The Process: Customer Development

Customer development is all about testing the right hypotheses at the right time with the right data.

When Thomas Bukowski thought of a way to help really sick people in low-income countries, one of the first things he did was get out in the field. He flew from San Francisco to Nepal to see firsthand how patients enter the system he was hoping to improve. Watsi, his nonprofit, crowdsources funding to help critically ill individuals get the treatment they need. Thomas wanted to go lean. It was out in the clinics of rural Nepal that he began to understand what that really meant.

One of the shorthand ways lean entrepreneurs refer to customer development is “get out of the building” because the key to its implementation is that the data comes from real people (your targets, your funders, your partners) in the real world, well outside the conference room where you came up with your hypotheses.

Besides relentlessly driving you toward feedback from outside your organization, customer development lays out a process that stretches from the very first hypotheses about what you are creating to the questions of how to scale your innovation and, eventually, how to institutionalize it for long-term sustainability and growth. It’s a four-step process that helps you develop hypotheses appropriate to your stage of development and drives you to use real-world data (from customers!) to test them.

The discipline of customer development is the core framework for lean startups. We’ll be devoting several chapters to each of its four stages. From end to end, they are:

Discovery. The initial stage of customer development involves translating your initial ideas about the innovation into hypotheses, testing assumptions about the needs being filled and the behaviors of key “customers” with respect to those needs. The key output of this phase is the simplest possible implementation of the program, called the minimum viable product (MVP), that allows for in-depth hypothesis testing. The focus is directly on the service or program to discover whether it can achieve its goals in as small an experiment as possible.

For Watsi, the MVP was simple. It test whether money to pay for critical healthcare could be channeled effectively to deliver that treatment. Watsi’s founders didn’t build software to do this. They worked with partners to identify the needy and sent money directly collected from their families and friends. At minimal expense they rapidly proved that individuals from across the world could directly save a life dependent on an expensive medical procedure.

Validation. The second stage broadens the range of hypotheses tested to include the broader environment, what it takes to get the program noticed, placed in use, paid for. This is often the point of first failure, where some key hypotheses start to fail. In almost every case, lean startups learn so much in this phase that they perform what’s called a pivot. They learn lessons, redesign their approach, and turn to a new way of doing things.

The moment when Monica Martinez and the Homelessness Services Center realized that they weren’t going to make their numbers was a pivot moment. They revamped their MVP to focus less on building a network and more on driving down time lags in the system.

Creation. With a proven, simple product in hand and a granular understanding of how targets, partners, and funders react to the new program, you focus in the creation phase on what it takes to grow rapidly. You test a new set of hypotheses around the problems of scaling and replication. How will you reach the average program customer? What medium (online, word-of-mouth, direct mail …) will you use? Who will be the most effective messengers? What will be the range of reactions to different ways of reaching customers? In short, beyond the service or product itself, how can it be effectively delivered to the largest number of people at the least cost?

Watsi hasn’t fully answered this question yet, and the answer will undoubtedly be complex. Beyond delivering money for healthcare, Watsi must understand the best ways to attract donors to its crowdsourcing platform. What will its long-term relationship be with the philanthropic community that supports its infrastructure? Are individual donors willing to see some portion of their contributions go toward organizational overhead?

Institutionalization. The final phase of customer development is institutionalization—shifting from the exploratory mode that launches and scales innovation to an operational mode that embodies all the lessons learned. Many hypotheses remain to be tested, but they tend to focus more on internal processes and how to keep improving and scaling impact in a more institutional way.

Lean startup practices are relatively new in the social sector, and not many of its practitioners’ organizations have reached this phase yet. But as they mature, these organizations can draw on their counterparts in the private sector for inspiration, and we’ll lay out some real-world cases in chapter 12. In a true lean organization, this phase can require the most creativity to keep the organization focused on ongoing innovation and prevent it from slipping back into expensive, inefficient ways of doing business.

Despite all this structure, customer development fosters tremendous creativity. The key is that it allows you to postulate the wildest possible hypotheses and then gives you a rigorous structure in which to test them efficiently and effectively. It helps social change entrepreneurs focus on the right questions at the right time, while taking nothing away from their tremendous creativity. On the contrary, it gives them a structured way to aim high and move quickly.

The second principle of lean startups for social change is all about how to test their hypotheses … how to build your program and succeed in the fastest, cheapest way possible.