Note: One of the more difficult aspects of customer development is understanding when to listen to customers/prospects and when not to. When should you rely on intuition and when is the customer right, if not always? Steve Blank’s oft quoted clarion call to “get out of the building” demands that you listen to customers, but not that you necessarily heed what they say! You may have the wrong customer for your business. You may have the right customer who emphasizes the wrong root cause to a problem. As I tweeted the other day:

maybe your product focus should be what your current customers don’t ask for or what your lost customers wanted.

I invited “CustDevGuy,” author of the “Fake Screenshot/LOI” customer development case study, to write up a continuation of that story, which illustrates an easy trap to fall into when interacting with potential customers. Here’s his story:

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Hi there.

This guest-post is a follow-up to my original Case Study posted at the Lean Startup Circle.  (Thanks Brant for lending me your digital soapbox.)  I wanted to further flesh out an important insight that came out of conversations about my ongoing Customer Development experiences as well as address a common fallacy that keeps popping up in conversations and email threads with regards to what Customer Development is and isn’t.  The fallacy being that customers will simply hand over the Holy Grail (read: Product/Market Fit) if you go and chat a bit with them.

The insight I would like to share, one that with hindsight appears entirely obvious, is that an entrepreneur should always keep in mind, customers have their own agendas which may not have your best interests, as a start-up employing Customer Development methodologies, at heart.  Not only may they not have your best interests at heart, they may actively and skillfully manipulate you to serve their immediate needs to the detriment of your goals of product/market fit and scalability.  This is why I, like Brant, am skeptical of the maxim:

Early customers are often more visionary than the startup they work with for that product.

IMHO, if you employ any Customer Development processes you must take into account that, as Brant writes,

Customers are inherently egocentric and have a limited view.  Their motivation is to solve problems that will increase their market share, increase revenue, or decrease expenses.   They certainly don’t wish to solve their competitor’s problems, though you would be happy to solve both.

The danger in relying the customer’s vision is that in truth, the customer is not always right.  Their limited perspective and selfish (rightfully so) objectives means they will, if it is in their best interests, change your product to fit their needs. If you have several customers doing this, and you opportunistically give each customer what they’re asking for, you will face an untenable situation that will prevent you from scaling the business.

And that is exactly what this post is about:  my experience in following a customer (partially) down a rathole.  To recap, we used Letters of Intent (“LOI”) as follows:

On the third visit, we pressed those who saw merit in the idea to sign a legally non-binding Letter of Intent.  Namely, that they agree to use it for free, if we deliver it to them and it is capable of X, Y and Z.  And not only do they use it, but that they intend to purchase if by Y date at X price, if it meets their needs.

The LOI

The language of this plain vanilla LOI is below.  Obviously feel free to use, but we’d appreciate a link back to this post if you do.

Letter of Intent

START-UP agrees to provide its XYZ platform on or before DELIVERY_DATE to CUSTOMER without charge or fee, which will provide the following features:

  • Functionality XYZ (one sentence description)
  • FunctionalityABC (one sentence description)

START-UP recognizes the sparseness of detail in the aforementioned features and therefore agrees to update CUSTOMER on development progress on the following dates:

  • DELIVERY_DATE minus six weeks
  • DELIVERY_DATE minus four weeks
  • DELIVERY_DATE minus two weeks

In exchange, CUSTOMER will avail itself on the aforementioned dates to provide feedback and guidance as to functionality and requirements.

During and after the development process, CUSTOMER agrees to fairly evaluate the product for use as their XYZ platform for a free trial ending DELIVERY_DATE plus four weeks.  Additionally, CUSTOMER agrees to use START-UP, at a 12-month rate of $XYZ/month, as their XYZ platform if START-UP satisfies their needs.  It is the intent of CUSTOMER to enter into a formal agreement with START-UP, by REASONABLE_DATE.

Due to the sensitive nature of the discounted pricing, CUSTOMER hereby agrees not to disclose pricing information and the terms of this Letter of Intent to any other person or entity that is not an employee or associate of the CUSTOMER.

