Nail It then Scale It - by Nathan Furr and Paul Ahlstrom
READ: Feb 4, 2014
The goal of any entrepreneur is to build something customers want, for a problem they're willing to pay for. Yet 90% of businesses fail because they can't get anyone to buy. Why is this the case?
Y Combinator founder Paul Graham promotes the motto "Make something people want." Paradoxically, research shows that the natural tendencies of entrepreneurs jeopardize that mission, every step of the way. For example, entrepreneurs become enamored with their product and follow their own beliefs rather than facing up to the realities of the market before it's too late. Ultimately, our greatest enemy is ourselves--investing our time and money into things that won't work, at the cost of not discovering and pursuing the things that will work. NISI outlines a process that emphasizes having a scientific, unemotional mindset and maximizing time to failure, thereby minimizing the potential sunk cost of trying to realize a true business opportunity. NISI also warns us of the natural psychological traps of entrepreneurs and how to avoid them. At its core, the NISI about avoiding dangerous path of "I've got a great idea", and instead taking the road of "customer data indicates that this is true".
The NISI process is straightforward and methodical: start with hypothesis about the customer pain, then test it. Once you've identified and validated the customer pain, hypothesize the minimum feature-set necessary to drive a customer purchase. From there, build a series of gradually more advanced prototypes, while discussing and validating with customers each step of the way. Eventually, you build a usable solution and sign up pilot customers, who help you refine your product and develop a go-to-market strategy.
This process can be applied to startups, new ventures within, and to turn around lagging companies. But while this process sounds simple—even conventional—the true challenge is avoiding common entrepreneurial pitfalls and having the discipline to adhere to this process in full. My main takeaway? Talk to customers starting on day one, and don't stop. Be a scientist, not a hero.
Two criticisms of the book:
I thought that the third phase, "Nail the Go-to-Market Strategy" was presented weakly compared to the earlier phases. I give the authors credit for trying to condense positioning, marketing, and sales into a relatively small number of pages. But I felt that the sections on understanding the customer buying process and market communication and distribution infrastructure were not as practical as I would have hoped.
The process, or at least the explanations and examples (eg. cold email scripts), is tilted toward B2B. I've started a B2B business previously, and from that perspective the content seemed spot-on. But as someone working on a B2C business now, I felt a little bit short-changed.
The Three Myths of Entrepreneurship
hero myth - What does it take to be a successful entrepreneur? We all hear the same list of qualities: passion, determination and vision. But the same qualities that are heralded as traits of the successful may lead to your startup’s demise. The driven entrepreneur can fall in love with their product, ignore negative feedback from customers and spend years building a product based on a vision that no one else shares.
process myth - The conventional, "build it and then sell it" process doesn't work because entrepreneurs start out with a guess . Building a product based on a guess is a game of Russian roulette. Entrepreneurs must search for the right problem and the right solution.
"Make something people want." —Paul Graham, Y Combinator
money myth - More money isn't necessarily better. Investment removes the constraint of entrepreneurs needing to focus obsessively on what customers want. it enables you to pursue flawed business plans
90% of businesses fail because they can't get anyone to buy it, not because they can't build it.
Core Principles of NISI
Get out into the field - Get out of the building, outside the company, outside your circle of friends... validate assumptions like scientists. Don't be attached to your vision.
OrangeQC only picked up traction once I got out into the field.
Entrepreneurs innovate, customers validate.
Kool-Aid Law : The team members who most need to get outside and be shocked by reality (eg. founders, CEO's) are the ones who usually believe they already "understand" reality.
Fail fast and embrace change - Do not waste time pursuing an idea that's not a true opportunity; fail fast. Be dispassionate enough to let go and move on.
Care about truth. Not about being right.
Cognitive flexibility is the ability to recognize new information and then change the way you view the world. It can help you be more agile and beat out your competitors who are stuck in the old way of doing business.
"Try to fail in one month for $100."
The histories of most successful companies show that pursuing a rapid experiment and finding out you were wrong and changing directions isn't a failure. It's the road to success.
"When I have eliminated the ways that will not work, I will find the way that will work." —Thomas Edison
Recall the "S" in SCARF model — it supports our natural aversion to failure.
Adopt the attitude of learning - The attitude of learning will enable you to successfully discover real opportunity.
