Thesis

Analysis and Application of Customer
Development Techniques for Web Startups:
Unknown Russia
Authors
Lorenzo Nicolò Formenti
Daria Kurochkina
Course name
Electronic Business (Seminar)
Institution
Universitè de Fribourg
Facultè de sciences èconomiques et sociales
Dep. of informatics – Information systems research group
Bd. de Perollès 90
1700 Fribourg, CH
Examiner
Prof. Andreas Meier
Supervisor
Dr. Luis Teran
Date of submission
12th May 2013
"The real voyage consists not in seeking new places but having new eyes"
Marcel Proust
i
TABLE OF CONTENTS
Title page ............................................................................................................................................. i TABLE OF CONTENTS .............................................................................................................................................................. ii LIST OF FIGURES ....................................................................................................................................................................... iv LIST OF ABBREVIATIONS ...................................................................................................................................................... v 1. Introduction .......................................................................................................................... 1 1.1 Background ............................................................................................................................................................................... 1 1.2 Problem statement ................................................................................................................................................................ 1 1.3 Research questions .............................................................................................................................................................. 2 1.4 Case Study: Unknown Russia ......................................................................................................................................... 2 1.5 Objectives ................................................................................................................................................................................... 3 1.6 Outline .......................................................................................................................................................................................... 3 2. Theoretical framework ........................................................................................................ 3 2.1 The classic new-product introduction approach .................................................................................................... 3 2.1.1 Concept & seed .............................................................................................................................................................. 4 2.1.2 Waterfall product development .............................................................................................................................. 4 2.1.3 Alpha & Beta tests ........................................................................................................................................................ 5 2.1.4 Product launch and first ship ................................................................................................................................... 6 2.2 Business Startups .................................................................................................................................................................. 6 2.2.1 Key facts ............................................................................................................................................................................ 6 2.2.2 Business startups vs. large companies ............................................................................................................. 6 2.2.3 The waterfall development failure ......................................................................................................................... 8 2.3 The Customer Development model .............................................................................................................................. 8 2.3.1 Ratio ..................................................................................................................................................................................... 8 2.3.2 The “path to the epiphany” ....................................................................................................................................... 8 2.3.3 Customer discovery .................................................................................................................................................. 10 2.3.4 Customer validation .................................................................................................................................................. 10 2.3.5 Pivot ................................................................................................................................................................................... 11 2.4 The Business Model Canvas ........................................................................................................................................ 11 2.4.1 The business model .................................................................................................................................................. 11 2.4.2 The canvas .................................................................................................................................................................... 11 3. Case study: Unknown Russia ......................................................................................... 14 3.1 The Business model’s establishment ....................................................................................................................... 14 3.1.1 Customer segments .................................................................................................................................................. 14 3.1.2 Value propositions ..................................................................................................................................................... 14 ii
3.1.3 Channels ......................................................................................................................................................................... 15 3.1.4 Customer relationships ........................................................................................................................................... 15 3.1.5 Revenue streams ....................................................................................................................................................... 15 3.1.6 Key resources .............................................................................................................................................................. 16 3.1.7 Key activities ................................................................................................................................................................. 16 3.1.8 Key partnerships ......................................................................................................................................................... 16 3.1.9 Cost Structure .............................................................................................................................................................. 16 3.2 The Evolution of the Business Model ....................................................................................................................... 17 3.2.1 Customer segments .................................................................................................................................................. 17 3.1.2 Value proposition ........................................................................................................................................................ 18 3.1.3 Channels ......................................................................................................................................................................... 19 3.1.4 Customer Relationship ............................................................................................................................................ 20 3.1.5 Revenue Streams ...................................................................................................................................................... 20 3.1.6 Key resources .............................................................................................................................................................. 20 3.1.7 Key activities ................................................................................................................................................................. 21 3.1.8 Key partnerships ......................................................................................................................................................... 21 3.1.9 Cost structure ............................................................................................................................................................... 21 4. Conclusions ....................................................................................................................... 22 4.1 Findings .................................................................................................................................................................................... 22 4.2 Limits .......................................................................................................................................................................................... 23 BIBLIOGRAPHY .......................................................................................................................................................................... 24 APPENDIX ...................................................................................................................................................................................... 25 Appendix 1.a - Unknown Russia’s Business Model Canvas – February 2013 ...................................... 25 Appendix 1.b - Unknown Russia’s Business Model Canvas – April 2013 ................................................ 26 iii
LIST OF FIGURES
Figure 1 - The Product Development Diagram [Blank 2006, p.2] ..................................................... 4
Figure 2 - The Waterfall Development model [Formenti/Kurochkina 2013, according to Blank] ...... 5
Figure 3 - Search vs. Execute [Blank 2012]...................................................................................... 7
Figure 4 - The Customer Development Model [Blank 2006, p.16] .................................................... 9
Figure 5 - Unknown Russia’s Facebook followers by gender and age ........................................... 17
Figure 6 - Reader’s segment sub-segmentation ............................................................................. 18
Figure 7 - Unknown Russia’s website visits for March-April 2013 .................................................. 19
Figure 8 - Unknown Russia’s Facebook advertisement activity...................................................... 21
iv
LIST OF ABBREVIATIONS
CRM
Customer Relationship Management
MRD
Market Requirements Document
SEO
Search Engine Optimization
v
1. Introduction
1.1 Background
The new challenges offered by the modern globalized world and the new styles of doing
business have taken firms, entrepreneurs and the agents involved in global value chains to
reconsider their approach to customers and, as a consequence, the traditional marketing
theory.
In modern markets, characterized by a growing demand for differentiated and customized
products and services, customers have formed their expectations over quality, service and
flexibility of supply. This fact implies the need to shift from a logic of product-oriented to a
relational and customer-oriented marketing, where products are developed taking customer
needs and wants as a starting point, in accordance with the firm’s value creation and strategy.
In the last decade, the widespread diffusion of web technology and the relevant innovations in
IT systems, have led to the creation of new marketing challenges. New tools are now available
to firms to compete in a radically new way: social networks, web communities and eCommerce
portals have shaped the relational sense of marketing to new forms.
Huge data flows, containing relevant information about consumers and their preferences are
now available to companies to address their marketing efforts in a more efficient way. Millions
of consumers can be reached and their behaviors regularly monitored.
The presented issues and related challenges deserve even more attention in the case of
business web startups, where the customer’s needs and wants are still under identification and
a successful product development have to be carried out relying upon such flows of
information.
1.2 Problem statement
Given the existence of such new practices and related challenges, it is questionable how the
classic product and project management, traditionally applied to established and operating
companies, may performs well in the case of startups.
In fact, the development of a new product within an existing company is based over known
facts about known customers. Their needs, wants, and purchasing behaviors are considered
as starting points of development and may result in being powerful business drivers.
Instead, in the startup building process the entrepreneur cannot rely upon such stock of
information. According to the most recent techniques, he should establish a set of initial
hypothesis, covering the whole set of business elements. Then, all of the hypotheses have to
be tested on users and be turned into facts or discarded.
In particular, considering the new approach of the Customer development, this process have
to be repeated iteratively, adopting a try-fail-try again mentality to test the initial hypothesis by
actually getting out of the building.1 The aim is to create real interaction with the early adopters
and learn from them, understanding what they look for, in order to build over time a solid
customer base that allow to transform the original idea into a success story.
The adoption of such new approaches is even more attractive in the case of web startups,
where the traditional means adopted to create such interactive learning process, as
questionnaires, interviews and focus groups, can be mixed with the modern tools of web
analytics and the extraordinary interactive potential of social networks.
