Value-Stream Discovery
From the 50,000-foot view, your value stream might look something like:
Validate idea ⇒ Validate product ⇒ Validate marketing and sales ⇒ Validate growth engine
Planning and customer feedback are worked into each step. (Investment can be as well.)
Drilling down into a generic product, validating the idea typically involves testing three components: the problem you’re trying to solve, the customer segment that has the problem, and the proposed solution.
Validating the product means figuring out the specific product functionality required to minimally solve the problem.
Validating marketing and sales indicates that you know what channels to reach out to in order to find the target customers and what’s required to convert them into satisfied customers.
Validating the growth engine is determining how you convert satisfied customers into passionate customers, at a cost that will allow the business to scale.
Let’s look at a normal user acquisition and conversion funnel. We might use Dave McClure’s Pirate Metrics4 as an example for web-based businesses:
Acquisition—How users get to your website, such as Google AdWords or Facebook ads.
Activation—Customers sign up and try the product.
Retention—Customers are satisfied with the product, so they come back and use the product regularly.
Revenue—You’re paid by advertisers based on the quantity of users or customers who pay for the product.
Referral—Customers are passionate about your product such that they put new people in the top of the funnel through word-of-mouth or even by “showing-off.”
All businesses have such a funnel. A B2B funnel typically uses different labels, but it amounts to the same thing.
A packaged good sold in a retail store might have a funnel that looks like:
This might be a valuable way to understand how your customer moves from “aware” to “repeat buyer.” You can visualize that the number of people who go through the funnel decreases from stage to stage. It’s easy to imagine the activities you might perform to get them to move to the next stage. So the funnel is a valuable part of the stream, but it’s not enough.
First, though the funnel purports to describe the state of the customer, it’s really seen from the seller’s point of view. A funnel from the customer’s point of view is better described using emotional states. So, McClure’s AAARR funnel might look like this:
We’ve drilled into the funnel to expose both the customer conversion process and the customer’s product experience. Each step is indicated by the emotional state of the customer. You can rightfully quibble with the words, but this method can be a powerful way to empathize with the customer and to avoid the trap of thinking about the process you would like to implement versus the one the customer wants to experience.
To summarize:
When customers first become aware of your product via advertising, social media, or from a friend, they will seek to learn more if they are intrigued (acquisition).
If upon learning more, they like what they hear, they become trusting. They have started the path down the funnel toward activation.
Once they have been convinced that the product and company are right, perhaps through references, they buy the product (revenue).
After buying, they are hopeful that they have purchased the right product. They next try to realize the value proposition promised to them (activation).
Only after using the product for some period of time do they become satisfied. The value proposition has been realized and they are likely to continue to use the product (retention).
Customers who are merely satisfied don’t refer products. Passionate users do.
Note that for business models in which scale must be achieved before revenue is realized, revenue is not realized until after user retention, whereas in most other businesses, revenue is achieved prior to retention and, many times, prior to activation. To illustrate, Facebook doesn’t charge customers to use the product. As some like to say, the customer (the user) is the product. Facebook had to nail the product to such a degree that people were willing to invite all their friends and a large enough percentage of those friends had to convert and be engaged enough to invite their friends. This is known as the viral coefficient. Viral coefficients greater than 1.0 result in exponential growth. Revenue is realized only after scale has been achieved.
In business models where there is a free component (often known as freemium) and revenue is achieved by up-selling to premium accounts, we treat the free component as a component of acquisition. Revenue happens when customers are convinced that the paid component is worth paying for.
It’s worth reiterating here that free does not equal freemium. Free means there is no paid component for the product’s use. Revenue is not made directly from users, but via other means, such as selling user data to third parties, selling advertising, or, in Facebook’s example, taking a cut of revenue from for-pay applications that run on top of Facebook.
It’s also worth noting that freemium is not really a business model. The business model is based on selling premium features beyond the free level. Free is a hook to get users to try the product, perhaps become dependent on it and pay for additional usage, or it’s simply a marketing activity. Entrepreneurs should be careful about over-complicating their value proposition. As we have told more than one entrepreneur, if you sell hats and have identified a market that wishes to pay for hats, there’s no sense in giving them a visor first and then upgrading them to a hat later.
