Customer Discovery, Phase One: State Your Business Model Hypotheses

Dr. Noman Islam

Customer Discovery Phase

• Market size estimation and business model canvas development are key components of the customer discovery phase.
• Hypothesis briefs provide a detailed yet concise understanding of initial business hypotheses.
• Tracking pivots and iterations based on customer feedback and market insights is essential for business model refinement.

Customer Discovery Process

• Hypothesis briefs focus on clarity and brevity to ensure understanding among team members.
• Using bullet points instead of paragraphs helps in conveying key points effectively.
• Iterative hypothesis refinement based on customer interactions and market research is crucial for the customer discovery process.

Phase 1: State business model hypothesis

• This phase starts by developing a rough market size estimate to size the opportunity for your new venture.
• Next, the rest of customer discovery uses the business model canvas to record short summaries (hypothesis briefs) of initial hypotheses about your business.
• The canvas provides a picture of the business model on a single page, serving as a reference for team members and a scorecard keeping track of pivots and iterations as the company’s business model changes.

Market Size Hypotheses

• Estimating market size is crucial for understanding the potential of a startup market.
• Aligning investor and founder objectives is essential for success.
• Market opportunities are fueled by three key ingredients: a large number of potential active users or customers, clear future-user growth in a market with rapid and predictable growth, and the opportunity to attract active customers or users

TAM, SAM and Target Market

• Marketers and their investors typically think of market size as three numbers;
• TAM (total addressable market),
• SAM (served available market)
• and target market
• A top-down estimate is a first step.
• Use industry-analyst reports, market research reports, competitors’ press releases, university libraries—and discussions with investors and customers to “size” the overall market.
• Use whatever metric is most appropriate—units, dollars, page views, eyeballs, whatever.

30/10/10 Rule

• Thirty percent of registered users and those downloading mobile apps will use the service each month.
• Ten percent of registered users and those downloading mobile apps will use the service each day.
• Concurrent users of a real-time service will seldom exceed 10 percent of the number of daily users

Market Sizing Techniques

• The top-down approach and bottom-up approach are common methods for estimating market size.
• The 30/10/10 law of web/mobile "physics" provides insights into user engagement and retention.
• Industry research and web-specific tactics are valuable for market-sizing exercises.

Industry Research

• Market research tools and tactics are essential for understanding the market landscape.
• Web-specific research methods provide insights into user behavior and preferences.
• Understanding industry trends and competitive analysis is crucial for market research.

Business Model Canvas

• The single-page business model provides a comprehensive overview of the business model.
• Hypothesis briefs serve as a reference for team members and track pivots and iterations.
• Updating the business model canvas based on customer feedback and market insights is essential for business success.

Physical Startups

• Value Proposition Hypothesis for physical startups focuses on product features and benefits.
• Product vision and MVP description are crucial for developing physical products.
• Understanding customer needs and preferences in the physical product space is vital for success.

Web/Mobile Startups

• Value Proposition Hypothesis for web/mobile startups focuses on digital product features and benefits.
• Product vision and MVP description are crucial for developing web/mobile products.
• Understanding user behavior and preferences in the digital space is vital for success.

Value Proposition Hypothesis

• Filling out the canvas with the value proposition hypothesis is the first step in product development.
• Defining the product features and benefits and describing the MVP are key components of the value proposition.
• The value proposition serves as a contract between the customer and the company, solving a specific problem.

Value Proposition 1: Low fidelity MVP

• A low fidelity MVP can be as simple as a single web page used to gather customer feedback about the problem the product will solve.
• For web-based startups using agile development and continuous deployment, the delivery date for the low fidelity MVP is basically Day One.
• Ideally, though, it’s a snapshot of the product as it exists on that day in the agile development process, in its “quick and dirty” form, even though that form will evolve almost every day

Minimum Viable Product (MVP)

• Learning objectives and the smallest feature set are key components of the MVP.
• Creating a user story and understanding the job the product will do are essential for MVP development.
• MVP development focuses on delivering the core features to validate the product concept.

Hi-Fidelity MVP

• Web/Mobile channels will test both a low fidelity and a hi-fidelity MVP.
• The low- and hi-fidelity MVPs are used very differently: the low fidelity MVP tests whether you’ve accurately identified a problem that customers care about (based on user visits to your site, e-mail received, demos played, etc.), while the hi-fidelity MVP, detailed in Phase 3, will later test whether the product is on the right path to solving that problem (based on orders received, users’ stays on the site, users’ recommendations to others, etc.).

