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I asked myself that question about a decade ago when I came across statistics that pointed out only 1 out of 10 new product introductions result in a profitable business. This means that having a product does not mean you have a business, having a paying customer means you have a business—Start-ups don’t fail because they lack a product; they fail because they lack customers and a proven financial model.
This is when I realised where Customer Development comes in. Think of it as the sibling of Product Development. While Product Development focuses on building the product, Customer Development focuses on building the customer base. It is a separate and distinct process that involves deeply understanding your target audience, their needs and how your product fits into their lives.
Does Customer Development Matter?
Start-up businesses do not fail because they lack a product; they fail because they lack customers and a proven financial model. Too often, start-ups follow a traditional product-centric launch model, focusing on features and functionalities without truly understanding if there's a market demand for their solution.
Successful start-up founders, on the other hand, prioritise customer learning and discovery. They go out into the field, talk to potential customers and gather valuable insights that inform their product development process. This iterative feedback loop allows them to adapt, pivot and refine their offering to meet the real needs of their target market.
The initial product specification comes from the founders vision, not the sum of a set of focus groups. Hence, the customer development team job is to see whether there are customers and a market for that vision.
The Difference Between Winners and Losers
The difference between successful and unsuccessful start-ups often boils down to:
- Winners: Engage with customers early and often, incorporating their feedback into the product development process.
- Losers: Hand off a finished product to sales and marketing teams with minimal customer interaction during development.
The lesson is clear, by listening to potential customers, understanding their needs and validating your assumptions before committing to a specific product, you significantly increase your chances of success.
Common Mistakes in Customer Development
One of the biggest mistakes start-ups make is using the same process for product development and customer development. These are distinct activities that require different approaches. Another common mistake is neglecting the importance of understanding customer behaviour and the psychological factors that influence their decisions.
For example, founders often overestimate the value of their product and underestimate the "switching costs" customers incur when adopting a new solution. We have learnt that developers of new products, on average, overvalue the expected benefits of their innovations by a factor of three, compared to the benefits ultimately delivered. This mismatch in perception can lead to flawed decisions and high failure rates. Due to these biases, gaining in-depth understanding of status-quo behaviour is a crucial task of customer discovery.
How People Assess New Offerings?
We have learnt that people assess market choices based on three characteristics of decisions about new products:
- Customers evaluate new products relative to a reference point, usually the products they already own or consume.
- People view improvements relative to the reference point as gains and treat any shortcomings relative to the reference point as losses.
- Most important for entrepreneurs—perceived losses have a much greater impact on behaviour than similarly sized gains, this is something we call “loss aversion.” For instance, repeated studies across cultures have shown that most people will not accept a $100 bet where there is only a 50% chance of winning. In fact, the potential gains must be two to three times the potential losses before most people will find a $100 bet attractive. Loss aversion leads to a bias for the status quo, which has been demonstrated in research about choices regarding stock investments, automobiles, jobs and labour- management negotiations (e.g., “give-backs”), among other areas.
Conclusion
Customer development is not just a buzzword; it's a critical process that can make or break a start-up. By embracing a customer-centric approach, actively seeking feedback and understanding customer behaviour, founders can increase their chances of building a successful and sustainable business.
So, as founders embark on a start-up journey, remember: Don't just build a product; build relationships with your customers. Listen to their needs, validate your assumptions and adapt your approach accordingly. By prioritising customer development, you will be well on your way to creating a product that truly resonates with your target market and achieves lasting success.