1
Mainstream slogan of Steve Blank, a Silicon-Valley serial entrepreneur and academician father of the
Customer Development Model.
1
1.3 Research questions
Considering such issues, the following research questions will be addressed and answered,
shifting the report into two main parts:
1. What is the Customer development approach and what are the main differences with
the classic approaches of product development?
A theoretical analysis of the customer development process will be provided and compared to
the classic product management approaches. An introduction to the Business model canvas, a
strategic and management tool that will be used in the application part to define and iteratively
adjust the hypothesis according to the tests’ outcomes will also be presented.
2. How the Customer Development approach perform when applied to the web startup
‘Unknown Russia’? In particular:
It gives the opportunity to build a company putting the customer in the middle of the
development process. Does it help to produce a product that will meet the needs or
solve the customer problem?
b) Does the suggested try-fail-try again iterative testing of hypothesis show some degree
of empirical consistency?
c) Does the framework help to decrease development risks by building the business step
by step, relying upon information achieved from interaction with customers?
d) Can a business be started faster and without huge investments and the first business
model built in short time?
a)
For such purposes, the methodology exposed in the next chapter will be applied in practice, in
order to check for its suitability and capabilities and start the development of our newborn
business. An in-depth description of the process will be presented, from the original hypothesis
setting to gained results and conclusions, passing through the iterative testing and consequent
adjustment.
1.4 Case Study: Unknown Russia
Russia is the largest country in the world, but how many people have access to valuable
touristic information about it? How many people do actually travel there? Russia recently
opened up its frontiers to international relations in a western liberal style, but it is still perceived
as distant and out of reach by the majority of travellers. Only 2.5 millions of international
tourists visited the country in 2012.2
Strict visa rules are only one of the difficulties. The main problem is the lack of information
about the country available in foreign languages. What turn out is that it is very complicated for
self-organized tourists to visit Russia and travel inside the country.
Unknown Russia is a web startup that has two main goals. The first one is to provide reliable
and attractive contents in an interactive way for self-organized travellers, in order to fulfill the
current supply failures. The second one is to motivate people to visit the country. It is defined
as an open touristic community which is active in the Internet by a website and a Facebook
page.
The business was founded in February 2013 by Daria Kurochkina and a team of motivated
travellers.
2
Source: Russian Federation’s Ministry of Culture – Federal Agency for Tourism (2012), available:
http://www.russiatourism.ru/en, accessed April 2013.
2
In the beginning, a Facebook page was established with the aim to test the appreciation of the
idea by national and international travelers through the posting of self and external produced
contents related to the country’s less known but attractive events and places.
Afterwards, in the early March 2013, a first website prototype was developed and launched on
the base of the knowledge acquired during the first set of tests with interviews and web
analytics monitoring on the Facebook page.
1.5 Objectives
The main objective of this paper is to provide the reader with a basic knowledge of the
Customer Development framework, in order to show how it performs in a real-world case
application.
The relevant fact is that such techniques were developed by Silicon Valley’s entrepreneurs
who were facing their own startup’s challenges. In 2005 they formalized their experience and
findings into the framework. Therefore, academic contributions and empirical testing evidences
are still scarce. Although, we truly believe that they represent an attractive forward-oriented
approach, where business development and customer relationship management are combined
together in an attractive way.
The project will allow us to gather relevant information for the development of the Unknown
Russia business, through a coherent framework of empirical hypothesis testing and
adjustments for the overall business development.
1.6 Outline
In Chapter 2, a theoretical analysis of the Customer Development framework will be provided,
relying upon the literature coming from its inventors and early adopters. The focus will be
given to the first two phases of the process, customer discovery and customer validation, the
ones that we expect to go through during the project.
In the same chapter, the Business Model Canvas, a strategic and management tool that is
used to define, visualize and iteratively adjust a set of initial hypotheses will be also presented.
It is concerned with nine fundamental business blocks.
In Chapter 3, the presented methodology will be applied in practice to check its suitability and
capabilities for the development of the Unknown Russia startup. The process will start from the
initialization of the canvas with hypotheses based on the founder’s vision. They will be
iteratively tested against reality by use of web (Google Analytics, Facebook page insights,
Google AdWords campaign results) and no web tools (interviews, informal speaking).
The original set of hypotheses will be adjusted accordingly and the process repeated until
stable results about the main business drivers will be reached, taking into account the
available time horizon.
2. Theoretical framework
2.1 The classic new-product introduction approach
In the 20th century, every company bringing a new product to the market used some form of
product management. Models evolved over time, starting from early-century manufacturing
activities to technology business nowadays, passing through the packaged-goods mass
industry of the 50’s.
Although, as presented in [Blank-Dorf 2012], a general four-steps scheme, adapted to
different business types and products, has been adopted by the majority.
3
Figure 1 - The Product Development Diagram [Blank 2006, p.2]
2.1.1 Concept & seed
At the concept and seed stage, founders combine their passion and vision for the company
coming out with new ideas that are worth to be developed and may become profitable. Once
the most suitable is selected, the main issues behind the transformation of the idea into a final
product are discussed. In particular, arguments go on with respect to the product or service
concept, functions, features, benefits and potential customers. Market research, along with few
customer interviews is carried out accordingly.
As a consequence, a business plan is gradually defined, based on the answers given to the
previous arguments and some additional guess: how the product will reach final consumers,
which distribution channels will be adopted, considering market and competition issues as
well. Finally, financial sections for the forecast of revenue streams and costs are set up to
complete the picture.
2.1.2 Waterfall product development
In stage two, product development, discussions turn into operations: departments start
working on the first stage outcomes and focus on their specific functions.
In particular, the marketing considers potential customers in a more systematic way, limit the
market size and start to target defined segments. In this phase, focus groups, questionnaires
or interviews may also be adopted to learn and receive a first set of relevant feedbacks. Sales
demonstrations and materials (dedicated web page, presentations, data sheets) are created
accordingly. Dedicated personnel start to be hired for mainly public relation purposes.
At the end, a market requirements document (MRD) is worked out in coordination with the
product management and delivered to the engineering department, in order to specify the
product’s final features and functions.
As a consequence, the product development stage shows for the engineering team unique
features and expands into “an incremental process of interlacing steps, all focused on
minimizing development risk of a defined feature set”. [Blank/Dorf 2012, p.5] This is
commonly recognized as the Waterfall development model.
The waterfall development model originates in the manufacturing and construction industries,
highly structured physical environments in which ex-post changes are prohibitively costly, if not
out of reach. Although, it was first formalized by Royce in 1970 for the application to software
development models, in which progress is seen as flowing steadily downwards, as a waterfall.
The model is presented as not properly working in practice, because of its lack of iteration,
step-back and flexibility and the author provides, in the same publication, some corrective
measures.3 It comprises nine subsequent steps that describe what an engineer team does
during the product development stage described above.
Briefly, marketing first rise requirements of how the product should perform and what functions
it should fill, according to the previous market research. Engineers receive and translate such
requirements into features, prerequisites for the design process, in which the product takes the
definitive shape. Then, the team begins to work on the implementation phase that must be
3
Information about the waterfall model: Royce, Winston (1970): Managing the Development of Large
Software Systems: Concepts and Techniques. In: Technical papers of Western Electronic Show and
Convention (WesCon), August 25-28, 1970, Los Angeles, USA. Electronic version available:
http://www.cs.umd.edu/class/spring2003/cmsc838p/Process/waterfall.pdf, accessed March 2013.