Sell them a $&*@&! hat!
On the other hand, you may be able to disrupt an existing market by offering a free product in an otherwise for-pay business. Your revenue comes from consistently identifying and delivering value on top of the free version. Keep in mind that you can’t disrupt a for-pay model with free if free already exists!
Back to our funnel. For each step, you wish the customer to move on to the next step. You want them to take a specific action. As a business, you must do something or have something that leads the customer to take that action. That it is easy to imagine a whole laundry list of activities a business might deploy for each stage, or product features it might build to deliver some value, makes discovery difficult. What’s optimal? We want to be able to posit one best-case scenario and work to validate that scenario, hoping it will instruct us on how to capture the market.
Customer State
To develop one scenario for an entire value stream, we’ve found it helpful to begin at the end and work backward. In other words, we flip the funnel. It’s actually a flipped value stream. We start with, “Why is your customer passionate?” and work backward:
Passionate—your customer loves your business; your customer is loyal. Passion comes from something more than that the product met expectations.
Satisfied—your customer’s expectations have been minimally met. Minimally is not imbued with negativity. This is a positive thing; your product does what you’ve promised.
Hopeful—your customer first experiences the product in order to realize the promise you’ve made. They are hopeful that their needs will be met, that they hired the proper product to complete the job.
Convinced—your customer has become convinced your product is the right fit for the problem they’re trying to resolve. The reasoning can be both rational and irrational and include reasons beyond the product itself.
Trusting—your customer believes not only in the likelihood that the product will do the job, but also that the company is worthy of a relationship.
Intrigued—your customer is intrigued when early investigation indicates the product will solve a problem important to them.
Aware—your customer first realizes your product exists and purports to address a concern of theirs.
For some products the lines between convinced, hopeful, and satisfied are blurry, if not arbitrary. The goal is to measure the changes between customer states. If you have fewer states, then you have less to measure. Other products will have more states. If you’re selling B2B, you could create a whole decision-making tree that includes all the champions, opponents, and deciders and the internal processes they go through to purchase a product. As a matter of fact, if you’re selling to businesses you should create such a tree.
Customer Action
Next, we want to ask ourselves, what specifically is the customer doing that indicates the state they are in? We follow this working-backward process all the way back to the point when they first heard of you.
Emotional State of Customer |
Customer Action (example) |
Customers love your product and your company (passionate). |
They continue their subscriptions and tell their friends about you. |
Only after using the product for some time do customers become satisfied. The value proposition has been realized and they are likely to continue to use the product. |
Log in daily, run report, view dashboard, create something. (What is the specific interaction with your product, and what is the frequency with which that happens that indicates satisfied engagement?) |
Customers are hopeful that they have purchased the right product. They next try to realize the value proposition promised to them. |
Log in, create something, upload something, configure something, view something. (What is the specific minimal interaction with your product that customers must do to try and realize the value proposition for the first time?) |
Once customers have been convinced that the product is a good fit and company is capable, they buy the product, resulting in revenue. |
They buy. |
Customers trust that the product is a good fit and the company providing the product is worthy of their business. |
They sign up for the product trial. |
If upon learning more, customers like what they hear, they become intrigued. They have started the path down the activation part of the funnel. |
They read more about product benefits on your website and in testimonials. |
Customers first become aware of your product via advertising, via social media, or from friends. |
To learn more, they visit your website landing page and watch a video. |
Obviously, these are examples from a hypothetical software-as-a-service application. You must create your own set of hypotheses for your product.
Business Action
This value-stream discovery technique can be used with any business, with some tweaking for different products and services. As you flesh out the scenario, it becomes apparent that the business needs to do something or provide something for the scenario to work.
