If you have been following my “early adopters trilogy”, you might recall I first introduced a simple test for determining when you are ready to start pitching your product to its first customers, the early adopters. And in its second installment, I discussed five important value catalysts you can obtain from these early adopters and how each can be critical to the success of your startup.
Now, it’s time to put these two concepts together and answer an even more important question. While there may be dozens of customer segments that could use your product in its current form (which represents your universe of currently viable customers), which group of customers should you focus on first?
The Minimum Viable Customer
In this post, I’ll lead you through an exercise to answer this question by identifying your Minimum Viable Customer.
In Lean Startup methodology, a Minimum Viable Product (MVP) is the simplest version of your product that has value to a customer. My concept of the Minimum Viable Customer (MVC) is similar: Your Minimum Viable Customer is the customer archetype from which your firm can most simply generate value.
When I use the term “value”, what I am more accurately referring to are “value catalysts”, which are the things you can get from your customers that will help increase the valuation and probability of success of your company. Recall from my last post that there are five primary catalysts: revenue, legitimacy, evangelism, engagement data, and user density.
Of all the viable early adopters for your product, the MVC is the archetype of a customer that optimizes for:
a) the amount of value catalyst your firm can gain from the customer (you want this to be sufficiently high, and of the right types), and
b) the cost to your firm to entice this customer to adopt (you want this to be sufficiently low, and within your range of affordability).
Although this may sound like a ratio to be calculated, I encourage you to not think of it in such precise terms. The value and cost can’t be quantified exactly, but it is not required for this exercise to add value to your go-to-market planning. Focusing your efforts on the MVC first will help to maximize your rate of adoption while minimizing the cost and risk to your firm.
Identifying Your Viable Customers Comes First
The process of identifying your Minimum Viable Customer starts with identifying all of your viable customer archetypes, of which there may be many. In order for a customer archetype to be viable in the first place, your firm needs to have sufficient resources and capabilities to service that customer across all function areas of your business, not just your product’s capabilities.
For example, if your product cannot be deployed on a private cloud and does not yet use the most advanced security protocols, you won’t be able to count ultra-secretive hedge funds as your customers (at least not yet). This is an example of a product functionality constraint.
Or, if your customer support staff only speaks English, an overseas financial institution where most users speak a different language is unlikely to be a viable customer until you hire additional team members to fill this need. This is a company capability constraint that’s unrelated to your product.
These may seem like two obvious examples, but I’ve seen startups repeatedly take meetings with anyone who shows interest in their product, regardless of their actual viability as a customer. Focusing your customer development efforts on your Minimum Viable Customer first can help you avoid these misuses of time and resources.
Identify Your Minimum Viable Customer in 5 Steps
The process to identify your MVC is:
List all of the currently viable customer archetypes you have identified
Rank the value catalysts required from your early adopters (revenue, legitimacy, evangelism, engagement data, and/or user density) in order of importance to your firm at this time. (Again, see my last post for a discussion of this topic.)
Rank each viable group based on how well they provide these value catalysts, and then rank each group based on the combined catalyst achievable
Estimate the relative cost to your firm of driving adoption in each group
Choose the group with the highest expected value catalyst and the lowest expected cost
Don’t be scared—none of the steps in this framework require any math or complex analysis. Simply ranking each choice as low/medium/high relative to the other choices you have at each step is typically sufficient.
To demonstrate this process, I’ve created a detailed example of how to perform each step in this process, which you can access here. I encourage both startup managers and early-stage investors to take the additional time to see this framework in action.
If you end up with several groups that seem like optimal choices, that’s okay. The purpose of this exercise is not to confine you to only one set of customers. It is much more important to eliminate the many groups that are clearly suboptimal at this stage of your company’s development. Focus gives you the ability to use your firm’s limited resources more efficiently, which is very important, but not if you become so narrowly focused that you don’t move on to the next best opportunity when the first one doesn’t work as planned.
How Does This Compare To How Startups Typically Choose Their First Customers?
For some startups, there are a limited number of options for early adopters. For example, if your firm addresses a highly niche aspect of the banking industry, your choice will come down to the size and location of the banks you target. This exercise can still help you think through how to prioritize based on those two factors, but you probably already knew what course to take without needing a framework.
But for startups with products that have much broader appeal, the choices can multiply rapidly, and a lack of focus can suck significant time and resources from your company. I rarely see these types of startups apply structured thought to their customer acquisition strategies at this stage. Instead, they tend to take meetings with any potential users who show interest in their product.
A great example of this is the mismatch of expectations when small startups pitch to large financial institutions. Individual employees of a bank are often easily excited by new technologies, particularly because many of the technologies they work with on a daily basis are years behind the beautiful and intuitive apps they use at home. But this can create false hope for a startup, because the appetite for the financial institution as a whole to adopt something new is significantly lower. Excitement does not necessarily equal viability, and hours of meetings may not create any value at all.
Finding Your Sweet Spot
When you focus your initial customer acquisition efforts on your Minimum Viable Customer, you are putting yourself in a position to optimize many important things: customer traction, resource usage (of both time and money), and your future growth trajectory, just to name a few.
You can help put yourself in this “sweet spot” by ensuring your activities across your entire organization are aligned. This includes:
Spending the majority of your sales time in meetings with MVCs
Crafting your marketing to address the specific needs of your MVCs
Setting up recurring processes for extracting the value catalysts you require from your MVCs, and then using those to drive further customer adoption
Ensuring your employees are fully informed about this focus, incentivized to achieve it, and the right people for the job.
My partners and I at ValueStream Labs love speaking with FinTech companies that are entering this phase of their growth, so please don’t hesitate to contact us to discuss your firm’s unique situation.
Reprinted by permission.
Image credit: CC by Terence Lim