4
fueled by patience, accuracy and intensity. Once the first prototype is ready, its functioning will
be iteratively screened through testing and eventually fixed up. The last step is concerned with
maintenance.
Figure 2 - The Waterfall Development model [Formenti/Kurochkina 2013, according to Blank]
Although, what is relevant to mention, in line with the original formulation by Royce is that
“Once a waterfall process starts, the proverbial train has left the station and the product is
nearly impossible to revise. As a rule the “train” can run almost nonstop for 18 or perhaps 24
months or more, uninterrupted by changes or new ideas, no matter how good they might be
for the business” [Blank/Dorf 2012, p.5].
2.1.3 Alpha & Beta tests
In the third stage, engineers continue building the product along the waterfall steps, working in
cooperation with a small group of potential users, either internal or external. The goal is to find
out bugs and limits of the first developed design and to test the product’s architecture
functionality.
Similarly to the software testing, alpha tests consist of simulated or actual operational tests
made over potential customers, an independent test group or the development team itself at
the company’s premises. It is mainly meant as a set of tests for internal acceptance, a flexible
double-check device.
Beta tests come after the alpha type and work as external tests for final customers
acceptance: engineers work with a limited group of outside users, receive some feedbacks
and check if the product works as expected.
The marketing department work towards the marketing mix, providing sales personnel with
dedicated support materials. A definitive version of the product is launched and branding
activities started. Then, public relations agency starts to make contacts with external agencies
like press and blogs. Sales acquire the first beta customers, usually early adopters who might
be also willing to pay for the privilege of testing a new product. The sales department starts to
build a dedicated distribution channel outside. Finally, finance and control areas start to work
towards achieving the revenue goals defined in the business plan and put general
performance control for the project, seeking for additional capital and new investors.
5
2.1.4 Product launch and first ship
In the fourth stage, once the product works and the background apparatus has been set up,
the product is launched, usually managing press events and communication campaigns.
The project works now as a structure of functional areas. The marketing department carries
out demand-creation programs; sales work to reach channel goals by establishing relations
with external partners; research and development make efforts on continuous product and
process improvement. The board starts to measure the project’s performance in a systematic
way, according to predictions and statements presented in the business plan.
It must be pointed out that all of the activities described above are cash-burning ones, and the
company must be able to sustain the growth relying upon solid financials and regular cash
flows gained from other activities. More fund-raising is often required. In such events,
executive officers look back at the company status and go out of the premises to meet
institutions and potential investors.
2.2 Business Startups
2.2.1 Key facts
When we think about business in the modern sense, the first thing that comes in mind is an
established and growing company. A company can be seen as an organization of persons
who work towards a common goal. It is a structure of coordinated departments or areas,
carrying out specific functions in search of continuous improvement, by means of more or less
established routines. The structure is supposed to operate in the interests of shareholders.
Usually, a company is moved by a mission, put in practice by the adoption of a strategy, that is
the way in which different departments work together and relate to the environment outside, in
order to deliver value to the final customers. The market is generally approached with a
defined product portfolio, which is adjusted over time according to the generated revenue
streams.
In order to undertake such activities, additional funds can be raised within (self financing and
capitalization) or outside the company (financial markets and institutions). Then, the
performance of the apparatus is assessed by a dedicated department, in charge of
performance control.
Conversely, a startup does not show off as an established and operating organization. It deals
with the transformation of ideas into a business, where a functional structure and routines
have not been established yet. Here a product or service has not been developed, the market
can be unknown, as a stable customers mass do not exist.
Accordingly, a startup company or simply startup can be defined as a company, a partnership
or temporary organization, designed to search for a repeatable and scalable business model.
Within this definition, a startup can be a new venture or a new division or business unit in an
existing company. [Blank 2012].
2.2.2 Business startups vs. large companies
Over years, methodologies have been developed and were commonly recognized by
entrepreneurs and academicians on how to run and manage the whole set of business related
processes within a company. Such methods concern all of the functional areas an already
operating company is composed of. The techniques were used for about one hundred years,
since the first MBAs programs have been offered by universities in the United States of
America and applied indifferently to existing companies and startups.
Although, as it comes clear from the definitions provided above, startups are not smaller
versions of large companies, and they cannot be equalized to them in management
6
processes. In 2005, understanding such differences, Steve Blank presented in his book “The
Four Steps to the Epiphany”, a specific approach to start up a business.4
The classic approach to start up a company is to write a business plan, which consists of a
suitable operating plan along with proper financial forecasts. Once conceived, it only needs to
be executed. The belief was, and for some still is, such that if an entrepreneur is smart enough
to work on proper data, spending time in undertaking a careful market research and work out
the right predictions, the only needed thing is to hire people to implement and execute what is
specified in the plan.
Instead, according to the customer development theory, “no business plan survives the first
contact with customers. In fact, the first year of life of a business startup is something
completely unpredictable: what you think is right on today, might turn out to be wrong
tomorrow...A startup is an incredible, rollercoaster, unpredictable series of events that there is
no way to put together in a 5-years plan”. [Blank 2013].
All of this does not mean that operating plans and financial forecasts are something to be
avoided and get away from. Instead, a startup business needs some real facts to be used as a
basis to work it out.
In particular, a business model, that is how an organization creates, delivers, and captures
value is something granted for an operating company, that can continuously be tested against
performance and customer feedbacks and adapted accordingly. Instead, it is something totally
unknown for a startup, that means it is only a set of untested hypothesis.
Figure 3 - Search vs. Execute [Blank 2012]
On the one hand, an operating company, relying upon such model, is able to execute and
undertake operations. On the other side, in order to build a suitable business model, a startup
is required to search for it. In short, search versus execution is what differentiate a new
venture from an existing business unit.
4
Even if “The Four steps to the Epiphany” is where Steve Blank’s Customer Development model was
presented first, the theoretical support suggested here is built considering the last Blank’s updated
publication “The Startup’s Owner Manual: the Step-by-Step Guide for Building a Great Company”.
7
2.2.3 The waterfall development failure
The waterfall development life cycle has been previously described as a subsequent step-bystep process by which engineers manage the realization of new products, starting from
guidelines expressed in the MRD. The statement of such requirements implicitly assumes that
the customer’s problems or needs are something known to the entrepreneur.
In large companies this might be true. Although, in most startups, all that founders can rely
upon is their vision and what they tend to do is to confuse a day one faith-based vision with
facts about customer’s problems and needs.
The consequence is that the most of startup entrepreneurs, adopting the traditional
methodology to product development, start to work on the implementation of the product in a
waterfall style, with every possible feature they have considered as desirable. They take every
single guess they made on customers as proven fact, investing huge amounts of resources on
a race to “first customer ship”, before even talking to a single customer.
It must be noticed that, in the case of software products, around the 85-90% of product
features are unwanted or unneeded by customers [Blank 2013]. This is an enormous amount
of waste of time and money and what may result from the waterfall model application to
business startups.
Therefore, the adoption of the waterfall development model makes all the sense in case of
existing companies with established business patterns and routines. Instead in the case of
startups, it straightforwardly failed, for the same reasons identified by Royce in the 70’s: the
lack of flexibility and step-back iteration.
In conclusion, startup founders, in order to succeed, need to turn the guesses into facts, by
getting out of the building. The point is to check by means of direct interaction with customers
if the established hypotheses were right or wrong. In case they turn out to be wrong, founders
have to change them into new ones that have to be tested again. The try-fail-try again iterative
process constitutes the theoretical foundation of this project, to be applied to a real world case.
