Lean Methodology is a process developed by Steve Blank to describe the various stages a Start-up goes through on its journey towards becoming a company. Steve Blank defined this as his “Four Steps to the Epiphany”, which are Customer Discovery, Customer Validation, Customer Creation and Company Building. I discussed the first stage Customer Discovery in my previous article “The Art of Discovering Customers” (Tech Juice, Oct 2018) so now let’s look at Customer Validation and how that leads to rapid, sustainable growth in a business.
The Customer Discovery stage was concerned only with understanding customer needs and that they want what the business had to offer. The Customer Validation stage is about making sure the business can scale, if it doesn’t scale it will face potential failure in the future. Customer Validation then is about trying to prove two things. Firstly the business model, does it generate sufficient revenue to cover costs and generate profit and does this remain true as revenue increases? Secondly, does the business have a repeatable sales process?
To validate the business model the business needs to establish that there is a fixed and known relationship between revenue and cost. That is for every increase in revenue there is corresponding and predictable increase in cost. It’s imperative that they track each other. If costs increase faster than revenue then the business will reach a point where selling more will only result in it losing money and ultimately business failure.
To validate repeatability of the sales process the business needs to understand how it acquires customers, how does it work for them? A sales process, or funnel, consists of a number of stages that define how a business moves from potential customers or leads to actual customers. It’s how the business qualifies its customers. Once established, it can tell the business a number of useful things about customer acquisition. Firstly, what it needs to do or find out to move potential customers or leads through the funnel from one stage to the next. Secondly, how long that process takes and finally what the conversion rate of leads to customers is. For example, if the process takes six months and the conversion rate is 10% the business knows that if it wants 10 customers in six months time, it needs 100 leads today. If it doesn’t have 100 leads it has to do something, such as running a market campaign. It’s this predictability that gives the business forward visibility and means that it can be reasonably managed. It’s important here to understand the roles of Sales and Marketing in this process. Marketing’s job is to fill the funnel, to generate leads. Sales job is to move them through the funnel and to close them as customers.
Once these two things have been proved there is an understanding of the basic mechanics of the business, what its moving parts are. Trying to scale without this understanding means there is a risk of running out of steam in the future and potential business failure. Only with this understanding is a business in a position to scale, to put the foot on the gas and the big bucks into sales and marketing required for the next stage of Lean Methodology, Customer Creation. Businesses that have this understanding can go forward with confidence to make the transition from Start-up to Company and enjoy the rewards of rapid, sustainable growth.