Be intellectually honest, focused, and committed, with time to experiment
- confirmation bias: we naturally tend to listen to information that supports our beliefs while ignoring disconfirming evidence
Recall "you see what you expect to see" from Positioning. - motivation trap: sunk-cost leads to irrational decision-making. when entrepreneurs stake their hopes and dreams on a startup, the resulting motivation can make it all but impossible for them to learn in an intellectually honest way - overconfidence trap: research shows experienced individuals tend to be overconfident in their judgement and ability to control the uncontrollable. stay determined but be humble along the way. - familiarity trap: Recognize our weaknesses and blind spots. We tend to try and reuse ideas from other settings that may not appropriate. eg. A CEO with a marketing background may see the world through the lens of the "go big" marketing blitz strategy.
- become an "expert novice": hold knowledge and confidence, but always maintain a seed of doubt and thirst for more knowledge
- reframe your startup's purpose: reframe the purpose of your venture to be learning about what the market wants, rather than proving that your idea works. this mental trick helps you avoid learning traps and focuses you on learning. find the solution to the problem you are trying to solve, regardless of who owns the idea
- seek a high volume of feedback: feedback helps correct overconfidence, increase pattern recognition, and helps us see the truth
- be data-driven: don't rely on beliefs and gut feelings (remember the overconfidence trap?). base decisions on data — even if it's limited data
"It helps to have a coach, mentors, or board that will hold you accountable and keep you honest with yourself as you go through this process."
Test your guesses with rapid, inexpensive, simple experiments - Don't start building. When you build a product based on a guess about what customers want, even your best guess is bound to be wrong in ways you couldn't imagine (except for the lucky few). Test your guesses.
Phase 1: Nail the Customer Pain
Don't look for a "problem to solve", look for a "customer pain".
The goal of this phase is to clearly define and understand the customer pain and determine whether the customer pain is a market opportunity.
The test of nailing the pain is whether customers return your cold calls. In this first step, we want to answer the question "is this a pain worth solving?" No pain, no business.
Note: "Customer pain" in B2B is different than B2C. In B2C, customer pain often solving unmet needs such as love and friendship. Also remember that people pay for things with their money AND their time — eg. Facebook fulfills the innate desire for social connection.
Things to consider: SCARF model, Maslow's hierarchy of needs, and Made to Stick: appeal to self-interest AND self-identity.
Write down a monetizable pain statement - A monetizable pain represents a pain that customers recognize, have money to pay for, and are overly interested and eager to solve.
What pain faced by my customers would be so significant that they would return a cold call? What problems are they working on, and when they wake up in the middle of the night, what are they worried about and what are they trying to do?
Focus. Narrow the target. Get specific about the pain you are solving and the persona of the customer. Broad problems are hard to validate and build solutions for.
A helpful technique is to focus around specific customers—that is, real people.
3 common mistakes:
- guessing but not testing the pain
- choosing a small customer pain
- choosing a narrow customer pain (small number of customers willing to pain)
Write down a big idea hypothesis - An idea for a solution to the pain you observed, specific to the customer group, and why it is different from existing solutions.
Read about the "elevator message" in Crossing the Chasm
can be a "breakthrough idea" or "better faster cheaper"
It's a hypothesis; keep it big, keep it abstract, keep it flexible.
"Big ideas are like uranium — they can be incredibly powerful but incredibly dangerous if you let a solution take over your heart and mind."
Building a product biases you. "As soon as you build something you are dead." —Paul Kedrowsky, Kauffman Foundation
I naturally tend to jump to product-building mode. I need to be disciplined and avoid this.
Test your hypotheses - Be quick about it.
- Find a sample of customers in your target market and cold call or email them
Reaching out to strangers is better because it reduces biases due to prior relationships.
Need to be creative about finding a sample of customers for tests. eg. for a vitamin business, go to the gym or a bodybuilding meetup or forum. When relevant, take advantage of entrepreneurial communities like Hacker News.
Example of a cold email - P74
Response time and response rate are the key indicators of the how urgent and significant the customer pain is. The value of the problem is the time they are willing to give you.
It seems like the language and quality of the cold call/email itself would be a significant factor in this?
50% rule: If 50% of customers return your call, you have found the monetizable pain and a potential beachhed for your product.
If < 50%, the low response rate may mean that you just haven't found the right customer niche or the right words to describe the pain to the customer. By talking to the customers who do respond, you can find clues about where to find the real monetizable pain.
This answers my question above ^. In our tests we're not only trying to identify the pain. We're trying to find an optimal "positioning" in the mind of the customer based on how we communicate it.
