Lesson: Customer Discovery Primer with Steve Blank

Step #8 Business Model: A business model shows how your company will be organized

One of the interesting thing about a startup is how is your company going to be organized? What we now know is the most efficient way to think about all the pieces just all the parts is by a business model. And so the next question is okay, Steve you just told me think about a business model but what is a business model? What are all the pieces? Well let's take a look. A business model is how a company creates values for itself while delivering products or services for its customers. Now if you think about it, in the old days we'd think about how to organize a company around functional organizations. We'd think no, a company is about its sales department or its engineering department and you would draw a work chart but now where going to draw a very different diagram. We're going to draw a diagram of how to think about all the pieces of a business. Let's take a look at these 9 boxes. 9 boxes to describe any company from the world's largest, to a two-person startup starting in your parents' garage.

Let's take a look at the first piece called the value proposition. The value proposition answers the question, what are you building and for who? The value proposition says, "Hey, it's not about your idea product, it's about solving a problem or a need for a customer." That is what pain are you solving, what gain are you creating, and more importantly, who are your customers? Now value proposition is a fancy word for what product or service are you building. This is where you normally would list all your features and here's all the speeds and feeds and benefits and whatever but you're really going to be asking a different question than might have been used to. It's not all about your technology. Your technology is just part of the value proposition. Customers really don't care about your technology. The customers are trying to solve a problem or fulfill a need. By the way, we'll be talking about this for multiple lectures. The difference between a problem and a need is--a problem is "I have an accounting problem" or "I want to use the word processor," and those type of products solve a problem, but there are other things that human beings do--like "I want to be entertained" or "I want to have a date." Those are just some basic hard-wired social needs. Or "I want to communicate with my friends." Like Facebook or Twitter. Those are needs. Needs are different than problems. And by the way, if you could find products that solve needs, your total available market as you'll see later is huge compared to, "I solve specific problems."

The next thing is, who are my customers? Who are they and why would they buy? And as you'll hear a number of times, your customers do not exist to buy, you exist for them. And what you're going to do by getting out of the building is figuring out all their geographic, social characteristics, demographics such that you actually could draw and put up a picture on your wall of who the archetype is or who the persona is of your customer. And it turns out that in most startups you might have more than one or two or three types of customer archetypes and personas, but you need to understand them in detail, and there is no possible way you could have anything but a hypothesis on day one of who they are. The next is channels. How does your product over here get to your customers over here? We use distribution channels to do that. Now what's really interesting is pre-1990s, the only channels to get to a customer was at physical channel. That is you went to a store, you have sales people, there was physical distribution, but since the mid 1990s, in the last couple of decades, we now have virtual channels: the web, mobile, cloud. And so for distribution channels, the first question you want to ask is, how will I be selling and how will I be distributing my products. Are they through physical channels or the web mobile or given today almost every physical channel also has a web presence. What is the relationship of how your product gets from your company to the customers?

Customer relationships is kind of a fourth piece, and customer relationship has a really interesting interaction with these other three pieces. It basically says how do I get customers, how do I keep them, and how do I grow them, and just like thinking about distribution channels, these are very different for web mobile than they are for physical channels. But visually, they kind of look like this double-sided funnel. Let's just take a look at quickly a web example--in getting customers, you're going to be worrying about how do I acquire them, that is how do I get them even to my website, how do I activate them that is how do I make them do something, and then later on we'll see after I got them how do I keep them around, that is how do I not lose them through attrition and churn and then what can I do once I have customers to make them spend more money or use my product even more. One of the things we'll be thinking about is how do I get, keep, and grow customers. And just like every other step, you might have hypotheses on day one, but you're only going to figure this out when you're out of the building.