2.3 The Customer Development model
2.3.1 Ratio
According to S. Blank, many startup fails more from a lack of customers than from a failure of
product development. Entrepreneurs go out of business not because they are not able to
deliver a product to the market, but because they do not build a customer base that is willing to
pay enough money for such product.
What is even more relevant, is that specific functions have been developed within firms to
manage the engineering risk, which is the largest one for a company. Although, no
methodologies exist to manage this newly recognized customer risk. Such search for the
business model, for the “entrepreneurial truth”, was first suggested by Steve Blank in 2005 and
is called Customer Development.
Most startups, relying upon the classic product introduction model, lack a structured process
for testing their business models’ hypotheses. Instead the customer development framework
allows to rapidly test assumptions and make corrections in near real time.
2.3.2 The “path to the epiphany”
The framework is designed to improve the limits that the product development model faces
when applied to business startup cases. In particular, “a major difference between the
framework and the traditional...model is that each step is drawn as a circular track with
recursive arrows. The circles and arrows highlight the fact that each step in Customer
Development is iterative…The nature of finding a market and customers guarantees that you
will get it wrong several times. Therefore, unlike the product development model, the
8
Customer Development model assumes that it will take several iterations of each of the four
steps until you get it right” [Blank 2006, p.16].
Figure 4 - The Customer Development Model [Blank 2006, p.16]
As figure 4 shows, the model is constituted by two pieces, each one comprising two
subsequent but not irreversible steps. The first of the pieces is strictly related with the search
of a suitable business model and the second with its execution. Briefly:
-
Customer discovery is where the initial founders vision is caught and translated into a
series of business model hypotheses. Then a plan is developed to test customer
reactions to those hypotheses and turn them into facts (or eventually into new
hypotheses).
-
Customer validation, instead, is supposed to test whether the outcoming business
model is repeatable and scalable. Sales processes are proven to be repeatable and
scalable if a target market of willing customers exists for the company.
-
Customer creation is the start of the execution. It is meant to create a proper end-user
demand and drives it into the sales channel to scale the business. The process varies
greatly depending on the characteristics of the market: some startup enter existing
markets, others create markets from scratch and others try to re-segment existing
markets by focusing on niches or competing on price. Each situation requires different
strategies.
-
Company building is where the transit take place from a startup business to an
operating company, from an informal entity to the one operating as an organization by
a defined functional structure. The focus is on bringing the previously validated
business model to full execution.
As shown in figure 4, the model is embodied with the existence of a pivot in between step one
and two. A pivot represents the need for a step back during the customer development
process. A pivot may arise within one single phase as well as while moving from the first to the
second phase. If one or more hypotheses turn out to be wrong, this requires the entrepreneur
to move backward, change or adjust failed hypothesis, and test it again.
It must be pointed out that pivots may happen, as well as failures, but this is simply “part of the
game”. In fact, “the customer development model embraces the way startups actually work,
with moving backwards playing a valuable and natural role in learning and discovery”
[Blank/Dorf 2012, pp.25].
Given that such dynamics constitute the startup core drivers, our focus will be on the first two
steps of the process, both for the theoretical review and the related real-world application.
9
2.3.3 Customer discovery
In this first step, the founder’s vision of the company have to be translated into a set of
coherent hypotheses about every component of the business and experiments have to be
established in order to test the validity of such assumptions. Once brainstorming and guessworks are over, founders actually get out of the building in order to empirically test customers’
reactions over guesses.
Of all of the statements of Customer Development, the fact of getting out of the building is the
most crucial one. In contrast with traditional approaches, only by moving away from “the
chair’s comfort” the startup entrepreneur can gain an in-depth understanding of customers.
The true engagement and collaboration with customers is something fundamental.
Although, the initial product specification has to come from the founder’s visions and not as an
outcome of collected features from the customer perspective, in order to guarantee a solid
product identity. A product has to be defined, and then customer discovery is to be used to find
a target market for that vision.
In particular, the phase started by testing the customer perception of the problem and the
customer’s need to solve it. The goal is to check if a sufficient critical mass of customers is
present and can be developed. Then, if the answer is positive, it takes to show customers the
product or service when it is still at a basic development stage. The idea is to prove that the
product is able to meet the needs or solve the problems of customers and that is good enough
to persuade them for purchase.
For web/mobile applications or products, the first step is to create a web platform prototype.
Then, customer discovery begins when the first “low-fidelity” version of the website is up and
running. The website is used to test the business model hypotheses against customers or
users [Blank-Dorf 2012, p.26].
Web and mobile businesses conduct customer discovery differently from those in the physical
channel. They can reach hundreds or thousands of users by combining online and face-toface interaction. They can conduct more tests on customers, with more granular customerresponse data [Blank-Dorf 2012, p.62]. As it will be shown, the presence on social networks
along with the use of web analytics tools can also play a major role in this part of the process,
working as real-time monitoring sources and improvement benchmarks.
The customer discovery process comes to the end once customers confirm the importance of
both the problem and the way to solve it, at the same time.
2.3.4 Customer validation
The second step is meant to prove if the business model is “repeatable and scalable”, that
means to embody the customers’ mass and participation needed to actually run the business.
During this phase, through a series of more systematic tests extended to a broader number of
users, the company tests its ability to scale, that means to grow, expand and establish itself in
the market. Core features are related to product, customer acquisition, pricing strategies, and
channel activities. A sales plan is also developed and first marketing efforts carried out.
It’s reasonable to mention that how such tests are carried out strictly depends on the business
model adopted in the previous phase and no strict guidelines exist with respect to this.
In the case of web startup, an online demand creation plan is validated, relying upon the most
suitable metrics among users clicks, views or likes. The previously launched version of the
website become “high fidelity” and close to be definitive, as a result of continuous
improvement and development [Blank-Dorf 2012, p.27].
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2.3.5 Pivot
Back to our previous statement, it is necessary to further clarify the concept of pivot.
A pivot is defined as a major change of one of the business model blocks based on learning
from customer feedbacks. It may happen, but it does not necessarily mean an irreversible
failure. In fact, pivots come as a normal part of a startup process: it is common to get the
wrong assumptions and misunderstand who really your customers are, what problems and
needs they have, and which product features would help them.
If it’s the case, the entrepreneur should notice the only partial fit of the business model to the
market’s requirements and will be required to stop, in order to make changes in the
hypotheses set and test it back again.
2.4 The Business Model Canvas
2.4.1 The business model
In general, a business model can be defined as “a conceptual tool that contains a set of
elements and their relationships and allows expressing a company's logic of earning money. It
is a description of the value a company offers to one or several segments of customers and
the architecture of the firm and its network of partners for creating, marketing and delivering
this value and relationship capital, in order to generate profitable and sustainable revenue
streams.” [Osterwalder 2004, p.15].
In the case of startups, a coherent business model is suggested through the specification of
the hypotheses and requires the adoption of a clear and recognized operative tool for both
team members and externals, to facilitate hypotheses statement, communication, testing and
improvement.
The so-called Business Model Canvas was recognized as the most suitable tool for the
Customer Development running. It is defined as “a shared language for describing, visualizing,
assessing, and changing business model” [Osterwalder-Pigneur 2010, p.12]. It was
designed as a dynamic scorecard for strategic and management purposes, elaborated by a
group of “strategy practitioners” coming from forty five countries, and presented in A.
Osterwalder’s Business Model Generation.