Customer State |
Customer Action (example) |
Company must do something like . . . |
Passionate |
Subscribes. Refers. |
Something beyond basic product that delivers promise.
|
Satisfied |
Uses product in specific way over specific time period. |
Build minimum specific functionality that delivers on value proposition.
|
Hopeful |
Tries product in specific way. |
Overcome blank slate? Drip campaign? Follow-up phone call? |
Convinced |
Buys. |
Ability to purchase. Call to action. |
Trusting |
Demos product. |
Provide trial. Get testimonials. Provide tutorial. |
Intrigued |
Reads landing page, watches video. |
Provide website messaging and positioning; create video. |
Aware |
Reads third-party blog post; visits company website. |
Reach out to third-party blogger who is a customer influencer. |
What would your customers say about you? Let’s look at the different possibilities companies might employ to affect the customer at each state, by imagining what the customer might think or say when feeling a certain way.
They’re Passionate
“The product is so easy, so beautiful; it makes me want to use it.”
“The product does what I want it to, and then so much more.”
“This game is addictive!”
“I have to get to the top of the jackpot!”
“When I called customer support, the CEO answered!”
“They took the shoes back, no questions asked. Even paid for return shipping.”
“My replacement arrived before I shipped the defective one back.”
“For every pair of glasses I buy, they provide a free pair to someone in need.”
“The package is so cool!”
“Their new packaging makes pouring so much easier.”
“I’ve improved my bottom line, month after month.”
“I don’t know, the product just makes me feel good.”
“It found problems I didn’t know I had. Now I’m a hero at work.”
“Not only do the jeans fit me, but the looks I get . . .”
“The waitstaff went above and beyond the call of duty.”
They’re Satisfied
“The food was delicious.”
“I was actually able to find jeans that fit me.”
“I am able to create and share new surveys in under 10 minutes.”
“The intrusion-detection system immediately and consistently reports accurate anomalies on my network.”
“The shoes fit and look good, too.”
“After I configured the system, I am finally able to track my marketing campaigns.”
“This game is fun!”
“Using this product has helped me generate more leads.”
They’re Hopeful
“I hope I chose the right product to solve my issue. Let’s give it a try.”
“I hope this thing works as advertised.”
“It’s rated as at the top of its class, let’s see.”
“I’ve heard the prime rib is top-notch, I can’t wait to taste it.”
“I hope implementation goes smoothly; this wizard looks helpful.”
“I’m nervous I won’t know how to work it.”
“I wonder what I should do first.”
“It says no assembly required.”
“Wonder if it comes with batteries.”
They’re Convinced
“Wow, Oprah recommends it.”
“Demo seemed to do what I needed done.”
“Worth a shot.”
“After 30 days, trial seems to be paying off.”
“Sample tasted good!”
“Well, not too expensive.”
They’re Trusting
“Feels like they’re talking to me.”
“I respect the testimonials they have on their website.”
“Data analyst gave them a thumbs up.”
“Online customer reviews are positive.”
“Huh! Four out of five doctors recommend it.”
“Trade mag review was enthusiastic.”
“Not much to lose, satisfaction is guaranteed.”
“At least I can return it, plus free return shipping.”
“Looks like it’s approved by the Better Business Bureau.”
“Case study example matches us perfectly!”
“Friend said it was cool.”
“4 out of 5 stars!”
They’re Intrigued
“Cash back sounds good.”
“Sounds cool.”
“Whoa, this demo rocks.”
“Nice data sheet.”
“That’s a clever video.”
“Sounds exactly like what I need.”
“Yep, that’s my problem.”
“Who woulda thought, better, faster, AND cheaper.”
They’re Aware
“Wow, those trade show boot babes were hot.”
“Sales guy was kind of pushy, but the product sounded pretty good.”
“Did you hear about that product thingy?”
“Wonder if it’s for real.”
“Yeah, we should check that out.”
“Huh, what’s this?”
“Cool packaging.”
Measure
What is particularly helpful in the software world is that one can measure the customer’s progress through the various stages. In today’s software-eating-the-world environment, most businesses can figure out ways to measure much of their value-stream activity, too. Getting customers to interact with you online is key. You are only limited by your creativity.
Of course, you are encouraged to observe your customers and even speak to them, which are a couple of tactics available to everyone.
