Fill in the blank . . .
The purpose of a business is to create ______________________
Most people get this wrong. They say things like wealth, or value, or a great product, or even what Steve Jobs said: “a dent in the universe.” Those can all be good things, and certainly can be the effect of a business. But not its purpose.
The right answer comes from Peter Drucker, the guy who practically invented the whole field of management as something to study in the 20th century. He studied startups, as well as the largest companies of his time like General Motors. He worked with for profits as well as nonprofits, like the Girl Scouts. He gave names to concepts like “knowledge worker” and talked about personal development before it was cool.
His answer to the question is found in this quote:
“There is only one valid definition of business purpose: To create a CUSTOMER.”
So who is a customer? HINT: it’s not a user. Facebook users are not customers but their advertising clients are. A customer is someone who pays you. It’s important to understand why they pay you. Start by thinking about why you pay for anything — from your morning coffee to a new car. Customers pay for solving some problem they think is worth paying to solve; or for providing something they value more than they want their money. In this context it’s the customer that defines value not you, the entrepreneur.
This sounds obvious, but when the significance of this sinks in it changes everything. You see, most entrepreneurs start from the other end – they start thinking of a product. Then they work on how to build it, and how to get costs down, and only after that do they consider how to sell it. This is bass ackwards. They usually find out that not enough people want to pay enough money for their wonderfully designed product, or that the cost of selling is much higher than they thought. No wonder A) so many startups fail and B) those that do survive end up very different from the way they started out. As Steve Blank has said, “No business plan survives first contact with a customer.”
You’d be forgiven for taking this approach because so much business education has taught that you need to start with a business plan. The media can also support this approach by suggesting that the key to success is having an idea, writing a business plan, and then raising a bunch of money from investors. These approaches are a waste of time and money because they make assumptions about startups that are often wrong.
In fact, almost every idea you have when you start a company is wrong. That’s not a problem. The problem arises from not realizing you’re wrong, and worse, thinking you’re right without verifying that you are. And in this context “right” is determined by the customer.
If you don’t start learning who the customer is and how they see their problems BEFORE you start working on a solution, you’re very likely to run out of money. The good news is in the last several years, some very smart people have figured out a new approach. It’s a scientific method for subjecting your ideas to the harsh light of the customer to learn what you need to know as quickly as possible.
Parts of the method go by various names such as Customer Development, Lean Startup, and Business Model canvas. You can search for these phrases online and find more than you’ll have time for.
Let me give you a couple of ways to start.
- Write down who you think your customer is
- Write down what problem you think they have that you can solve.
- Go talk to 20 or 30 of those people and ask if they agree that this is a problem.
- Then learn how they describe the problem, how important it is to them (or not) and how they’re dealing with it now. Are they just ignoring it? Are they using work-arounds? Are they using some other products or services?
- See if you can learn how much this problem is costing them.
While you’re doing this, you’ll probably find out you’re wrong. The people you think have a problem don’t really care about solving it. Maybe some different people do. Or maybe they care about a different problem.
What you’re looking for in this phase is called Problem/Solution Fit. You want data that shows there is a group of people (your customers) who have a problem that you can solve that pains them enough to pay money.
Your data is usually in the form of guided conversations (not surveys) accompanied by some spending numbers.
This phase of the process is called Customer Discovery. You’re literally trying to discover customers who have a problem that they want to spend money to solve. Only after you’ve documented this should you start working on a solution. But that’s the next phase of the process and involves a different kind of learning. I’ll write about it in a future follow-up post.
If you can’t wait till then, allow me a shameless plug . . . Derek Koch, CEO and Founder of Independent Software, and I are doing an intensive workshop on this very topic. I’ve you’re committed enough to invest a whole day (Saturday Sept. 20, 2014) learning about it – either for your company or companies you mentor and advise, please sign up at https://custdevintensive.