Hi-Fidelity MVP(contd…)

• Later, during customer validation, when the hi-fidelity MVP is exposed to many more customers, it should look and operate much more like a finished product. Taken together, the low and high fidelity MVP tests help establish product/market fit.

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Write a user story

• A “user story” is important in web/mobile channels, where intense competition and millions of online products and properties often make product differentiation harder to “nail.”
• For example: There are thousands of websites for nurses, and a user story can help explain the need for a new one

User story for a nursing website

• Until now, operating-room nurses had trouble talking to one another about their stresses and “doctor problems” for fear of spawning gossip or incurring the wrath of HR.
• Now “ORNurse,” “Nurseconfidential.net” allows these specialized nurses to:
• interact and chat anonymously with their peers nationwide and beyond
• pose questions to fellow nurses in similar situations and collect a variety of advice
• obtain advice anonymously from legal, HR, and clinical professionals
• send private messages to people they’d like to talk with personally
• post anonymous comments about specific doctors, problems, or patient situations
• get a daily e-mail summary of what’s going on at the site

Product Vision

• Long-term vision and an 18-month schedule are essential for team agreement.
• Delivery dates, product strategy, and MVP are key components of the product vision.
• Changing or solving problems, expanding into adjacent markets, and changing customer behavior are part of the long-term vision.

Customer Types

• Identifying customer archetypes is crucial for understanding buyer demographics and psychographics.
• A day in the life of a customer helps in understanding their behavior and needs.
• Understanding customer personas and their preferences is vital for product development.

A day in life of customer

• Create a “day in the life” scenario using 15- or 30-minute increments
• from wakeup to bedtime,
• paying close attention to time spent on web/mobile devices,
• specifying not only which device but what your customer is actually doing on the device and for how long: texting with friends, reading blogs (note which ones), playing mobile or social games (note which ones), shopping for shoes (note where), or posting pictures of her cat on Facebook?

Day in the Life Scenario

• Customer behavior analysis is essential for product development.
• Understanding the time spent on web/mobile devices and detailed customer activities is crucial.
• Identifying customer preferences and activities throughout the day is vital for product design.

Channels Hypothesis

• Web/mobile channels have the potential to reach billions of people worldwide.
• Different distribution channels have unique strengths and weaknesses.
• Understanding audience and aggregation is important for channel validation.

Long-Term Vision

• Understanding how the product will change or solve problems is crucial for long-term vision.
• Expanding into adjacent markets and changing customer behavior are key aspects of the long-term vision.
• Developing a clear and compelling narrative for the long-term vision is essential for stakeholder alignment.

Product Features and Benefits

• Identifying the problem or need the product solves is crucial for product development.
• Listing the benefits through the customer's eyes and summarizing the benefits for each feature is essential.
• Ensuring that the benefits are accepted without the need for explanation is important for product adoption.

Customer Understanding

• Understanding customer needs and preferences is vital for product development.
• Customer segmentation helps in targeting specific market segments effectively.
• Analyzing customer behavior and feedback provides valuable insights for product improvement.

Customer Relationships

• Customer acquisition activities and targeting strategies are essential for business growth.
• Maximizing return on investment through effective customer relationship management is crucial.
• Fine-tuning customer acquisition activities based on customer feedback and market trends is important for success.

Web Influence Map

• Consumer influence mapping helps in understanding the impact of web/mobile channels on customer behavior.
• Web/mobile influence strategies and tactics are crucial for engaging and retaining customers.
• Analyzing consumer behavior and preferences on web/mobile platforms provides insights for marketing and product development.

Distribution Channels

• Web/mobile channels are commonly used for product distribution.
• Amazon charges 55% of retail prices for physical book sales, highlighting a specific example.
• Strengths include fast national distribution at variable cost, while weaknesses involve little control of on-site promotion.

Web/ mobile channel choices

• Dedicated e-commerce
• Two-step e-distribution
• Aggregators

Platforms as channels

• App stores
• Social commerce
• Flash sales
• Free-to-paid channel
• Different tests Can Help You Pick the Channel
• Consider whether your product fits the channel

Market Type

• Startups need to determine if they are entering an existing market, re-segmenting, creating a new market, or cloning.
• New-market entries are the most expensive, emphasizing the cost implications of market entry strategies.

Analyzing an existing market

• If a single company has 74 percent of the market, the market has become an effective monopoly. For a startup, that’s an unassailable position for a head-on assault. (Think Google in search or Facebook in social networks.)
• If the combined market share for the market leader and the second ranking company is greater than 74 percent and the first company is within 1.7 times the share of the second, it means a duopoly commands the market. Its position is impervious to attack by a startup. (In the telecom sector, Cisco’s and Juniper’s combined share of the core router market fits this description.)
• If a company has 41 percent market share and at least 1.7 times the market share of the next-largest company, it’s the market leader.