In B2C, response rate is not as strong evidence for a monetizable pain. eg. in a smoke test (eg. google ads to drive traffic to a dummy landing page asking for emails in exchange for early access), just because someone leaves their email address doesn't mean there's a monetizable pain. The hassle test follows up on the smoke test by asking respondents to rate the hassle they face in dealing wit the problem. 50% rule applies here too. 2. Talk to customers
"Which would you rather do, talk to customers now and find out you were wrong, or talk to customers a year and thousands of dollars down the road and still find out you were wrong?"
Avoid selling. Focus on listening. Don't fish for problems that fit your solution.
Do you have this problem? Tell me about it? Does something like this solve the problem? Reference interview template in appendix.
Make an audio recording and take notes
Reformulate and repeat every 3-6 conversations.
Keep in mind the different types of customers, and validate the relevance of your customer pain for each of them: end-user (person who uses the product or manages people who use the product), technical (the IT person who installs or maintains the product), economic (the person who makes the purchase decision).
Only listen to your customers, eg. don't fall victim believing an idea won't work because some famous investor told you so.
Understand your customers' pain in terms of the job they are trying to do. What is the outcome your customer would like to achieve? What is the job they are trying to do? How might they ideally solve their pain?
Consider referencing the problem interview structure from Running Lean
Assess the responses and the overall market . Move to the next phase, reformulate, or abandon ship.
Once you've validated a customer pain, it's time to ask yourself "how big is the pain I'm trying to solve, and is it worth it?"
"Many, many entrepreneurs we have talked to discover a customer pain, build a solution for the pain, and then realize after the fact that they are actually tackling a rather small market."
- Market Size - TAM (see: http://tamsamsom.blogspot.com)
- Market Growth - A rising tide lifts all ships.
- Competition - What differentiates you?
- Laws & regulation
- Sales cycle
Phase 2: Nail the Solution
In this stage, you cultivate a minimum feature set that you develop iteratively while validating with customers.
As you iterate, in addition to refining the solution based on customer feedback, you should be improving your understanding of the market and defining the best segment for an initial beachhead. As much as possible, you should try to find new samples of customers to gain fresh, unbiased perspectives.
In the last prototyping stage, we test price point as the ultimate validator of the value of our solution. The price your customers are willing to pay is the measure of the degree to which you have nailed the solution. Don't defer finding the answer to this.
In the final solution stage, you should be closing sales or paid pilots and returning to customers as you build for validation. The test of nailing the solution is whether customers purchase.
Throughout this process, you need to assess the responses you are getting and either reformulate and revert back to earlier steps, or abandon ship.
- Write down a MFS Hypothesis
The minimum feature set represents the smallest, most focused set of features that will drive a customer purchase. Think of it as the bull's-eye; the must-have features.
The MFS is more customer-focused and action-oriented than an MVP.
Stripping the solution down and finding the core not only makes your job easier, but appeals to customers' desire for simplicity and helps them recognize the real value of your solution.
Remember "If you say three things, you don't say anything" from Made to Stick
Don't rely entirely on your customers to create a solution for you. "If I had asked people what they wanted, they would have said faster horses." —Henry Ford
Keep a wide-angle view. Talk to actual customers and get deep into customer thinking. Don't ask customers "what" they want. Try to understand the job they are trying to do, the problems they have, and ask a lot of "why"'s to get to the root cause.
Put ideas down on paper—don't build anything yet. As soon as you start building a product, you get locked into the solution you are developing. Don't prematurely commit yourself to a path.
- Test 1: The Virtual Prototype Test
The focus of the first test is to discover whether your minimum feature-set hypothesis is anywhere near the mark of solving the customer pain.
Develop a virtual prototype
Spend a day; at most a week. fail fast. minimize your investment.
"Since only one in every five to ten ideas works out, the strategy of limiting the time we have to prove that an idea works allows us to try out more ideas, increasing our odds of success" —Marissa Mayer
Virtual prototypes keep your mental flexibility high and your commitment to sunk costs low.
Discuss potential solution with customers
detach yourself from your biases, get on the customer's side of the table, look at the problem from their perspective, and make them feel that you truly want to learn how they feel about this problem and potential solutions
Do you have this problem? Does this solution solve your problem? What would the solution need to have, for you to purchase it? (see p. 108 and appendix)
Revise and retest
"Be a scientist — be passionate about solving the problem, not proving your solution."
Have the willingness to change in response to feedback, and the optimism to innovate a new path. This does NOT mean persistence in your own beliefs. Be willing to abandon what you thought was a great idea if the market tells you otherwise.
