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Figure 2.3 The Customer Development Insight Cycle

      Start by asking yourself, “What insight do I need to move forward?” Then ask, “What’s the simplest test I can run to get it?” Finally, think about, “How do I design an experiment to run this simple test?”

      One of the things that trips up engineering founders is thinking that these tests have to be actual code, hardware or the real product. Most of the time you can mock-up the web page or create a demo or physical prototype to elicit valuable learning.

       Rule No. 7:

      Agree on Market Type. It Changes Everything

One of the radical insights guiding this book is that not all startups are alike. One of the key ways in which they are different is in the relationship between a startup’s new product and its market. These product/market relationships generally fit one of these descriptions:

      What confused entrepreneurs for decades is that the traditional product introduction model works when introducing a product into an existing market with a known business model (i.e., known customers, channels and markets). However, since the majority of startups are not pursuing known markets (those in new or re-segmented categories), they don’t really know who their customers will be. These types of startups are searching for a repeatable and scalable business model.

      Market type influences everything a company does.

      Market type influences everything a company does. Strategy and tactics that work for one market type seldom work for another. Market type determines the startup’s customer feedback and acquisition activities and spending. It changes customer needs, adoption rates, product features and positioning as well as its launch strategies, channels and activities. In sum, different market types require dramatically different discovery, MVPs, and sales and marketing strategies.

In existing markets, where customers exist, marketing is relatively easy: users can describe the market and the attributes that matter the most to them. The new product or service typically runs faster, does something better or cheaper, or otherwise improves on a customer-defined attribute. Users, the market, and competitors are known, and competition involves comparing the product and its features with others.

      In a new market, a company lets customers do something they couldn’t do before by creating something that never existed before. Or it dramatically lowers costs to create a new class of users. By definition, new markets have no customers yet, so there’s nobody to know what the product can do or why they should buy. This makes getting feedback and creating demand particularly challenging, since the product is unknown to users and the market is undefined and unknown, and costly to develop.

      The key isn’t competing, but instead understanding whether a large customer base exists and whether customers can be persuaded to buy. A classic founder error in a new market is the “fast-burn” spending of sales and marketing funds, a practice that may be appropriate when selling to existing customers in a known market, but makes no sense in a new market. The new-vs.-existing axis is at the core of the market-type definition.

      Re-segmenting an existing market is useful when the incumbent is too difficult to attack head-on (like Amazon, Facebook, or Microsoft). A re-segmentation strategy is based on the startup’s market and customer knowledge, ideally identifying a market opportunity that incumbents are missing, which usually takes one of two forms: a low-cost strategy or a niche strategy. (Unlike differentiation, segmentation forges a distinct spot in customers’ minds that is unique, valuable, and in demand.)

      Low-cost re-segmentation is just what it sounds like. Are there customers at the low end of an existing market who will buy “good enough” performance at a substantially lower price?

      Niche re-segmentation looks at an existing market and asks whether some segment of this market would buy a new product designed to address more specific needs. Can some sizable portion of the market be convinced that a characteristic of the new product is radical enough to change the rules and shape of an existing market. See Chan Kim and Renee Mauborgne’s work on “Blue Ocean Strategy” for another way to think of re-segmenting a market.

Cloning an existing business model is a powerful technique when an existing business has been proven in one country but has not yet been introduced in another. Startups in Russia, India, Indonesia, Brazil, Japan and China (each with its own large local market and language and cultural barriers) can adopt, borrow, or copy a successful American business model and customize it for local language and buying preferences. (Soon ideas from those countries will be cloned in the U.S.)

      For example, Baidu in China and Yandex in Russia are the equivalent of Google in their respective markets. And Qzone, RenRen, PengYou and Kaixin are the Facebooks of China, while Vkontakte and Odnoklassniki play the same role in Russia.

      Startup companies generally enter one of these four market types and ultimately must commit to one. The consequences of a wrong market-type choice will prove to be severe in the customer creation stage. While market type is ultimately a “late-binding decision,” a working hypothesis helps frame early customer discovery issues. Market-type decision-making is explored in greater detail in Chapter 3.

      …the few financial metrics to track: cash-burn rate, number of months’ worth of cash left…

       Rule No. 8:

      Startup Metrics Differ from Those in Existing Companies

We now have several centuries’ worth of performance metrics for existing businesses —P&Ls balance sheets, cash-flow forecasts and line-of-business analyses, plus scores of others. Here’s hoping your startup becomes big enough to need them someday. In the past (not so long ago), we used these tools with startups because we didn’t know what else to measure.

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