Customer Development Case Studies
Reading about the Customer Development model is all well and good. Blank’s book is full of valuable case studies that illustrate his points well. However, it is just as helpful to learn about how some of today’s most successful startups have employed the Customer Development model successfully. In this article, you will learn how two of today’s most successful startups used customer development – Dropbox and Groove.
CUSTOMER DEVELOPMENT MODEL AT DROPBOX
What is Dropbox?
Dropbox is a file hosting service based in Silicon Valley. It offers both commercial and personal cloud storage of all sizes. Founded in 2007, Dropbox entered a very crowded market around the time that the cloud was beginning to explode. Unlike its competitors, Dropbox managed to capture huge swaths of the market and the service grew from 100,000 users to several million users in just 18 months. While this sounds like the typical tech explosion story, the difference between Dropbox and other companies is that Dropbox did this without doing any advertising.
Dropbox uses the freemium model to draw in customers. It offers basic customers 2 GB of free online storage space and allows them to scale up to the paid service as needed. As of June 2015, Dropbox had captured 400 million registered users.
The Problem at Dropbox
At first, the Dropbox story sounds like a typical Silicon Valley fairytale. Founded by a couple of engineering students from MIT, it was accepted into the prestigious Y Combinator seed accelerator and saw rapid growth.
It is true that Dropbox was growing. However, there were serious problems. The team at Dropbox had engineering experience but almost no marketing experience to speak of. The team was taking the advice of investors and mentors and using traditional marketing methods. Yet, these traditional marketing methods were not what was causing the company to grow. Essentially, Dropbox was throwing money away on marketing channels that were not driving customers while still seeing a growth that was unexplained. Growth of any kind was good but it is hard to perpetuate that growth when it is unclear where the growth was coming from.
The founders at Dropbox discovered Steve Blank’s Four Steps to the Epiphany as they were dealing with this problem. They then tried to use Blank’s method to learn more about their problem and attempt to come up with a solution.
Four steps of the Customer Development model at Dropbox
1. Customer Discovery at Dropbox
As previously noted, Dropbox’s biggest problem upon launch was that they were trying to apply traditional marketing techniques to their business. However, they were not having any success with these techniques. Investors and friends were telling them that these were the tried and true methods for any business. They were under the impression that they should be launching early and launching often. These launches were supposed to provide a perfect product with all the right features. If they could do this, then traditional advertising would work.
What Dropbox learned was that it was more important to launch when they were ready rather than as early as possible. When they entered Y Combinator, the founders of Dropbox promised to have a fully functional product available for launch in only eight weeks. In reality, launch did not come for 18 months. While traditional wisdom would suggest that this would be the end of the business, Dropbox figured out that all of the learning and discovery that they did during those 18 months would be more important than getting a product out to the public. They needed to have a better idea of who their market was.
What Dropbox realized it had to do was go back to finding their customers. To do this, they began to work closely with the customers that Steve Blank would call “early adopters.” They worked to put code together to send out to keen engineers – people just like them. The code they sent out was far from the finished product. However, this basic presentation of the product allowed Dropbox to confirm that the problem that it was attempting to solve was very real for its customers. Through the feedback it got from early adopters, Dropbox realized it was on its way to a real solution.
One of the biggest lessons that Dropbox learned during this stage was that they could not just head to the forums where its audience spent its time. They also had to communicate with these customers in an authentic way if they wanted to get real feedback.
2. Customer validation at Dropbox
Dropbox had already come to the conclusion that they needed to learn early. They also quickly understood that learning was not a one-time event. They understood that if they really wanted to understand their customers, they needed to learn early and learn often.
They created a private beta launch video for their early adopters. Because they knew where their customers were and how to speak to them, the video resulted in a waiting list that grew to 75,000 people in only a single day.
Part of the reason that Dropbox was so successful during customer validation is because they used the product themselves. They knew that they had a problem and needed a solution. This does not always translate into a successful product. However, because the team at Dropbox were early adopters themselves, they knew where the other early adopters could be found. As a result, Dropbox decided to get out of the office and when they did, they knew where they could go to validate their assumptions.
To get out of the office, Dropbox created a snapshot of their product. This was their minimum viable product. It showed the inherent value of the full product but did not include all of the bells and whistles yet. They sent this minimum viable product out to Hacker News, where their early adopters lived. The feedback they got was of very high quality. More importantly, the feedback they got validated their learning.
During this time, the company began to see real pressure from investors to use more traditional methods. Reading Blank’s book, the company knew ostensibly that these methods would not work for everyone. However, the pressure that the young company faced was real and so they tried these methods anyway. Using these methods taught them an important lesson: they needed to keep their focus on what worked for their company and their market if they wanted to be successful.