2.4.2 The canvas
As shown in appendix, the canvas template is implemented as a nine-block matrix. “The nine
blocks cover the four main areas of a business: customers, offer, infrastructure, and financial
viability.” [Osterwalder-Pigneur 2010, p.15]. The canvas has to be considered in a dynamic
way because continuous search through iterations are the key point of Customer
Development.
As described in [Osterwalder-Pigneur 2010, p.18-41], nine building blocks and related
business components can be identified as:
-
Customer segments – it basically defines different groups of people or organizations
which an enterprise aims to reach and serve. As it is commonly recognized, no
company can survive without customers and they end up with represent the heart of a
business model.
In order to satisfy customers, a company should group them into different segments,
with similar attributes, behaviors, needs, and wants. A company may focus on a broad
target market or on a narrow defined segment, depending on its value proposition and
competitive advantages. Different types of available market segmentation can be
adopted: mass market, niche market, segmented, diversified or multi-sided market.
Once groups of customers are identified, the business model will be carefully designed
and developed over time around a strong understanding of the target.
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-
Value Propositions – it is concerned with the bundle of tangible and/or intangible
assets that the company offer to the selected customer segments, in order to meet their
wants and needs. In particular, a bundle of selected products and services have to be
offered to match the requirements of the identified target group.
On the one hand, a value proposition may be innovative and representing a new and
disruptive offer. On the other hand, it may be similar to existing ones and in competition
with them, but should come with added features and attributes that “make it worth it” to
choose it. Key values may be either qualitative (design, brand, accessibility, customer
experience,) or quantitative (price, cost reduction, speed of service).
-
Channels - the focus is on how the identified value proposition is delivered to the
market, that is the way the company communicates with and reaches the identified
customers segments. In fact, the key areas of communication, distribution, and sales
channels define the way a company interface with customers and the way customers
experience it.
In this way, finding the right channel mix is something crucial. A company can choose
among adopt its own channels, external partner channels or a mix of both. Owned
channels can be either direct, such as an in-house sales force or a website/app, or
indirect, such as retail stores operated by the organization. Partner channels, instead,
are mostly indirect and span a broad range of options such as wholesale distribution,
retail or partner-owned websites. After-sales services also constitute a core element in
many modern businesses.
-
Customer relationships - this block is dedicated to the types of relationships the
company aim to establish with the targeted customer segments and the way that is
chosen to interact with them. Relationships can be of a wide range of types, spacing
from personal, as face to face interaction, to automated, as automatic mail systems,
and driven by different motivations, depending on the development stage of the market.
The will to acquire new customers is usually relevant in the industry’s early days.
Instead, the attempt to retain the existing ones and improve loyalty becomes more
relevant in periods of saturation and maturity. As reasonable, the internal stage of
development of the business plays here a fundamental role and must be taken into
account when choosing the way to entertain relations.
In practice, several categories of customer relationship exist and are usually combined
in use: personal interaction/assistance, self-service, automated services, communities,
and, beyond the traditional customer-vendor approach, co-creation.
-
Revenue streams – the block at hand deals with the cash flows the company is able to
generate from each selected customer segment. The key issue that has to be
addressed here is for what value is each customer really willing to pay.
Usually, each revenue stream is generated adopting different price mechanisms. Two
main groups can be identified: fixed menu pricing, where predefined prices are based
on static variables and dynamic pricing, where instead prices change over time, based
on market and demand conditions. Basically, the goal is to charge the customers a
price that is as close as possible to the actual willingness to pay for the good or service
offered. In this sense, the type of price mechanism used can make a difference in terms
of revenue generated.
Considering revenue sources, It is also useful to distinguish between transaction
revenues, resulting from one-shot customer payments and recurring revenues,
resulting from payments that go on in time, such as a good’s sale and the purchasing of
after-sales services.
-
Key resources - it deals with the relevant assets that a company is required to own in
order to make the business model work. Such assets and resources can be either
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tangible or intangible, and comprise everything a company needs to create and offer a
value proposition, reach markets, maintain relations with customers and earn money.
They may range from high-tech machinery or brilliant computer scientists to distribution
facilities or patented know-how.
As clear, key resources differ according to the type of the adopted business model and
the industry. They can be: physical, such as manufacturing facilities, buildings, vehicles
and machines, which are often capital intensive; intellectual, as brands, proprietary
knowledge, patents, and customer databases; human, consisting in skilled or nonskilled people, crucial in knowledge-intensive and high-value generating industries;
financial, such as cash, credit lines and securities.
-
Key activities – every business model calls for a set of Key Activities, consisting in the
most important actions a company must take to operate successfully. Like Key
resources, they are required to offer a value proposition, reach markets, maintain
relations with customers and earn money. Again, they differ according to the type of
adopted business model and industry.
In particular, production activities are related to designing, making and delivering a
product in substantial quantity and quality; problem-solving activities, concerning the
study of new solutions to both internal operative issues and individual customer
problems; platform/network related activities, dominating in business models where a
platform is adopted as a key resource, being it a network, a matchmaking platform, a
software, a website or even a brand. Activities of this kind are concerned with
information management, platform management and promotion and service providing.
-
Key partnerships – the purpose of this block is to describe the network of suppliers
and partners that make the business model work. In short, companies create alliances
and search for partners for mainly three reasons: optimize processes and reach
economies of scale, reduce overall risk, costs and uncertainty or acquire assets that it
is not proper to build in-house.
According to the players involved, It makes sense to distinguish among four different
types of partnerships: strategic alliances between non-competitors, strategic
partnerships between competitors, as joint-ventures to develop new businesses and
buyer-supplier relationships to assure reliable and on-time supplies.
-
Cost structure – it describes the most relevant costs incurred by a company while
operating with a particular business model. In fact, creating and delivering value,
maintain customer relationships and generating revenue all incur costs. After having
properly defined key resources, key activities and key partnerships this costs can be
calculated relatively easily, or at least estimated.
In particular, It is convenient to distinguish between cost driven and value driven cost
structures. On the one hand, cost driven business models focus on minimizing costs
wherever possible, adopting low-cost value propositions, maximum automation and
extensive outsourcing. On the other hand, value driven approaches are typical of
companies that are less concerned with the cost implications of the adopted business
model, but are rather focused on value creation. Premium value propositions and
customized goods/services are here the core points.
In operative terms, as a startup go through the Customer Development phases, it will use the
Business Model Canvas as a dynamic tool, fullfilling each of the previously described blocks
with related hypotheses, starting from the founder’s initial conceptions and mission.
Afterwards, the main task is to get out of the building, test such hypotheses against reality, and
adapt the blocks contents accordingly, to finally define a suitable and working business model.
The application of the explained theory will be presented in the next Chapter.
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3. Case study: Unknown Russia
3.1 The Business model’s establishment
The theory that was presented before was applied in practice on the web startup Unknown
Russia. It is an open touristic project that provides information about Russia for travellers.
Daria had a first touch with Customer Development techniques reading Steve Blank’s “The
Startup’s Owner Manual”. She found it an appropriate approach that encouraged her to turn an
idea into a startup business.
In February 2013, the first Business Model Canvas was filled with the set of initial hypotheses
based on self-experience and guesses. A compact version of the canvas described in the next
section is available in appendix 1.a.
In this Chapter the process of building the web startup Unknown Russia will be presented
following the steps of Customer Discovery.
3.1.1 Customer segments
For whom are we creating value? Who are our most important customers?
In the case of Unknown Russia the customer will be named as user. In the Internet and social
resources, the user is the key element who can help to promote and grow a project.
