The fact is simple: Nine out of Ten businesses fail… this is not from a lack of business training or not having a great product. It seems crazy to think, but popular business teaching and common sense thinking actually lead down a road towards failure (don’t believe me?… keep reading). One of my favorite business influences, Steve Blank puts it kind of like this: The sad reality is that most start-ups fail because they don’t have enough customers, not because they don’t have the best systems in place or their product/service is not good enough. The reality is that most business owners put all of their time into product development only to find out later that there is no customer demand for what they have been busy building.
So how do we go about building a business based on customer demand instead of the owners assumptions?
Here are the 2 roads that business owners can take… which one do you find yourself walking down:
1. The Wide Road beginning with Product Development (Building your start-up based on assumptions that people will buy from you someday)
2. The Narrow Road beginning with Customer Development (Building your start-up knowing that people will buy from you on the first day)
I’ll illustrate the both below:
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1. The Wide Road:(9 out of 10 times this road is traveled and the business fails) The Entrepreneur gets an idea, creates a plan, raises money and starts developing the start-up with the hopes that someday there will be enough customers to actually make a profit. This scenario hinges on the owner’s assumptions in the Business Plan (“Assumption” is really just a fancy word for “guesses”), because in this scenario the owner hopes that Marketing will bring in enough customers to meet the growth projections in the business plan. Everything is predicated on the Launch Date, because that is the day that the investors (if there are any) and owner(s) hope to start getting their money back. Without a defined customer base that demands the product/service, many companies will Alpha/Beta Test the product to make sure it works and launch a Free or Reduced Cost version to gain “customers” in hopes that someday they can charge full price for the product. “Hopefully” is a common word in the marketing and sales meetings, while “someday” is a realm of reality that the company continually lives in.
The problem with this type of Start-Up: Once they burn through the cash and launch the product, they often find themselves asking the tough question, “But where are the Customers?” without enough money to rebuild the company to meet what people actually want.
Now let’s take a look at the Road less traveled that begins with Customer Development instead of Product Development:
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2. The Narrow Road Less Traveled: (Only 1 out of 10 times this road is traveled and the business succeeds) The Entrepreneur gets an idea, forms a Crush Club of potential customers to replace their assumptions with facts, creates a Minimum Requirements Document, Crush Club “ok’s” plan and then First Draft Business Plan is Written. In this situation the start-up takes the time to find out the actual needs of a targeted group of people that actually have money to pay for the solution. In this model, the Potential Customer dictates the type of business that is created and this is accomplished by having Crush Club Meetings where, by the end of the meeting, the person either has a Crush on your Business Idea or let’s you know that your assumptions are not correct.
With this process you don’t need to offer a “perfect” or “whole” product on your launch date… you only need one that meets their “Minimum Requirements,” or in the words of Eric Ries, a “Lean Startup.” You will be able to add more features or services to your business as you grow and continue to have Crush Club meetings and if at any point in this process the Crush Club stops approving of the plan, the owner can go back to Step 1 and proceed from there to build a business based on customer demand (See Diagram below). This 5 step process will save you a lot of money & stress because you will find out within the first month or two if you have a real business idea or just assumptions that should not be built on.
From there you can forecast growth and create the First Draft of your Business Plan and know that you can “Cash Flow” the start-up on the day you launch… how great would that feel?
The choice is yours which road to go down (or keep going down), but if you find yourself currently on the first road, the good news is that you can still get onto the second road because there is an off ramp right ahead. Just “take a break” from building your business, get out of your office and get in front of the customers… they’ll tell you how to finish building it.
How will you implement this in your business?