They also learned that the right market fit would cure them of several ills. In this sense, Dropbox were fortunate because since they were engineers, they knew how to create a great product that other engineers, early adopters, would use. Because they discovered the right market and had a great product, users grew. This was despite the fact that Dropbox had a poor website and was virtually invisible in the PR world. At this point, Dropbox also did not have any partnerships, extensive features or even good market positioning.
All of these things make up conventional marketing techniques. For Dropbox, they either did not have these techniques or these tactics had failed. Yet, the product was still getting to customers. The typical Dropbox customer journey looked like this:
- Customers would hear about Dropbox from a friend, not knowing that they needed this product.
- The customer would try it and realize that Dropbox solved a real problem that they weren’t acutely aware that they had.
- Thrilled about this discovery, these customers would spread the word to their friends about this happy surprise.
Dropbox would come to learn that the techniques it was using were trying to harvest demand rather than drive demand. This was the difference between the steady growth it was seeing and the explosive growth that it would be capable of later. When it came time for customer creation, Dropbox would take the current customer journey and really begin to employ it effectively.
3. Customer Creation at Dropbox
Dropbox had its early adopters excited about its product. To stick to the Customer Development model, the company would have to begin to create its mainstream customer base. To get started, Dropbox created a landing page that was designed to capture interest before the official release of the product.
This landing page was important because it gave a place for its current customers to refer their friends. Rather than driving demand through the mainstream media, Dropbox pivoted and found a way to facilitate these referrals by creating a solid landing page.
Dropbox tried the cookie cutter approach. It failed miserably. It tried using paid searches. Its affiliate programs and display ads also failed. Dropbox also tried hiding the freemium option but realized that this did not always work successfully but more importantly, that it just was not cool. It did not build up trust with customers.
All of this paid advertising failed but not because Dropbox was not acquiring customers. It failed because the cost per acquisition was needlessly driven up to $233- $388 for a product that only cost $99. The paid advertising was not drawing in customers but it was still costing them a lot of money. This balance was both unfavorable and unsustainable over the long term.
What was working, however, was the word of mouth experiments. Not only was the referral system a lot cheaper than traditional marketing but it was also underdeveloped at the time. When Dropbox realized that the traditional methods were not working, it worked on giving its current users the tools they needed to help grow the business.
4. Company Building at Dropbox
This word of mouth referral program became Dropbox’s main marketing strategy. The program that Dropbox created offered a double sided incentive to give the current user incentive to share and encourage sign ups while also rewarded new users. The program started by offering both users an extra 250 MB of space for free.
To make sure that this was the best way forward, Dropbox started to focus on data analysis and marketing. They hired someone with a data background to perform split tests to determine the best landing page optimizations, encourage sharing and analyze surveys. This investment in the analytics was a part of the “learn early, learn often” strategy that Dropbox had previously adopted.
With all of these tools, Dropbox grew their user base from 100,000 users to four million users almost entirely through viral sharing and their word of mouth programs.
Dropbox learned two big lessons that contradicted the traditional wisdom that they were receiving from other sources. The first big lesson was to get something into the customer’s hands as soon as possible. Don’t worry about having a lot of features or making the product perfect. Putting a minimum viable product in the customers’ hands will ideally provide the feedback you need to propel the product forward in a viable way that is useful to customers.
The second lesson was one of the biggest focuses of Blank’s book. Dropbox learned that it is important to create a strategy that reflects your market. Even if more “experienced” people question that strategy, stick to what you know about your customers and your market and give them what they want.
CUSTOMER DISCOVERY & VALIDATION AT GROOVE
Who is Groove?
Groove creates online help desk software for enterprises and small businesses. For customers, Groove’s software looks like an ordinary email service but offers features that allow it to be integrated with social media platforms like Facebook and Twitter. Groove decided to move away from the freemium model and now offers all of its features for $15 per user per month.
The Problem at Groove
In its early days, Groove was earning customers but it was unable to hold on to them. The CEO realized that the churn rate was hanging out around 3% and that was not something he could live with because it did not fit the company’s goals. The problem for Groove was not the churn rate itself but the fact that no one was sure why the churn rate was as high as it was.
Four steps of the Customer Development model at Groove
1. Customer Discovery at Groove
To get to the bottom of its growing churn rate, Groove started by talking to customers. Groove’s CEO makes it clear that one of his biggest priorities has been to learn more about his customers. He goes through major efforts to collect client feedback in order to really learn about his product.
To begin to approach the problem of the churn rate, Groove relied on exhaustive feedback to make sure the product was viable for the market. This feedback initially came from feedback surveys and onboarding emails sent out to new clients. However, this feedback was not enough to fix the problem.
Unsure of what to do about this churn rate, Groove decided to dig into its metrics to see what was going wrong.