Agreed and understood by:

Designated START-UP Representative

Designated CUSTOMER Representative

Nota bene:

1) We could have titled this a Memorandum of Understanding (“MOU”) as opposed to an LOI, but we wanted to strongly signal that they are demonstrating intent to buy by signing something called a Letter of “Intent”.

2) Brief description of functionality.  This is is simply to get both parties on the same page and set expectations.

3)  Development process updates.  This was to ensure us face-time with our customer.  Should our customer get busy, we didn’t want to be easily forgotten or ignored by having all our communication relegated to email and phone.

4)  Pricing and price discovery.  Our next LOI recipient got a significantly higher price.

5)  Intention discovery.  Do they actually want to buy our product?  Well, let’s test it very plainly with “It is the intent of CUSTOMER to enter into a formal agreement with START-UP, by REASONABLE_DATE.”  We have de facto started the sales cycle.

6)  Terms.  Can we sign them up for 18 months?  24 months?  3 months?  Month-to-month?  Per usage?

7)  Disclosure.  This is our effort to keep our customers from chatting with one another about the terms of the LOI as we go about price and intention discovery.

On Our Way

They signed this LOI and we were golden, eh?  So what happened?  As it turns out, much of the information we received via the LOI was valuable with one small massive hitch.  In our efforts to listen to and engage the customer, we allowed them to effectively control and drive our vision.  The customer didn’t care at all about ABC functionality, but wanted XYZ.  Not only did they not care about ABC, they quite accurately surmised that we would move Heaven and Earth to build XYZ for them to get their business, but we would probably only do so if they feigned interest in ABC. In our schoolchild-like giddiness in getting the LOI signed, we overlooked what are now obvious signals to that effect.  To wit, we allowed ourselves to get played.

Mea culpa.  Mea maxima culpa.

We thought that ABC was our unique value proposition, after all ABC got us our initial meeting with them, but we would give them XYZ to get our foot further in the door.  Plus, how difficult could providing them with XYZ be?

Very difficult.  As in very, very, very difficult for two guys bootstrapping a start-up.  But what is even more important, providing XYZ put us on a completely different trajectory in a different industry with different customers and different products and different technology and different competitors.

Resolution

Fortunately, we failed in providing XYZ.  (You read that correctly.  I did use the word “fortunately”.)  And by that time, we realized we didn’t want to go into the XYZ business and we also realized that this specific customer was not a particularly good earlyvangelist.  By that I mean, relative to our other earlyvangelist customers, they took up an inordinate amount of time and resources which could have been deployed elsewhere for significantly better ROI for our Customer Development efforts.

So we “fired” them, and in doing so, our suspicions were confirmed.

The email trail went something like this:

Customer:  We’d like to revisit this 2010. Do you think the XYZ will be fully functioning then?

Me:  Sorry XYZ didn’t work.  BTW I also wanted you to let you know we are super busy doing ABC for other people and have revised our prices.  We’d still love to do ABC for you without XYZ.

Customer:  Great to hear that you are doing well.  We’d love for you guys to do XYZ for us.  When do you think you’ll have it ready?

Two people talking right past one another….funny, eh?  BTW some of you are probably slapping your foreheads right now, “D’oh!  Doesn’t this idiot see?  Forget ABC, and just do XYZ!  That is what your CustDev processes are telling you.”  All I can tell you is that XYZ requires a few orders of magnitude more time, money, talent, skill and luck than we have right now, while ABC lends itself better to bootstrapping, and is, not to mention, more interesting from my POV.

Lessons Learned (shamelessly borrowed from Steve Blank):

  • Simply talking to customers and taking feature requests is not Customer Development.
  • LOIs are great, and I will continue to use them, but Garbage In, Garbage Out still holds true.
  • Customers will not actively hand you the Holy Grail (read:  Product/Market fit) because they don’t have it, nor do they care about it.
  • Customers do have their own self-interested agenda (rightfully so, as Brant points out above) and will quite gladly subordinate your interests to theirs.
  • The art and science of Customer Development consist of being able discern when, how and why a customer’s agenda is aligned with your own agenda/vision.

Update: If you haven’t done so, please take our State of Customer Development Survey.