Starting a Company, Part 2: Identifying your Customer

The previous post in this series was about changing your thinking from a project mindset of making something that people like, to a business mindset of making a sustainable product with paying customers. This post is about working out who your customer should be.

Your hypothetical customer

One of the most pressing problems for any startup is making that first sale. You need a product to be able to sell something but, as I said in the last post, you don’t know what to build until you know who you’re building it for. Without customers, this looks like a vicious cycle — where do you begin when the customers are needed before you can make the product, and the product is needed in order to draw in customers?

The answer is to start with a hypothesis for both, a best guess of who your customer is and what the product they need looks like. The next post in this series is about developing products.

Once you have a hypothesis about the customer and product, you can cycle between improving your hypothesis of the product and improving your hypothesis of the customer. Only part of this process is actually recruiting the customers and actually building the product.

CustomerProductHypotheses

You read that right. More important than building the product and recruiting customers is refining your understanding of the customers and what they need from the product. The latter is how you set yourself up for long-term success.

An example

Let’s say that we want to start a dog-sitting service. Perhaps you love dogs but don’t have one yourself and you think there’s a gap in the market for looking after other people’s dogs. Customers pay you to turn up at their house and take care of their dog when they’re unable.

Disclaimer: I’ve never owned a dog and am not much of a pet person. If this idea sounds mean to dogs, then I apologise. If you think it sounds like a ridiculous business that would never work, then you should Google for “dog sitting service” and be surprised, like I just was.

Customer hypothesis 1: My customers are any dog-owners who want to be able to send someone to care for their dog when they’re busy.

Customer hypothesis 2: My customers are middle-aged commuters with desk jobs who live near me. They constantly feel busy and love their dogs, who are always waiting for them when they get home. On nights when they have to work late, they feel very guilty about leaving the dog on his own and waiting to be fed. Existing dog-sitting services are frustrating because they will look after the dog over holidays, but won’t come to the house for an evening. They’d love a way of sending someone to care for their dogs while he can stay working at the office until 10pm.

Which is the better customer hypothesis for a startup to have?

For most people, they assume it’s number 1. It’s less specific, so there are way more potential customers, and more potential customers has to be a good thing, right? It’s also less detailed, so there’s less chance of it being wrong.

These are all terrible reasons. More potential customers makes it much harder to know where to direct your efforts at the early stage when you’re still trying to get your product going. And a hypothesis that can’t be wrong is totally pointless! The hypothesis is only useful if you can test it and find out if it’s true or not, so you can test whether you really do understand your customer.

Hypothesis 2 gives you a much clearer image of who the customer is and what their problem is that you’re solving. It’s a much stronger starting position, as it gives you a statement that can be proved or disproved. Moreover, it lets you empathise with the customer, and that’s critical to being able to solve their problems.

The reality is that most companies will start out with a slightly vaguer customer hypothesis than hypothesis 2 (“The customer is a dog-owner in my city who wants someone to look after the dog when they work late in the evenings”), but only really established companies can afford to have broad hypotheses like hypothesis 1 (“The customer is a dog-owner who wants someone to look after their dog”) because it takes a lot of resources and a strong brand to target a broad set of customers.

Improving the hypothesis

Once you have your customer hypothesis as a starting point, you can start improving and refining your ideas. The best way to do this is to talk to customers and to change your hypothesis to reflect what you learn. I’ve written before about creative ways to find customers. Here I’m going to talk about the right way and the wrong ways to talk to customers. There are two simple golden rules to bear in mind here.

Golden rule 1: Ask about problems don’t tell about solutions. When you’re still at an early stage, you’ll be tempted to go to prospective customers and tell them all about what you’re creating. That’s OK later on, when you have a firmer grasp on your product hypothesis, because you already understand who your customer is. But it’s a bad idea in the early days, because you’ll end up pushing the conversation towards your current hypothesis, rather than hearing how the customer describes the problem without prompting. This could be illuminating: customers will surprise you with the problems they find, the solutions they’ve tried, and the insights they have into what’s wrong with everything else on the market. Knowing these things is a big advantage in working out your customer hypothesis.

Bad: “How would you feel about a dog-sitting service that operates on evenings and weekends? You phone up to say you’re in urgent need of a sitter and we send someone round to feed your dog, walk them and stay in the house until you get home.”

Good: “What happens with your dog when you’re late home? Have you already tried any ways of fixing that problem?”

Golden rule 2: Ask for preorders not feedback. Feedback is quite vague. Kind people will respond with praise, cynical people will respond with criticism, creative people will respond with ideas for new features, most people will respond with a mixture of all three. But these don’t help you unless you can convert the feedback into a paying customer. The most valuable feedback you can receive is an answer to the questions “Can I take a preorder?”, “Why not?” and “When I’ve done that, can I come back and take a preorder?” The reason these are so valuable is because they immediately tell the other person to think about their own opinions rather than those of another hypothetical person who they think is user. And they bring the other person’s brain straight to the issue of money and value: is this product valuable enough that you’d pay for it? Getting closer to a ‘yes’ is the goal of improving your product and customer hypotheses.

Recap

For long-term success, it’s more important to understand who your customer is and what product they want than to recruit customers or build a product. This starts with a customer hypothesis and a product hypothesis. The best ways to improve your customer hypothesis are to to meet with potential customers and to find out as much as you can about their problems before telling them about your product. The strongest kind of feedback you can get is whether a customer will preorder your product, rather than simply expressing an opinion about it.

Thanks to Tom Carver for reviewing a draft of this post.

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Starting a Company, Part 1: Turning a Project into a Business

This is the first in a four-part series I’m writing on starting a company. Today’s post is about how you start turning a project into a business. The next article in this series is about how to identify your customer.