Your customer will do something that indicates they’ve moved a step through the funnel. In other words, you want to measure the customer’s state. Sometimes this can be done with simple analytics tools. In other instances, you must be much more clever.
Going through this process documents the business model assumptions you need to test first.
The value-stream stages can be divided into these categories:
Growth engine
Minimum viable product
Conversion
Funnel
Acquisition channel
For each, you have assumptions concerning specific customer behavior and business activities required to induce the behavior. You have also thought about ways to measure progress.
Growth Engine
What your customer does when passionate or loyal is the primer for your growth engine. For network effects businesses, passionate customers invite all their friends, colleagues, or whoever needs to participate to make the experience more valuable. A transaction business (both online and offline) relies primarily on some combination of case studies, testimonials, or referrals from existing happy customers; ongoing periodic transactions; and, sometimes, regular maintenance, support, or other services fees. Subscription models need referrals plus maintenance of subscription, in other words, low churn.
Minimum Viable Product
The MVP is your proposal for the minimum specific functionality required to provide the value proposition. The value proposition is the value you are hoping to deliver to a specific customer segment. The customer uses your product in a specific way in order to address a specific pain or passion. You want to nail the specific, not the general. At this stage, you aren’t concerned with how many people download your product or like you on Facebook. Rather, you must figure out what specifically your customers do with your product to complete the job your customer hired your product for. There may be more (or less) to the solution, but there are two things you should keep in mind:
1. Overbuilding makes it more difficult to understand what is the must-have part of your product. You’re not done building after the MVP. This is simply the first iteration.
2. Imagine the product from the outside in: Working backward from solving the problem makes you solution agnostic and architecture independent.
Conversion
How will you cross the penny gap? Getting customers to take out their credit cards is more difficult than it seems, no matter what the price. The act of paying money for anything is rarely a purely rational exercise. The steps of conversion happen between “I want to buy” and “I bought.” What needs to happen in between? Proper pricing? Trust? Ease of process? Approvals?
Funnel
All sales have a funnel comprised of several actions taken by the customer correlated to several activities undertaken by the business. We use the word activities in a very broad sense, from packaging and obtaining retail shelf space to providing elements of trust, such as testimonials or secure shopping cart badges on a website.
Acquisition Channel
The acquisition channel is how you first reach your customers. The methods you use are dependent on the behavior of the market segment. This is what the “Where do they hang out?” question addresses. Eventually, this is how you scale. Once you’ve nailed the value proposition such that you become your own acquisition channel, you’re ready to discover and validate and grow other channels, as long as the lifetime value of a customer is greater than the cost of acquiring them.
At this point it’s not necessary to document all possible steps for a particular segment; we want to start by articulating one funnel and one acquisition tactic you think is promising.
Case Study: AppFog’s High Hurdle
Lucas Carlson is the CEO and founder of AppFog, based in Portland, Oregon. AppFog is a platform as a service that allows web and mobile application developers to deploy, scale, and run their applications in the cloud as easily as installing an iPhone app. The number of deployed applications on AppFog grew from 600 at the beginning of 2011 to 25,000 at the end of 2011. They recently raised $10 million.
Lean Entrepreneur: What caught my attention about you, Lucas, is when I heard that you started AppFog with just a landing page and it blew up pretty quickly. I’d love you to share your experiences.
Lucas Carlson: Yes, absolutely. As a quick background, I’ve been developing software since 1996.
I’ve been in the startup world for a long time, and I’ve always loved startups and I’ve always wanted to do my own startup. I always had plenty of ideas. I’ve often tried to do these little ideas, and my experience led me to realize two things that helped me when I started PHP Fog.
First, one of the biggest faults with my side projects was I didn’t know how to get in front of the people that would use them or end up using them. So I dabbled in WordPress plugins, but I had no idea how to talk to people that used WordPress plugins or get in front of them.
Second, I viewed them as revenue streams that could augment my income, but not as businesses, so I would lose interest at a point because, to me, they were means to an end.
LE: So the passion really wasn’t there about the products. We could call this founder-market misfit.