Unknown Russia is mainly an information resource. This is why it is desirable that a content
that is meant for travellers is produced by other travellers, in order to provide valuable
information.
The company is meant to occupy a ‘self-organized tourism’ niche in the touristic market. In the
beginning two customer segments were identified: writers and readers. The first segment
consists of Russian tourists knowing the places inside the country who will write articles about
them inspired by the idea of the project. The second one is represented by international
backpackers who prefer self-organized tourism and search for information in the Internet.
3.1.2 Value propositions
Which one of our customer’s problems are we helping to solve? Which customer needs are we
satisfying?
While travelling in different countries, Daria heard many times that foreign tourists face
problems in finding proper information about Russia: many people did not know where to go,
how to go and what to do inside the country.
A small research was carried out about what information and services are available in the
Internet. The main guides, like Lonely Planet, provides not up-to-date information, some
articles are two to four years old (for example, the mentioned Russian president is still
Medvedev) and only the most popular destinations are presented. Instead, it is important to
provide actual information so that travelers can truly rely on it.
Moreover, most of the touristic companies promote their trips and they are not interested in
sharing real useful information. Consequently, if a foreigner wants to visit non-mainstream
destinations in Russia then he will have difficulties to access the information.
An alternative might be Wikitravel, an online encyclopedia about touristic destinations. It
contains very good quality content but to find it out the tourist has to know the right ‘search
keywords’. But as it was written before there are not many people who know more than three
or four places to visit in Russia.
What value do we deliver to the customer? What bundle of products and services are we
offering to each Customer Segment?
The value we want to deliver to the segment Reader is useful and practical information about
Russian unknown places, events and facts. The information, for example about the place,
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should be provided in the way to allow travellers to find it and encourage them to visit this
place.
Each article should be available on several foreign languages. Translation can be made by a
writer or automatically by online resources, with the possibility of further editing by hand.
Another part of the company's Value Proposition is the opportunity of interaction with Russian
travellers
Instead, value for the segment writer is constituted by the opportunity to share the knowledge
about their country, help other people to travel, and get satisfaction by foreign acceptance.
Nowadays many people are sharing their knowledge in Internet about all life aspects because
in real life it is very difficult to build audience and gain reputation.
3.1.3 Channels
“Through which Channel do our Customer Segments want to be reached?”
The awareness about our resource among users was planned to be raised by social platforms,
search engines, and private networks. A Facebook page was created to check the potential
demand for our content. Twitter was another popular social engine that was decided to adopt
for promoting Unknown Russia.
The web site www.runknown.com should become the main part of the project and the main
channel for value delivery to users. From the beginning the Search Engine Optimization (SEO)
became one of the important principle of the project in a way that people would be able to find
our resource in the Internet using keywords. Google AdWords campaigns were planned to run
when the website would have minimum content.
Other channels to reach both writers and readers are touristic forums and blogs. For instance,
by publishing a post related to the theme of the concrete forum and providing the link to our
resource we can reach an audience of persons who might later on become users.
The last channel that was recognized is the founders’ private network or, in other words,
friends. In fact, the project’s team includes several travellers who have contacts not only with
other travellers in Russia but also abroad.
3.1.4 Customer relationships
What type of relationship does each of our customer Segments expect us to establish and
maintain with them?
According to Osterwalder, several categories of Customer Relationships exist. Two of them
were actually adopted: communities and co-creation. They involve the both of the customer
segments, readers and writers, in several business processes: content creation, content
promotion, information spreading.
The Facebook page and the website are meant to be communities that allow users to share
their knowledge and establish connections among each other. Moreover, It would also help the
company to understand better its users and future customers. Instead, co-creation means that
the company’s Value Proposition will be created not only by company members but also by
active users, as it was said writers.
3.1.5 Revenue streams
In the beginning, two revenue streams were defined: advertising and donation.
Any popular Internet resource attracts companies who are willing to pay to advertise on the
resource. In this case, the project Unknown Russia should get a critical mass of users to
become attractive for such kind of companies. The critical mass was defined at the level of
1000 visitors per day on the website and more than 10 000 followers of the Facebook page.
Nowadays more and more open web resources rely upon donation-based revenue streams.
We believe that when the customer uses services without the subscription-limitation pressure
15
can feel more comfortable. Then, in case of satisfaction with the resource the user may be
willing to pay for the service.
3.1.6 Key resources
What Key resources do our Value Propositions require? Our Channels, Customer
relationships and Revenue streams?
Human: first, we aim to grow the Facebook page and for this purpose we need users who will
publish contents. Second, we need computer scientists who will develop a website, a
database and make SEO. Third, we need writers who will write articles to upgrade the website
content. In the beginning, we will do all of these tasks by ourselves. But in the future we need
to hire people who will be responsible for these tasks, so that the team will be able to focus on
the business development.
Financial: in order to run a self-developed high-performance website and database it is
necessary to rent at least a stable virtual server and to buy a domain name. In order to run
Facebook promotion and Google AdWords campaigns, it is also necessary to have some
funds. In the beginning it is estimated not to be more than 100 CHF, raised by own financing.
In future instead, financial resources may play a more important role depending on the growth
of the company.
Another Key Resource is Time. Usually it is not mentioned in business models but this
resource highly influences the previous two, since the more time is available the less human
and financial resources are needed. At least we believe that this rule works well in the
beginning of the startup building process.
3.1.7 Key activities
What Key Activities do our Value Proposition, Channels, Customer Relationship, and Revenue
Streams require?
The category platform/network represents the majority of Key Activities of the web startup
Unknown Russia. It basically involves designing and programming of a web site, articles
writing and Facebook posting. For instance, it was planned to publish two posts per day in
order to explore user preferences and to connect Facebook and Twitter accounts for automatic
reposting.
Another key activity is the promotion on different resources and by different channels, in order
to attract new readers. Furthermore, it is also very important to plan the communication with
users and ask them regularly a feedback about the website and the content.
3.1.8 Key partnerships
Who are our Key Partners, acquired from them Key Resources and performed Key Activities?
The initial hypotheses were that small touristic agencies from different regions of Russia could
become our partners. We would get from agencies the material about places that they know
and in change they will get the opportunity to publish an advertisement on our resource. In the
long run, we could resell their touristic services and both businesses would benefit from the
partnership.
Another category of Key Partners is writers who create a content and help to promote the
project. They were defined also as one of the customer segments and it was mentioned that
they do not bring revenue implicitly.
3.1.9 Cost Structure
What are the most important costs inherent in our business model? Which Key Resources and
Key Activities are most expensive?
The development of Unknown Russia does not include large costs. In fact, The Unknown
Russia team includes three friends inspired by the idea who accepted to work for free and16
eventually share the gains. Also some of their friends contribute with the design, SEO and
legacy consultations. Cost Structure includes just several costs: website maintaining (hosting),
Facebook promoting and Google AdWords campaigns. It is estimated as being 50 CHF per
month.
As it was stated before, writers will not be remunerated economically but in terms of reputation
and satisfaction, within and outside the platform.
3.2 The Evolution of the Business Model
The next step was to get out of the building and start to talk informally with potential users and
customers about the idea. During more than two month thirty six face-to-face and Skype
interviews were made with friends, Facebook followers and with five touristic agencies from
different countries.
Along with interviews, a constant monitoring were made for the Facebook page’s insights and
Google Analytics for the website. Quantitative data from these sources clearly reflect the
behavior of users: appreciation, sharing of the content and interaction with the platform. The
customer’s acceptance to our activities (publishing articles, posts, running AdWords
campaigns) was used for the canvas adjustment. Some hypotheses were actually turned into
facts, some others failed and new ones appeared.
