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 to 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 business 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 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
Author: Steve Blank
A prolific educator, thought leader and writer on Customer Development for Startups, Steve Blank is a retired serial entrepreneur who teaches, refines, writes and blogs on “Customer Development,” a rigorous methodology he developed to bring the “scientific method” to the typically chaotic, seemingly disorganized startup process. Now teaching entrepreneurship at three major universities, Blank co-founded his first of eight startups after several years repairing fighter plane electronics in Thailand during the Vietnam War, followed by several years of defense electronics work for U.S. intelligence agencies in “undisclosed locations.” Four Steps to the Epiphany, Blank’s fast-selling book, details the Customer Development process and is increasingly a “must read” among entrepreneurs, investors, and established companies alike, when the focus is optimizing a startup’s chances for scalability and success.
After 21 years driving 8 high technology startups, today Steve teaches entrepreneurship to both undergraduate and graduate students at U.C. Berkeley’s Haas School of Business, Stanford University’s School of Engineering and the Columbia/Berkeley Joint Executive MBA program. His “Customer Development” teaching and writing coalesce and codify his experiences and observations of entrepreneurs in action, including his own and those he advises. “Once removed from the day-to-day intensity of founding a startup, I was able to observe a pattern that distinguishes successful startups from failures,” Blank says. In 2009, he earned the Stanford University Undergraduate Teaching Award in Management Science and Engineering. The San Jose Mercury News listed him as one of the 10 Influencers in Silicon Valley. In 2010, he was earned the Earl F. Cheit Outstanding Teaching Award at U.C. Berkeley Haas School of Business. Despite these accolades, Steve says he might well have been voted “least likely to succeed” in his New York City high school class.
Steve Blank arrived in Silicon Valley in 1978, as boom times began. His early startups include two semiconductor companies, Zilog and MIPS Computers; Convergent Technologies; a consulting stint for Pixar; a supercomputer firm, Ardent; peripheral supplier, SuperMac; a military intelligence systems supplier, ESL; Rocket Science Games. Steve co-founded startup number eight, E.piphany, in his living room in 1996. In sum: two significant implosions, one massive “dot-com bubble” home run, several “base hits,” and immense learning leading to The Four Steps.
An avid reader in history, technology, and entrepreneurship who seldom cracks a novel, Steve has followed his curiosity about why entrepreneurship blossomed in Silicon Valley while stillborn elsewhere. It has made him an unofficial expert and frequent speaker on “The Secret History of Silicon Valley.”
Steve’s interest in combining conservation with best business practices had Governor Arnold Schwarzenegger appoint him a Commissioner of the California Coastal Commission, the public body which regulates land use and public access on the California coast. He also serves on the Expert Advisory Panel for the California Ocean Protection Council. Steve serves on the board of Audubon California, was its past chair, and spent several years on the Audubon National Board. A board member of Peninsula Open Space Land Trust (POST), Blank recently became a trustee of U.C. Santa Cruz and a Director of the California League of Conservation Voters (CLCV). Steve’s proudest startups are daughters Katie and Sara, co-developed with wife Alison Elliott. The Blanks live in Silicon Valley.
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I offered that 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.