Carlson: Right, so I had been watching Heroku for a long time and I thought it was really cool. I started to move all of my side projects into Heroku. The problem was one night I realized I had a whole bunch of PHP projects that I couldn’t move to Heroku because they don’t support PHP. [PHP is a software development language developers use to create products.] I wasn’t the first person to come up with this idea. I had heard people talk about PHP Heroku, and PHP’s a much bigger market than Ruby has ever been. [Out of the top million websites, a third of them are PHP and only 5,000 of them are Ruby, a rival software development language.]
It was probably around 10 o’clock one night, and that’s usually primetime for me to have an idea and start building it. I’ve always been a night owl and nighttime is when I do my side projects. That night I felt lazy. I was too tired to go out and start prototyping this platform as a service and start building it, so I decided to throw up a landing page [a one-page website with a specific call to action], and I was still too tired to even program a back end, so I used one of the mailing services to collect e-mails for me. And I came up with the name PHP Fog. I registered the domain name. I put up the landing page, it was one page, and put one paragraph of text and put a link on Hacker News and fell asleep. The next morning I woke up and there were 800 people signed up for the service.
LE: What was that like when you woke up and you saw 800 people had signed up?
Carlson: It was a thrill; it was a rush. It was amazing because this was kind of the missing piece compared to my past projects. I had spent a decade trying to do startups and this was the missing piece that I never had seen before, how do you find people that want to use your thing? This was an idea that the people were ripe for the picking and they were right there and I knew how to get them because they were me. They were people exactly like me, trying to do things exactly like me.
LE: You know how they think. You know where they hang out, right? Clearly Hacker News is where developers, especially startup developers, hang out, right?
Carlson: I was hoping that I’d get a few comments in the Hacker News thread that would help guide me, and I got way more than a few comments. There was a huge discussion. This was clearly something that a lot of people were interested in and wanted.
LE: What was your next step after that?
Carlson: That night I said to myself, “Okay, I’ve got to build it now. I have 800 people.” . . . I called it a private beta, so I hadn’t written any code, but 800 people were expecting to be let into the beta, so that put a fire under me. That night I started building. I started building it the way that I traditionally built ideas and side projects. I thought about the coolest technology I could and started prototyping that technology and building an ivory tower. A week later, I had been working on it hours every night, pouring into the morning, and by the end of the week I was not even close to having something that was ready.
LE: You got excited and you thought, “I have 800 people waiting for me. I feel a responsibility to the community.”
Carlson: Yes. I was working on it and by the end of the week I thought, “I’m not going to get anywhere this way.” So I trashed all the work that I had built for the entire week and I started again from scratch. This time I said to myself, “I need something that people can at least start looking at.” So I built the front end first.
LE: What happened there? What happened between you going from “Okay, I’m going to build the ‘bullet-proof ivory tower’ ” to “Okay, I just need to get something out to my people”?
Carlson: Well, I knew that it would be months before it would be ready if I kept it at that pace. Then I would definitely be letting these people down. I decided to build the front end first and let that guide all decisions. The first thing I built was the user experience I would want to see as a customer, the minimum interaction to get started with the product. I started with the most plain static HTML you could have. I am terrible at design, so I didn’t even bother trying. I just put the basics in place.
Step 1: Pick your framework, Step 2: Give us a domain name, Step 3: There is no step 3—you should have a running application now! Then I started making those things actually work.
I have always believed in the power of great design and simple experiences. I feel like if you don’t capture someone’s imagination in the first 60 seconds, you have lost the game. Design projects confidence, and especially with young ideas, those early users need to have as much confidence in it as possible in order to turn into your advocates. So, I hired a designer for a few thousand dollars to make it look as good as possible.
By the time I had this ready, about four weeks had passed and I was ready to start letting people in. I now had around 4,000 people signed up on the waiting list. I knew I couldn’t bring 4,000 people into the platform, but I knew that I needed to keep engaged with these people, that I had a contract with them.
I’m not sure if this was the motivation, but one of the things is that ever since that first day, with the 800 sign-ups overnight, I’ve just been totally addicted to traction. Traction is the blood flow of a startup, and you want to collect as much you can, as quickly as you can.