In the following sections the current state of the business model is presented. A compact
version of the canvas updated to mid-April 2013 is also presented in appendix 1.b
3.2.1 Customer segments
The hypothesis about two types of users was proved and more details appeared. For example,
the Facebook page’s insights provides information about country of origin, language, gender
and age of followers. The variables gender and age are distributed as shown in Figure 5. It is
very useful to know more details about people who are interested in the resource, because
this information helps to better target the market and suggest suitable content.
Figure 5 - Unknown Russia’s Facebook followers by gender and age
Relying on this information and on interviews three more subsegments of readers were
identified and are presented below in figure 6.
Periodical is a traveller who regularly visit the country (family, business) and who, as we think,
could be interested in short travels around the city of destination. The non-standard tours
segment is constituted by tourists who are interested in non typical and even extreme tourism,
like visit the North pole by helicopter. Standard tourists use instead mainstream touristic
companies and are interested in the most famous places in the country. In the Figure the
17
segment was crossed since it is not belonging to Unknown Russia’s target. It is served by
other types of touristic business.
Some presented characteristics of all segments are still hypotheses and they will be tested in
the future.
Figure 6 - Reader’s segment sub-segmentation
Furthermore, the Facebook page were also helpful to identify early adopters, people who are
interested in the idea from the very beginning and provide their help and support to the project,
for instance by producing a content. This brings a new fact: a reader from a foreign country
can be a writer if he possess interesting information about Russia, or at least can help by
editing the translation. This is a new way of getting benefit from readers.
In parallel with readers, new sub-segments of writers were identified: writer, guide, company,
and translator. Writer, as it was mentioned before, is a Russian tourist who provides the
content and benefits by satisfaction and reputation. Moreover, in some of the interviews,
people mentioned that they would be willing to hire a private guide to visit non-typical places. A
guide, in addition to the content, would offer paid services. Then, a touristic company will have
the opportunity to place its paid advertisement below its articles and bring by this a financial
profit to the project. Finally, a translator can be any person from any country who wants to
support the project and edit an automatically translated article.
3.1.2 Value proposition
The Facebook page was used to check the readers’ interest to different types of information, in
order to test value proposition hypotheses.
From the beginning, we assumed that the most attractive content in social networks was
photos of kids, animals or funny pictures. During the last two months, photos of unknown
places, events, facts, as well as kids, animals, and funny videos were published. Also various
types of content were promoted in order to increase the reached audience. Results that were
achieved were promising and unexpected at the same time.
For example, the most popular post was a picture of Chukotka region. It reached 6604
persons and engaged other 362, a large audience if compared with the most popular
promoted post that could reach only 1233 and engaged 46 people. Instead, posts about kids,
animals and funny videos turn out to be less popular than pictures about new unknown places.
18
Shares of the website pages show exactly the same statistic: if people came to the page about
Unknown Russia - they are interested in places, events and facts and not in any type of
content.
Interviews with people helped to find types of the useful information that people really need: “I
would like to see some ideas about itineraries...suggested places to visit and best times to go.
So far people have told me to go to St. Petersburg, but then if I go there, I would like to know
what to see or how long to stay and all of that: the kind of info that helps with the planning.
Once planning is made easier, then people get more motivated”.
Another person told us in more detail: “I want to know which is the cheapest way for going
from Moscow to St. Petersburg and back and how much does it cost? Also how much money
do I need per day approximately for food and going around the city”. In this way we can detect
the demand for the concrete type of the information and we can fit it by writing corresponding
articles.
Additional value proposition for readers that was explored is the opportunity to find a private
guide or tour. People are ready to pay money for the organization of their travels and it
generates new hypotheses about new financial value for writers and new revenue streams for
the company.
The hypothesis that Russian writers need a foreign audience have failed since many of them
don’t speak foreign languages and are also unwilling to show their work to a big audience.
Now we are looking for new ideas of how to motivate writers. For example, the idea to help
writers to become paid guides sounds very inspiring. In this sense, the value proposition for
the subsegment guide would be a financial remuneration.
3.1.3 Channels
Facebook page daily attracts new users and in the current moment has 276 followers. It is a
very important channel to attract new people and share new articles. Twitter account was
created and synchronized with the page and all new posts automatically appear there. The
“Follow us” button was also added to the web site. In fact, only three people became Twitter
followers and this hypothesis failed.
The website is still the main channel for value delivery to customers. It is constantly being
developed and updated based on users feedbacks and analysis of their behavior.
The visits’ trend for the considered period is presented below in Figure 7. Each peak, except of
the last one, corresponds to visits generated by an article published on the website and shared
throw the Facebook page. Instead, the reason of the last increase in visits is the interview that
Daria did with the Russian online project “Window to Russia” and where she told about the
project Unknown Russia.
People are also constantly coming from touristic blogs and forums where links to Unknown
Russia were published.
Figure 7 - Unknown Russia’s website visits for March-April 2013
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Starting April 10th, 2013, the first Google AdWords campaign was started in order to attract
more visitors. It daily brings around 30 new visitors and it is used to find the most appropriate
keywords and new topics for articles. In the current moment three campaigns are running
sharing a daily bid of 2 CHF. Splitting keywords between different campaigns helps to make
each advertisement more targeted.
The summarization gives two facts: the content quality is more important than the promotion
itself and a targeted promotion turned out to be more effective than a broad one.
The new untested-yet hypothesis is that email can be a new channel to reach touristic
companies by monthly digest, which includes the overview of a certain region of Russia with
the information about less known places, events, and facts. It can help to establish new
contacts with agencies which can lead to the cooperation. The idea came in mind after an
interview with a touristic agency from Rome.
3.1.4 Customer Relationship
The customer relationship was presented as a community of users who interact and co-create
the content. These hypotheses were tested and proved by users who follow the project and
now help to write and edit articles.
Considering to connect together new customer segments and new value propositions we
formalized a writers’ rating system. Any user registered on the website automatically become a
writer with the ability to create new articles and edit automatic translations of others. In the
beginning, if the user is known by the administrators, he can get a status of editor and be able
to edit all published articles. Later on, this function should be automatized.
For each written, translated, or edited article the user will get rating points. Also each member
of the community will have the opportunity to set a rating for each article. When the cumulative
rating of the user exceeds a certain threshold he will get a status of guide for his region. He
would be able to advertise his private tours below his articles and start to receive payments
from travellers who use his services. Such status could be withdrawn if the user stops his
activity. The next-level status is the one of touristic agency. For this, a user will have to write
much more articles or pay a corresponding amount of money.
The rating system should motivate people to provide high quality content to reach the guide
status and start to earn money through the project. It can also give an incentive to interested
touristic companies to participate in the project. So far, the system is an hypothesis and is yet
to be proven.
3.1.5 Revenue Streams
Existent hypotheses on revenue streams were not tested due to the recent establishment of
the project. Although, the rating system gives two new hypotheses:
1. The company can benefit from the deal between the traveller and the private guide. For
example, the traveler should pay a fee to be able to access guides’ contacts. Otherwise, the
travellers could buy guided tours through the website and a small percentage of the deal is the
company’s profit.
2. Touristic agencies, in order to promote their tours on their articles should provide a big
amount of the content or monthly pay a correspondent amount of money. Otherwise, Unknown
Russia can resell their tours and withhold a percentage from the deal.