Market map

• Draw the existing markets that customers should flow from (remember that a market is a set of companies with common attributes). Draw the product features and functions that, when assembled, best describe the new product

Acquision Vs. activation

• The acquisition phase equates to the “awareness,” “interest,” and “consideration” steps in the physical channel, where customers learn about and explore a product before they buy.
• This second step in the “Get” process is much like the “purchase” step in the physical channel.
• Here the customer shows interest through a free download or trial, a request for more information, or a purchase. A customer should be considered activated even if he doesn’t purchase or register, as long as the company has enough information to re-contact him (whether by e-mail, phone, text, etc.) with explicit permission to do s

Customer Acquisition

• Online lead generation and other tactics are used for customer acquisition, showcasing modern methods.
• Small-scale acquisition tests are conducted in customer discovery phases, emphasizing the importance of testing and validation.
• Develop your “Get Customers” Strategy
• Determine who your audience
• What kind of content will they find attractive?
• Make sure your content works in the location
• Participate in the communities your customers are a part of
• Create content that people want to link to.

Free acquisition tactics

• Public relations
• Viral marketing
• Search engine optimization (SEO)
• Social networking

Paid acquisition tactics

• Pay-per-click (PPC) advertising
• Online or traditional media advertising
• Affiliate marketing
• Online lead generation

Customer Retention

• Strategies for customer retention include product upgrades and loyalty programs, focusing on post-acquisition efforts.
• Retention is crucial for long-term success and profitability.

Activation tests

• Capture the customer’s e-mail address and get permission
• Offer incentives for activation
• Call 100 prospects who don’t activate immediately
• Free-to-paid conversion

Retention strategies

• Track start dates and sources of each customer (referred by a blogger, another site, etc.)
• Track customers’ activity level individually. How often do they come? How long is each visit? What’s the time span between visits?
• When do customers abandon, and what were they doing that caused them to do so?
• Monitor customers’ behavior on-site: what do they click on, what don’t they click on?
• Track customer referrals to others and the sources and activity level of referred visitors
• Track the results of each promotion, whether outbound or on the site itself

Retention tests

• Outreach programs
• Blogs, RSS
• Loyalty programs
• Contests and special events
• Mobile app push notifications
• Product updates and enhancements
• Placing live phone calls
• Tips-and-tricks newsletters
• Customer lock-in/high switching costs

Retention metrics

• signs of dwindling visits, page views or time spent on the site or app
• increased time between visits
• average customer life (how long they stay active) and, if possible later,
• lifetime value
• increases in complaints, help or support tickets
• reduced response rates or open rates on company e-mails

Get current customers to spend more

• Cross-sell programs
• Up-selling programs
• Next-selling programs
• Unbundling

Grow programs

• Thank you
• New items, special offers, and discounts
• e-commerece companies should have “recommendation engines.”
• e-commerce companies should include special offers and discounts in each shipment
• e-mail customers to introduce new and different products or “add-on” features to buy
• Referrals
• Viral products
• Network effect

Get Customers to Send More Customers to the Company

• Encourage customers to “like” the product on Facebook
• Offer customers discounts or free trial offers to share with friends
• Enable customers to e-mail their friends using their address books to create mailing lists
• Create contests or incentives to encourage Tweeting, “liking” and other viral activities
• Highlight social-networking action buttons on the site to make viral efforts easy
• Encourage bloggers to write about the product, and reward them for doing so

Resources

• Physical resources: company facilities and product/service resources.
• Human resources
• Intellectual property
• Dependency analysis

Intellectual Property

• Startups need to acquire, protect, and exploit intellectual property, highlighting the importance of IP in business.
• Common mistakes, such as not making a clean break with previous employers, are outlined to avoid potential pitfalls.

Partners Hypothesis

• Key partners provide capabilities, products, or services that the startup can't develop itself, emphasizing the value of strategic partnerships.
• The significance of choosing the right partners for business success is highlighted.
• Strategic alliances

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Revenue Model

• Startups need to focus on the key, big source of revenue before expanding into secondary sources, emphasizing prioritization.
• Distribution channels and lifetime value need to be considered for revenue calculations, highlighting key factors in revenue planning.