We had 4,000 people; there was no way I was ever going to invite 4,000 people in at this stage. It was a side project I was working on at night and it wasn’t fully baked, but I needed to keep them engaged and I needed traction.
One of the things I thought of was a VIP thing. None of these ideas I came up with; I stole everything. I stole all the ideas; I just watched what other people did and thought about how I could apply [their ideas] to what I was doing, but the idea was to create a VIP waiting list. So what I did was send an e-mail to the 4,000 people with a link to a survey and I said, “You can get into our private beta a lot faster if you fill out this survey.”
What I intended to do with the survey was make a survey that I thought would take a significant chunk of time to fill out, one that would not be easy, one that had many open-ended questions, like: Why did you sign up for PHP Fog? What did you expect from us? What’s your major pain point?
LE: So you purposefully created a burdensome survey to try to weed out the passersby from the early adopters.
Carlson: Yes. So I expected a few dozen people to spend the time to tell me what they were wanting. I thought, I can handle a few dozen people. So I sent the e-mail to 4,000 people and what happened was I ended up with about 2,000 responses.
LE: Wow, 50 percent!
Carlson: That was like striking gold. The first bit of traction with the 800 sign-ups overnight was a great indication, but this was the real gold that the whole company was built on. This was the stuff that has directed the product ever since.
LE: These were not early adopters in the sense that they are tech geeks who like to hang out at Apple for the latest iPhone. These people were early adopters in what I think is a very meaningful distinction: They were early adopters for your specific product.
Carlson: Yes, and I did not expect that half of the people who signed up were those early adopters and [that they] would be so willing to open their time and their energy to tell me about their problem and their pain, which just totally reinforced how painful this was and how big of a problem I was about to tackle because, literally, these people would put paragraphs of text. They had all been thinking about this for so long and nothing on the market was there to address that pain.
LE: Was it just you digesting all this information, with 2,000 responses and open-ended text responses? Seems like this is an amazing amount of data. How did you get through that?
Carlson: I read every single one of them myself. One of my early team members analyzed all the words and found which ones came up most often. That surprised me a lot because we had some expectations about what was going to be the most interesting; Was it going to be scaling, or ease of use, or reliability? We had our ideas about what people wanted, and out of these 2,000 responses of paragraphs, looking at the frequency of words, it became very clear what their expectations were and the priority of them became very clear, too. It was astounding, what they wanted most was not what I expected at all. Just by analyzing the text we found that what I personally thought was going to be most important ended up to be the least important.
LE: And the result?
Carlson: At the beginning of 2011, I think we had around 600 applications deployed on our system. By the end of 2011, I believe it was up to around 25,000 deployed applications. So we grew from 600 apps at the beginning of 2011 to 25,000 at the end of 2011. The end of this quarter we’re way past that; our sustained growth has just been huge through this whole process.
LE: Would it be safe to say that you guys are seeing exponential growth right now?
Carlson: Oh, we’ve seen exponential growth for over a year, yes. All of our curves look exponential right now. So revenue, apps, users, engagement, everything is exponential.
And you know, yes, part of that was listening to our customers and making sure that we were building something that addressed their pain but I don’t think that’s full credit. I think that part of it is the market itself. I feel like this is an idea that was a bull and I happened to grab the bull and I’m just trying to keep holding on to the bull because it’s really . . . the market’s driving us; we’re not driving the market. The demand is a groundswell.
Work to Do
1. Use the templates that follow to create your proposed value stream.
2. Using your ideal customer profile created from the last chapter, construct the “ideal” path customers take from first becoming aware to becoming passionate about your product.
3. We recommend you work backward from “passionate.”
4. Document:
a. Specific functionality business provides or activity business conducts for each step.
b. Why customers feel the way they do.
c. Expected customer behavior based on how they feel.
d. Metric to measure customer behavior.
5. Try to document only one or two business activities, or one customer action. Less is more.
Notes
1. Ries, 49.
2. Godin, 26.
3. Cooper, Inmates.
4. See http://vimeo.com/26277733 (video).