3.1.6 Key resources
All hypotheses were proved and no new ones appeared. Time showed that the human
resources still have the highest priority because at present a large amount of work has to be
carried out. Also, as shown in the previous sections, our focus was switched from the search
for readers to the search for writers.
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3.1.7 Key activities
The Main key activities remain the same: developing the website, creating a content and
promoting it. In the beginning all of them were only based on the founders vision. When the
first feedbacks have come from users and first interviews were done, such key activities
became driven by information and more targeted.
For example, it was planned to publish two Facebook posts per day, but in practice we
discovered that the number should have been increased to five, because users are distributed
all over the world and covered by different time zones. It is not profitable to publish more, since
people may feel spammed.
The Facebook promotion was run ten times with around one advertisement per week. The
results are presented in Figure 8.
Figure 8 - Unknown Russia’s Facebook advertisement activity
It shows that in the beginning the promotion was very effective but moving forward in time it
started to bring less and less new followers. In figure, we can see that the marginal cost of
getting one additional follower is around 1 CHF, which is dramatically expensive.
In the beginning the focus was to attract readers. But, as stated before, it resulted that the
quality of the content matters more than promotion intensity. At the same time it was founded
that to motivate and attract new writers is very difficult. Now the focus switched from the
search for new ways of attracting readers to ways how to find and involve new writers.
3.1.8 Key partnerships
Russian touristic companies, guides, and writers remain key partners and they will be even
deeper integrated in the project by the implementation of the rating system. Touristic agencies
can publish articles and get a free advertisement, pay a monthly fee and advertise, or their
tours can be resold through the website.
New key partners are foreign touristic agencies who are looking for new partners in Russia
and for whom we can provide Russian guides and agency’s tours.
3.1.9 Cost structure
Such block didn’t show relevant changes. The Facebook promotion will not take place in the
future anymore. First, it turned out to be ineffective. Second, the cost of the promotion
increased according to the amount of people in the group.
21
For example, when the amount of followers was less than 100 the promotion of the single post
for 5 CHF gave the opportunity to reach around 4000 people. Now, when the group has
reached almost 300 people, for the same money one post can reach only 1500 people, so that
4000 can be reached for 10 CHF.
There is no point to pay 5 CHF for 1-2 new followers, because the good post shared by
several people can bring much more interested people. For example, the most popular post
with the picture of Chukotka attracted more than 20 new people during two weekend days.
The cost for the promotion is redirected to the Google AdWords campaigns, which at the
moment share a 2 CHF daily bid.
4. Conclusions
4.1 Findings
From a theoretical point of view, the Customer Development shows an internal coherence and
a good capability of application to real-world cases.
The fact that it was developed “on the ground”, relying upon experience of serial Silicon Valley
entrepreneurs, have positively driven his suitability to the operative needs of startup cases. In
particular, the iterative and failure-friendly structure is able to allow entrepreneurs to undertake
constant monitoring and quick adjustments to their business models.
The overall flexibility of procedures and testing makes the Customer Development a valid
competitor to traditional business development approaches, frequently based on rigid forecast
that hold back people’s willingness to experiment.
The focus on the customer base as a starting point is also a feature that deserves to be
mentioned, as an element of innovation and modern orientation.
In short, conditions exist for the Customer Development to become widely used in the near
future by entrepreneurs and academicians, who still hesitate in most of the cases to ascribe
trust and reliability to it.
Such statements can be mostly confirmed when switched from the theoretical suggestions to
the real-world application. With the respect to the presented application to the web startup
Unknown Russia, we believe to have completed the customer discovery phase and be about
to approach the second step of customer validation.
For instance, the model was useful in understanding what are the real needs and wants of doit-yourself tourists and on which target the company should focus. In particular, the two
customer segments of readers and writers, identified in the first business model, were further
specified in the iterative testing process. Relying upon a mix of informal speaking, interviews
and web analytics, it was finally possible to come out with defined subsegments of each and
clear ideas on where to go in the future.
More generally, the approach looks coherent and consistent in the sense that the future
business is built over proven facts. Moreover, to prove such facts the entrepreneur does not
need to employ extra resources. What is required is direct experience, interaction and a good
dose of common sense.
Contrary to other development methods we have presented, that required the coordination of
different functions and departments, iterations are made in a way to avoid time-consumption
activities and encourage rapid improvements.
Positive consequences of that can be also detected on the risk side, since by definition
something that is tested and proven, also in a systematic way, is something less risky. This
can positively drive the business development and provide to the entrepreneur safer returns
on investment.
Furthermore, if the entrepreneur is able to show such facts, this may increase the possibility to
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raise funds or receive external support by venture capitalists, startup incubators or traditional
financial institutions.
To sum up, the Customer Development application brings a gradual and conscious
development of the startup. It avoids large initial investments based on risky forecasts, which
require large capital requirements and may involve delays. The business can start to run
almost immediately, in a cheap, reliable and monitored way.
4.2 Limits
On the theoretical side, even if the overall structure is coherent and innovative, some limits
were recognized with respect to the suggested ways to test hypothesis. Steve Blank, in fact
encourage Customer Development adopters to get out of the building, interact with potential
customers and users and test the validity of the original assumptions against opinions and
feedbacks. The point is that no prescription at all is made with the respect to the methods that
are supposed to be adopted in practice.
On the one side, this allows the entrepreneur to experience different methods and select the
most proper for its use. On the other side, this may turn out to be misleading. Based on our
experience, we believe that some minimum guidelines should be provided in this case.
Another relevant fact comes with the respect to the potential audience, which the entrepreneur
can reach by getting out of the building. In fact, the sample of potential customers that he
would be able to reach and interact with, would be far from being truly representative.
In our experience, the persons who were more willing to be interviewed were the ones that are
included in the founder’s social network. It is reasonable to think that they are probably uniform
in terms of culture, origin, age and other relevant attributes.
Considering instead internet campaigns or analytics, the entrepreneur would be probably able
to reach a broader and more heterogeneous sample of persons. Although, another distorting
feature would be shared by the group members: the fact of being all technology adopters
automatically limit the tests’ reliability.
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BIBLIOGRAPHY
Books
-
[Blank-Dorf 2012] Blank, Steve; Dorf, Bob: The Startup’s Owner Manual: the Step-byStep Guide for Building a Great Company, 1 edition, K&S Ranch Press, Pescadero
CA, 2012
st
-
[Blank 2006] Blank, Steve: The Four Steps to the Epiphany: Successful Strategies for
Products that Win, 2 edition, K&S Ranch Press, Pescadero CA, 2006
nd
-
[Osterwalder-Pigneur 2010] Osterwalder, Alex; Pigneur, Yves: Business Model
Generation, 1 edition, J. Wiley & Sons, Hoboken, NJ, 2010
st
Internet sources
-
[Blank 2012] Blank, Steve: Search vs. Execute, steveblank.com, available:
http://steveblank.com/2012/03/05/search-versus-execute/, accessed March 2013.
-
[Osterwalder 2004] Osterwalder, Alexander: The Business Model Ontology - A
Proposition in a Design Science Approach, PhD Thesis, University of Lausanne,
available: http://www.hec.unil.ch/aosterwa/PhD/Osterwalder_PhD_BM_Ontology.pdf,
accessed April 2013
Video sources
-
[Blank 2013] Blank, Steve, “How to Build a Startup” video lectures, udacity.com,
available: https://www.udacity.com/course/ep245, accessed March 2013
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APPENDIX
Appendix 1.a - Unknown Russia’s Business Model Canvas – February 2013
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Appendix 1.b - Unknown Russia’s Business Model Canvas – April 2013
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