The main difference between a project and a business is that a business’s aim is to make money and a project’s aim is anything else. This has a profound impact on the idea of perfection. Perfection in a project normally means satisfying your own opinions but perfection in a business means the qualities that make your product valuable to customers. Businesses must always be trying to sell to customers in order to understand what is valuable to them, so they know what kind of perfection they should be striving for.

Project or Business?

I remember talking to a friend of a friend about startup companies at a social occasion last year. This was an intelligent 25-ish man enrolled in a PhD programme and he told me (paraphrased): “actually, I have an online business too. In the early days of Google App Engine and before Google Drive, I made an app that lets people  collaborate on a single document in real-time.”

Me: “Nice! How’s it doing?”

Him: “Great, really successful. It’s got over 10,000 users.”

Me: “Wow. So how did you make money from it?”

Him: “It wasn’t really that kind of idea, I made it free. It hasn’t cost me anything so far.”

This is a project not a business. Not just because it’s not making money, but because making money isn’t the objective (the focus in this example is on getting lots of unpaying users). Making money from your users is great for them: it funds improvements in the project which, particularly in web and smartphone apps, benefits the people who paid you in the first place.

But, as he says, it hasn’t cost him anything so why should he expect to make any money from it? I disagree with the premise here: it has cost him. It’s cost him however much time he spent making the app, testing it, improving it, sorting out the hosting, telling anyone about it, seeing how many people were using it, etc. Unless his time is utterly valueless, he’s lost a lot. That was all time that could have been spent doing literally ANYTHING else. That’s a lot to give up.

And if its really useful and valuable to any of the users, they would probably be happy to pay for it. Paying for something sets up an agreement that it will continue to exist, that problems will be fixed, that new features will be added. This is part of what people pay for when they decide to hand over their money.

That’s not to say that we should only ever do things that make money: I’m not suggesting anyone demands their friends pay them by the hour next time they go to a pub. But if you’re making something that you want other people to use, then you should try to make money from it. This will give you the incentive to keep improving what you’ve made (good for customers) and rewards you for what you’ve already put into it.

Projects don’t try to make money and businesses do. Your customers benefit from paying you.

On Perfection

What is perfection? Let’s say you have a web-app for sharing photos with your friends. Should you give it every possible feature? Cropping, filters, colour correction, resizing, zooming, security controls, comments on photos, ‘likes’ on photos? Or maybe it should be designed beautifully: a modern colour scheme, with flat design, beautiful typography, rounded corners, a retina-resolution logo, with animations and the fastest loading times possible.

In a project you’re mainly answering to yourself so you have the power to decide what’s important to you and then do it. If you think it needs a feature, you can create it. If you think it needs improved design, you can improve the design. But if you’ve decided that you’re doing a business, you have to answer to your users. Your opinion of the features, design, branding and marketing are all irrelevant; it’s what your users think that matters.

This is an important distinction. If a schoolchild creates something as a homework assignment, the teacher will probably give more marks for every extra feature, or every improvement in the design. The same mentality of making everything beautiful and creating every possible feature exists in projects.

With a business, all the time spent adding features that your users don’t want, or improving design that your users don’t appreciate, is wasted. You could have spent that same time on working on things that added value for your users. Remember that you can always trade your time to improve quality later, but once you’ve improved quality, you can’t trade that back for more time.

With a project, you make and design a solution then see whether other people like it. With a business, your priority is making things that are valuable to a user. As a result, the order is reversed: you should find people who have the problem your solution addresses, find out what your customers want from your solution, then make something that does that.

As Eric Ries puts it in The Lean Startup, “If we do not know who the customer is, we do not know what quality is.

Be paid not admired

How do you know your project has been a success? Normally, because you are happy with it. Or maybe other people tell you its good. With a business, the dynamic is different: you are creating something sustainable, so it has to make money. As a result, the measure of success of your fledgling business is whether people will pay for what you’ve created.

This affects many aspects of how you improve your product. For example, when you ask a user to test a project, the critical question is “Do you like it?”, “Would you use it?” or “How would you score it from 1 to 10?” But if your aim is to create a business, the critical questions are “Will you buy it?” “How much would you pay?” and, my favourite, “Can I take a pre-order?”

If your users won’t buy, it’s important to find out why and to make sure you’re always working on things that increase value for them. Businesses should start with this in mind: projects start from things you’d like to do, businesses start from an idea that is valuable to someone and worth paying for.

This also affects how you measure your success. Think back to the 25-year-old PhD student who said his project had “over 10,000 users.” This sounds great for a project: lots of other people liked it. For a business, this is a vanity metric. It sounds impressive but the goal of a business is to make something valuable that people will pay for, and the metric of “number of users on the service” doesn’t tell us anything about that. The measure of success of a business doesn’t have to be the total amount of money made, but it should include money as a factor. Otherwise you’re measuring for a project.

A word of warning: some of the startup companies that you hear most about exist in a Silicon Valley bubble where they get explosive growth in the number of users, take some huge investment and then work on trying to make money from some of their users. These success stories are incredibly rare: the majority of companies that don’t try to earn money from their users don’t manage to find investment, don’t produce sustainable businesses and quietly fail without any media coverage. If you’re trying to develop a sustainable business, selling should be your focus from day one.

Developing a business

That’s all for now. Remember that, unlike projects, businesses aim to make money. That means only doing the work that your users are going to find valuable, so they can give you money, so that you can sustain your business and your innovation. The best way to do that is to make selling to customers your focus, and building the rest of the business around that.

Next in the series: identifying your customer.

Thanks to Tom Carver and Sam Jewell for reading drafts of this article.