Refining the business model for a startup using the 'customer discovery' methodology

Abstract

Startups face a distinct set of challenges compared to larger and established firms. Among those challenges is the high level of uncertainty that startups have to deal with. This uncertainty is both market and product-related: Is there a market for the product? Can the startup team develop and build it? Are customers willing to pay for this offer? Moreover, how will the startup finance its activities? This uncertainty together with liabilities of newness (Stinchcombe 2015) and smallness (Aldrich & Auster 1986) reduce the probability of survival for a startup compared to established firms (Saemundsson & Dahlstrand 2005). New approaches such as customer development (Blank 2007) and lean startup (Ries 2011) have been proposed to help startups find a sustainable business model. The 'customer development' approach, first introduced by Steve Blank in 2007, guides a startup through a process that helps it to validate and refine its business model before spending many resources on building a sophisticated prototype or entering the market. In this way, the customer development process may help to increase the chances for a startup to be successful. The process is separated into four interlocking steps: 1) customer discovery, 2) customer validation, 3) customer creation and 4) company building (Blank & Dorf 2012). In this thesis, the authors used the startup 'xDroid' as a case study for the first step of the customer development process - customer discovery. By interviewing 19 representatives of their two main customer segments and questioning over 100 people who tested the first minimum viable product, the authors collected feedback on the hypotheses they had developed for the xDroid business model. The results significantly challenged parts of the business model, most importantly how the startup should realize its idea of bringing video games to the real world. The findings from the customer discovery process have initiated a pivot that will result in a change of the product the startup will offer. This will, in turn, affect the firm's revenue and pricing forecasts, the channels through which it will offer its product and the partners it will need. Furthermore, the most important customer segments and what they value most about the xDroid offer will need to be reconsidered. 'References Aldrich, H.E. & Auster, E., 1986. Even Dwarfs Started Small: Liabilities of Age and Size and Their Strategic Implications. Research in Organizational Behavior, 8(March 2017), pp.165-198. Available at: http://papers.ssrn.com/abstract=1497769. Blank, S. & Dorf, B., 2012. The Startup Owner's Manual: The Step-by-Step Guide for Building a Great Company 1st ed., K & S Ranch. Blank, S.G., 2007. The Four Steps to the Epiphany. Cafepress.com, p.281. Ries, E., 2011. The Lean Startup 1st ed., Crown Business. Saemundsson, R. & Dahlstrand, Å.L., 2005. How business opportunities constrain young technology-based firms from growing into medium-sized firms. Small Business Economics, 24(2), pp.113¿129. Stinchcombe, A.L., 2015. Social structure and organizations. In Economics Meets Sociology in Strategic Management. pp. 229-259. Available at: http://dx.doi.org/10.1016/S0742-3322(00)17019-6.