Building a successful business model isn't about changing your company based on every bit of feedback: It's about understanding whom to listen to and why.
The art of entrepreneurship and the science of Customer Development
is not just getting out of the building and listening to prospective
customers. It's understanding whom to listen to and why.
I got a call from Satish, one of my ex-students last week. He got my attention when he said, "following your customer development stuff is making my company fail." The rest of the conversation sounded too confusing for me to figure out over the phone, so I invited him out to the ranch to chat.
'WE DID EVERYTHING YOU SAID'
When he arrived, Satish sounded like he had 5 cups of coffee.
Normally when I have students over, we'd sit in the house and we'd look
at the fields trying to catch a glimpse of a bobcat hunting. But in this case, I suggested we take a hike out to Potato Patch pond.
We took the trail behind the house down the hill, through the forest, and emerged into the bright sun in the lower valley. (Like many parts of the ranch this valley has its own micro-climate and today was one of those days when it was ten degrees warmer than up at the house.)
As we walked up the valley Satish kept up a running dialog catching me up on six years of family, classmates and how he started his consumer web company. It had recently rained and about every 50 feet we'd see another 3-inch salamander ambling across the trail. When the valley dead-ended in the canyon, we climbed 30-foot up a set of stairs and emerged looking at the water. A "hanging pond" is always a surprise to visitors. All of a sudden Satish's stream of words slowed to a trickle and just stopped. He stood at the end of the small dock for a while taking it all in. I dragged him away and we followed the trail through the woods, around the pond, through the shadows of the trees.
We sat on the
bench staring across the water, with the only noise coming from ducks
tracing patterns on the flat water. Sitting there Satish described his
"We did every thing you said, we got out of the building and talked to potential customers. We surveyed a ton of them online, ran A/B tests, brought a segment of those who used the product in-house for face-to-face meetings. " Yep, sound good.
"Next, we built a minimum viable product." Ok, still sounds good.
"And then we built everything our prospective customers asked for." That took me aback. Everything? I asked? "Yes, we added all their feature requests and we priced the product just like they requested. We had a ton of people come to our website and a healthy number actually activated." That's great I said, "but what's your pricing model?' "Freemium," came the reply.
Oh, oh. I bet I knew the answer to the next question, but I asked it anyway. "So, what's the problem?"
"Well everyone uses the product for awhile, but no one is upgrading to our paid product. We spent all this time building what customers asked for. And now most of the early users have stopped coming back."
I looked hard at Satish trying to remember where he had sat in my class. Then I asked, "Satish, what's your business model?"
"Business model? I guess I was just trying to get as many people to my site as I could and make them happy. Then I thought I could charge them for something later and sell advertising based on the users I had."
I pushed a bit harder.
"Your strategy counted on a freemium-to-paid upgrade path. What experiments did you run that convinced you that 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.
WHAT ARE CUSTOMERS FOR?
Part of Customer Development is understanding which customers make sense for your business. The goal of listening to customers is not 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 getting 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.
This article first appeared on Steve Blank's website.