2. Customer Validation at Groove
Groove’s CEO decided to get in touch with his customers. He started an email campaign that asked individual for in-depth one-on-one conversations that would provide real feedback. At the time, Groove had around 2,000 customers and a lot of them had something to say about Groove’s model, business, product or customer service. The response to the initial campaign was overwhelming.
Groove then set up an online calendar that allowed people to sign up for a phone call with the CEO. These calls were scheduled to be 10 minutes long and took place over phone or Skype. In addition to reaching out to customers, Groove was able to salvage relationships, forge new bonds and really validate the issues that laid behind Groove’s churn rate.
What Groove learned in the customer validation phase is that a business does not need to invest in exhaustive testing or expensive tools to get to know its customers. All you need to do is get out of the office and go to where your customers are with your hat in hand.
They also learned that they would not get useful feedback by sending out surveys or asking leading questions. Instead, they structured the conversation based on the individual issues that each customer had. Rather than going into a call with a set of expectations, they went in to learn about the customer’s problems and validate what they thought they knew about that customer.
As a result of 100 hours of phone calls with customers, Groove learned:
- It needed better second-tier onboarding.
- How to convert unhappy customers back into happy customers
- More about the personalities that make up its customer base
- How to improve marketing copy
- To make customer learning a habit by learning early and learning often
3. Customer Creation at Groove
During this time, Groove was embarking on a mission to grow its customer base from 2,000 customers to 5,000 paying customers. The timeframe for this goal was 12 months. Until this point, the company was more focused on retaining current customers and putting out fires than on really growing its customer base.
Over the first two years of its life, Groove found a great market fit and gathered a group of early adopters who loved the product. The foundation was already there – it was learned and validated several times over.
To grow, Groove decided to focus on three big issues:
1. Groove wanted to become the product leader in the SMB Market.
The global SMB market contained 76 million players worldwide. Research validated that customers who were using other customer support software products hated the service they were getting. With a great product designed specifically for these customers, there was no reason that Groove could not grow to grab 5,000 of these customers.
2. Groove needed to work on building a respectable and lasting brand.
Groove knew it had a great product but a product is not enough. It needed to use its brand to drive interest from the right customer group. To reach this customer group, Groove created the 100K blog where it documented its journey as a startup.
3. Groove needed to be more focused on using data.
Groove wanted to put a real focus on actionable data that would help them know what to expect when they made business decisions. Rather than hoping for luck, data analysis and collection could fuel growth systematically and help them achieve their 12-month goal.
In order to focus on these issues, Groove had to scale its company. It could not make these transitions with its existing teams and processes. Thus, Groove moved into the company building phase to create an infrastructure that could support this attainable growth.
4. Company Building at Groove
Groove needed to create a company that was capable of both driving new customers and handling these customers to make sure that their churn rate stayed low. They knew that they had to start by building the right time. The company decided that hiring and keeping the right employees was important because it was important that everyone was working towards the same vision. Groove wanted all of its employees to be working and thinking as if they were a startup CEO.
Groove also knew that it need to begin to work at a faster pace. Previously, the company had been stuck putting out fires and focusing on past and present problems rather than thinking ahead towards the future. To make sure that this pace occurred, they decided to set both quarterly and monthly goals designed specifically to reach the ultimate 12-month goal of growing to 5,000 customers.
They also realized that there was a lot of infrastructure debt and bugs that were holding the company back. To move past this, the company decided to reexamine its resources and realistically consider how those resources could be better used.
All of this resulted in a serious game plan for customer development and business growth the plan was bound take the following avenues:
- Blogging was the most viable channel that Groove was using. It decided to continue to pursue this channel aggressively.
- Groove decided to use the blog to drive a real online community.
- The blog would also become a valuable tool for driving organic SEO.
- Groove needed to figure out how to build a better solution for driving and processing referrals.
- Groove needed to figure out how to better integrate with future partners.
- Groove needed to drive product development within realistic timelines.
- Groove had to find a better way to convert more leads and nurture them through the sales funnel.
Groove took away a lot of lessons from Blank’s customer development model. Groove takes the “get out of the office” advice seriously and really commits to it personally rather than trying to automate the process through expensive means. Ultimately, Groove knows that it needs to ask its customers if it has any doubts. This also is one of the biggest takeaways for Blank’s work.
Groove also learned that this learning and validation was essential for growing the company. It employed a lot of what it learned in customer discovery and customer validation when it decided to grow its customer base and scale its business. When Groove decided to grow, it put together plan that was appropriate for its market. As Blank says in his book, market fit cures almost all ills.
5 Ways to Build Hot Customer Relationships – The Fire-Building Process that Sparks Profits and Long-Term Value
Before you build, know what you’re building. Whether you’re building a business that requires …
Would you deny yourself a chance to take a winning lottery ticket if someone handed it to …
In Palo Alto (CA), we meet founder and CEO of Instart Logic, Manav Mital. Manav talks about his …