Customer Check-in Calls

• Put together a plan to call every customer, or every fifth customer, once a month or once a quarter simply to thank them for their business and see how they like the product.
• Probe for questions they have about the product, features, or functions during these calls.
• Target at least a 15 percent improvement in repeat sales or renewals from customers who’ve talked.

Customer-Satisfaction Survey

• Plan to check with customers about their use of and satisfaction with the product or service.
• Probe for complaints or lack of use, and reach out to any who express problems.
• Look for at least a 15 percent reduction in churn from those who’ve been contacted.

Product-Update Bulletins

• Create simple tip sheets or user notes on how customers are making the most of the product.
• Send them to all customers to enhance their product experience.
• This can lead to increased customer satisfaction and loyalty.

Content Creation

• Create inviting, helpful, or entertaining information in various formats.
• Use copy, diagrams, white papers, blogs, videos, games, demos, and other formats.
• Participate in communities and social media your customers are likely to be in.

Get Customers Strategy

• Make your information as rich and inviting—and widely available—as possible.
• Cast the widest-possible net when people begin their search.
• Provide helpful, non-sales-y information that leads them back to your product, app, or site.

Decision-Making Influence

• Determine who your audience is, then be prominent wherever they spend time on the web.
• Tailor your content to be attractive to your target audience.
• Use the way people make decisions to guide your acquisition and activation strategy.

Content Preferences

• Understand what kind of content your audience finds attractive.
• Tailor your content to match the preferences of your target audience.
• Use content formats such as illustrations, games, and videos to reach them effectively.

Partnership Types

• Understand potential partner types, including strategic alliances, joint new business efforts, coopetition, key suppliers, and traffic partners.
• Each type of partner brings different value to the company.
• List target partners, their contributions, and what the company will offer in return.

Partnership Value Exchange

• Identify essential partners and the company’s “value exchange” with each.
• List target partners, their contributions, and what the company will offer in return.
• Update your business model canvas to reflect these partnerships.

Activation-Tactics Plan

• Create an activation-tactics plan in simple spreadsheet form.
• This plan should include details on how to activate customers and drive engagement.
• Consider low-fidelity (in discovery) or hi-fidelity (in validation) MVP for activation.

Hypothesis Validation

• Identify potential risks and uncertainties in the hypothesis.
• Address these in the hypothesis validation section.
• Ensure that the hypotheses are aligned with the overall business model.

Cost Assumptions

• Founders, product development, engineering, and operations teams should validate cost assumptions and changes.
• Ensure that the cost assumptions are realistic and aligned with the business model.
• Review and agree on the final versions of each hypothesis to validate cost assumptions.

Sales Channel Alignment

• Review the sales channel in light of pricing, need for installation, and other factors.
• Ensure that the sales channel aligns with the pricing and customer needs.
• Validate that the sales channel makes sense in the context of the overall business model.

Business Model Canvas

• Update the business model canvas based on the validated hypotheses and cost assumptions.
• Ensure that the canvas reflects the latest updates and changes in the business model.
• Review and agree on the final versions of each hypothesis to update the business model canvas.

Customer Engagement

• Engage customers through helpful tips, FAQs, cartoons, or fun videos.
• Make the content shareable and engaging for customers.
• Encourage customers to share the content with friends for additional sales and referrals.

Personal Career Advancement

• Seek specific resources to advance your personal career.
• Find teachers for specific subjects and hire coaches to hone skills or reach career goals.
• Focus on getting smarter and better over the course of your career.

MVP Development

• Start MVP development with a clear offer and a low-fidelity or hi-fidelity MVP.
• Create an activation-tactics plan to drive MVP adoption and engagement.
• Ensure that the MVP aligns with customer needs and preferences.

Customer Check-in Calls

• Put together a plan to call every customer, or every fifth customer, once a month or once a quarter simply to thank them for their business and see how they like the product.
• Probe for questions they have about the product, features, or functions during these calls.
• Target at least a 15 percent improvement in repeat sales or renewals from customers who’ve talked.

Customer-Satisfaction Survey

• Plan to check with customers about their use of and satisfaction with the product or service.
• Probe for complaints or lack of use, and reach out to any who express problems.
• Look for at least a 15 percent reduction in churn from those who’ve been contacted.

Product-Update Bulletins

• Create simple tip sheets or user notes on how customers are making the most of the product.
• Send them to all customers to enhance their product experience.
• This can lead to increased customer satisfaction and loyalty.

Get Customers Strategy

• Make your information as rich and inviting—and widely available—as possible.
• Cast the widest-possible net when people begin their search.
• Provide helpful, non-sales-y information that leads them back to your product, app, or site.