and entrepreneurs end up subsiding such incompetents. Is it Venture Socialism?
Awesome article. I’ve actually bookmarked it and shared it with quite a few people. It really drives home the idea of how important it is to research your customer segments. Poor planning and big egos can ruin a company faster than anything else.
As ex-VP Marketing, this is priceless.
Sales & Marketing need one goal and a service agreement. Marketing will deliver “X” leads based on “Y” criteria. From that Sales will deliver “A” meetings, “B” closings and “C” in sales.
A little basic accountability can go a long way.
This is brilliant. The biggest gap I see with my strategic and marketing consulting clients is that they never talk to their customers. When I ask “what do your customers think?” most often, I get blank stares. Business owners and executives sit in a bubble, creating strategies that fit with their perspective of the world, yet ignore all the external stakeholders. When the gap between sales and marketing — or manufacturing and service, or technology and finance, etc. — widens, the fingerpointing starts, cash flows in the wrong direction, and companies collapse. Thanks, and I’ll be sure to reference this!
Steve,
The VP of Sales must (in the immortal words of Ronald Regan)
“Tear down that wall”.
The Berlin wall between Sales and Marketing creates the organization’s most easily accessible scape goat.
In the movie Glenngarry Glen Ross, Alec Baldwin summarized it this way, “The leads are weak??? You’re weak!!!”
Marketing often works most comfortably in the eco-chamber of their own world…. where all things said sound good and feel great. These messages get packaged and sent to sales who must repackage in the way the customer thinks and talks. I’ve done this countless times.
Its the Sales VP’s responsibility to get marketing in front of real customers and prospects and experience first hand how the message reasonates. Get them out of their eco-chamber and in the field. The message must be co-built, co-owned and customer driven.
This sounds like a case for SVP of Sales & Marketing.
Such executive would come from sales background and align outbound marketing functions around the needs of sales and be held fully accountable. Things like product marketing might possibly go under product organization, though it might be hard to separate from its role in lead gen.
In all this means there will be two key executives in the company – one who will own making a product and the other in charge of marketing and selling the product. CEO needs to be hands on enough to manage and hold accountable each one, personally owning the Customer Discovery process.
Steve, what is your take on this setup?
Thanks for a great post Steve.
I saw this exact scenario happened at the last company I worked for. It was a start up company and we had a fully loaded executive staff and VPs and Chiefs of anything you can think of. The company was based in Southern California and our sales office was in Chicago 🙂 . They were out marketing and selling when engineering wasn’t even close to having a functional product. Not only that, the first wave of alpha users were people connected to the CEO. Needless to say, they burned through millions of dollars and went out of business.
Once again, you nailed it Steve. My start-up went through this exact scenario last year, and the end result was no different. By meeting our sales plan in Q309 through a friends and family sales program we were duped into thinking we had a real business. We soon realized after a horrible Q4 that we needed to cut staff and get back to identifying product/market fit. Oh yeah, and that sales guy from Boston is now looking for work.
[…] The No. 1 cause of start-ups burning through cash. It’s not handing out salaries too early. Nor is it investing too much in technology. It’s the “premature scaling of sales and marketing,” writes serial tech entrepreneur Steve Blank, and here’s how you can fix it before it’s too late. […]
This absolutely describes the situation I am facing on a client project right now, specifically the “early orders” scenario. The crazy thing is, the founder and CEO of the company is a terrific engineer, frequently demanding hard data regarding “results”, but will base a “strategy” on how he wants to interpret basic data. Product development seems to be mostly based on assumptions and internal brain-storming, and the self-denial about the root cause of slow sales and falling apart customer service, is going to be the down-fall of that organization.
Excellent post!
Especially never hire sales guys/head if CEO by himself was not able to crack a single deal in the open market – not from his circle of friends n well wishers.
Get a sales guys/head – make sure he understands the problem, product, market and the customer – have him do atleast a few sales before he is approved for hiring more into his teal. Else, the sales head focus will just be on hiring and missing all the targets with lame excuses – which can’t be tolerated/sustained after some time.
Sales team typically comes up with stupid silly excuses – either the marketing is not proper, well worst is the excuses on the product itself that its not ready etc etc stuff.
I think your recommendation on fire the sales team and understand the customer before hire anyone – is the appropriate action – to protect the startup from dying soon.
Thanks for the wonderful post!!
Dash
[…] vs. Sales – it should be Marketing + Sales There was a great post last month from Steve Blank and his aiding a friends’ startup company that was having execution […]
Lacking of basic nowledge is the main reason of failins in most small (and larger) businesses! But once again it’s trial and error!
Here is an interesting video for entrepreneurs on Marketing.
http://www.marsdd.com/buzz/video-detail.html?viddlerUrl=http://www.viddler.com/explore/marsdd/videos/74/
[…] Steve Blank, and others in the world of tech startups discuss the problem/solution distinction in detail. Seth Godin talks about avoiding solving the wrong problem too. […]
Steve, excellent post, thank you.
A friend told me about your website, and I’ve just read several of your posts – I absolutely like your site – great info here.
Not paying enough attention on Customer Discovery is one of the main problems affecting businesses today. Sadly, when facing a problem with customer delivery, most companies’ circumstances continue to worsen and losses continue. Here’s why: having invested so much money and effort, and with a full complement of staff on the ground, most companies refuse to go back to basics and start from scratch – or address the fundamental problem, namely, testing the product / service in front of customers.
If only businesses would follow the proper steps of a standard business model, many company flops, losses as well as customer and risks would be minimized or avoided.
It is simply really – your product or service must solve the customers’ problems or give them some benefits in a particular way. Now, if what your company offers is not aligned with what the customers want – your company is doomed to fail or lose a lot of money. It’s as simple as that.
Thanks again Steve for this post and captivating discussion here.
[…] http://steveblank.com/2010/02/11/it-must-be-a-marketing-problem/ […]
Steve, I really appreciate your open minded and analytical approach to solving problems in startups and businesses at large. After reading this post it really got me thinking about the next step.
What are your thoughts on how to put together a good sales meeting / presentation?
Coming in as a technical person who has had some sales experience I need to find resources to help educate my sales managers on best practices and how to practice “lean startup” practices (getting feedback, understanding customers needs, and shifting sales strategies). Here is the best post I’ve found so far on sales presentations, yet it doesn’t present a full story nor best practices keeping the customers “actively participating” customer development style.
http://www.bnet.com/article/how-to-create-an-effective-sales-presentation/313856
(I’m sure there has to be research on how to make sales presentations and meetings more effective)
Jeff
[…] of the biggest surprises is that success isn’t about size – of team or funding. It turns out Premature Scaling is the leading cause of hemorrhaging cash in a startup – and death. In […]
[…] biggest surprises is that success isn’t about size – of team or funding. It turns out Premature Scaling is the leading cause of hemorrhaging cash in a startup – and death. In […]
I find it quite surprising how frequently companies of all sizes fall victim to this, not just start-ups or early stage ventures. Working at a business planning company, I frequently have to remind these ventures to listen to their customers. The will come to us without a focus group and expect that macro-level research will be the silver bullet. I think a good way to illustrate the importance is that the value of targeted marketing ROI beats the short-run expenses and opportunity cost of poorly targeted marketing campaigns – regardless of the reach.
,