“It is the customer who determines what a business is.” — Peter Drucker, The Practice of Management The product is only the beginning, yet many startup CEO’s make the mistake of remaining glued to the product and its evolution, even in their post-Series B or C stages and with millions of users under their belt. Their problem is they haven’t been able to cross the chasm into business model evolution. I’ve already talked about the syndrome of the founding CEO who doesn’t appreciate marketing until much later because of their organic engineering or product focus. But there’s also the case of the founder who hasn’t been able to focus on a business model that is properly validated by the right business strategy. Fred Wilson wrote a post this morning highlighting the importance of the Product>Strategy>Model sequential process, and urging entrepreneurs to not rush into business model assumptions prior to locking down a clear strategy for the business. This prompted me to dust off a graphical evolution I had been working on to explain the importance of post- product/market fit in relation to the evolution of a startup’s journey towards sustainable scale. Sustainable scale will be a recurring theme in my writings because I believe it is not enough to start-up. You also need to scale-up, and anything in-between is the bridge to get you there. So, what happens after product/market fit and why getting to it is not enough is the focus of this post. You may also want to read Fred’s related post Revenue Traction Doesn’t Mean Product Market Fit.
FORGET THE PRODUCT, REMEMBER PETER DRUCKERIn 1973, Peter Drucker wrote:
“It is the customer who determines what a business is. What the business thinks it produces is not of first importance; especially not to the future of the business and to its success. What the customer buys (or uses) and considers value is decisive, and it is NEVER a product. It is always utility, that is WHAT THE PRODUCT DOES FOR THEM.”So, if you have gone way past the MVP and are well into the product/market fit, do not forget why you started the company. It’s not to develop the product. It’s not to get tons of users. It is to find out how the product is generating value for the user or customer so you can translate that insight into a sustainable revenue model. Nothing else is more important after that point. Delaying it could be a fatal mistake.
CUSTOMER VALUE WILL LEAD YOU TO THE MODELCustomer value comes in different flavors, but its articulation must be nailed down very clearly. It’s a validation process that you go through and it results from asking customers about the value they derive from using your product. It is what the product does for them, as Peter Drucker said. Once you know that, and assuming there is a big enough market for it, this value becomes a key part of your go-to-market strategy. Then you can start to replay that value to the next customers because it will resonate with them. But if you skip the value formulation step and you rush into reaching new customers with a half-baked value proposition, you end-up with a lot of leakiness in terms of market efforts, and you have to re-trace your steps to re-discover what moves your customers again. Once you have clearly understood the customer value of your product, and you start to talk about it instead of talking about your product first, then you have freed yourself from the product and you start to make your way towards sustainable growth. Now you can start perfecting the strategy that will back-up your business model.
NAIL IT BEFORE YOU SCALE ITNail it before you can Scale it is a cliché. Look at the graph. The first 3 phases are about nailing the repeatable business model. The last 2 involve a precise execution that is based on the validations from the first 3 steps. In summary, the steps are:
- Make sure your product satisfies the market
- Clearly understand the customer value your product provides, along with the segmentations you have discovered
- Develop the go-to-market strategy that targets these segments with that value
- Execute your business model at scale by selling the process repeatedly