- Test 2: The Prototype Test
Develop an inexpensive, rapid prototype — something your customers can use and gives them a picture of the solution you are proposing. Be resourceful — ask suppliers for samples. Find partners. Avoid investment.
Prototype Road Show - Test your prototype in front of full buying panels of customers.
"$100 game" = ask: if you had $100 to invest in any features of this product, what features would you invest your money in
Ask now. Don't avoid the truth.
Test price point — the price your customers are willing to pay is the measure of the degree to which you have nailed the solution.
- "How much would you expect to pay or a solution like this?"
- "Would you be willing to prepay for this product?"
- "Would you be willing to purchase this today?"
- "If I gave this to you for free, would you install it today system-wide?"
Assess the responses and refine the solution. If necessary reformulate or abandon ship.
- Test 3: Solution Test
Partner with your customers, usually through a pilot program, to take your solution through a final round of iteration to refine it into the solution customers want. At this point, your customers should be wiling to begin paying for the product. You should begin closing paid pilots or be selling your product.
"Lighthouse Customers" paid pilot program example: 1. customers pay $50,000 for the beta 2. customers have to deploy the solution 3. customers have to be willing to be references for future customers
While conventional logic says that customers shouldn't have to pay for a "beta". in the NISI process, the "beta" should have deep customer validation, so if customers won't pay now, they probably won't pay later.
If customers won't pay now, they probably won't pay later. While it's natural to shy away from or defer asking for payment, we're only avoiding the truth and doing ourselves harm.
Phase 3: Nail the Go-To-Market Strategy
Though discussed separately, this phase runs in parallel with iterations in "Nail the Solution".
The goal is understand the process by which customers find out about and decide to purchase our product, and to use our findings to develop a repeatable sales model and optimize our marketing and sales strategy. We should be continuing to explore and validate price points while closing paid pilots, nurturing early-stage customers, and turning them into evangelists. We should validate our go-to-market assumptions with paying customers.
Customer-Buying Process & Sales Model Discovery (during the Virtual Prototype Test)
Map the customer-buying process
The customer-buying process is the map of your customers' activities from the moment they find out about your product through the purchase and use to the ultimate disposal of your product. It is defined by the job your customer is trying to get done and all the relevant activities that surround that job. To uncover this, ask customers about how they accomplish or try to complete that "job" with any relevant solutions, from beginning to end (eg. "how did you find out about product X? how do you find out about new products?").
This is a typical break-down of the customer buying process (or consumption chain):
- Customer awareness
- Customer evaluation
- Customer purchasing
- Customer use
Ask your customers questions about each of these steps, such as how they solve the problem currently, how they decide which solution to purchase, and so forth. Simply take a stage and phrase a question around it.
Develop a sales model
Look for leverage points within the buying process at which you can influence customers' purchase decisions.
By understanding the process by which physicians prescribed drugs, Prozac uniquely positioned itself as an "anxiety" drug amongst other well-established drugs with similar chemical effects. (p. 138)
Apple didn't just revolutionalize the sale of MP3 players by making a better MP3 player. They also reinvented the entire buying process for digital music, which before iTunes was difficult and overwhelming. This opened up a segment of customers who previously had shied away from purchasing digital music and MP3 players.
This is VERY relevant to my "customized nutrition" idea
Communication & Distribution Infrastructure Discovery (during the Prototype Test)
Map and understand the market communication and distribution infrastructure. Map flow of information from your company to your customer such as distributors, partners, influencers, advertising, and social media.
You should be very selective in picking the most targeted and relevant channels to your customer
Define a Market Infrastructure Strategy
- Map the key categories of the market infrastructure
- Identify the top three partnerships in each category
- Understand the motivations and needs of each player
- Create measurable and time-bound objectives for each potential partner and a strategy to leverage the infrastructure based on your interactions with customers
- Assign an owner to each partner
Pilot-Customer Development (during the Solution Test)
Close and launch paid pilot-customer relationships and utilize them to refine the product, go-to-market strategy, and serve as references.
If you properly nurture reference customers, at the end of the pilot you will have a robust solution, a deep understanding of your go-to-market strategy, and a reference for future sales.
Phase 4: Nail the Business Model
Your business model is the map of how you create value and deliver it to customers.
In this phasewe will conduct financial analysis to verify business viability, launch your product and go-to-narket strategy, and then develop a dashboard to monitor your progress forward.
Predict Business Model with Customer Data ask questions like "how would you want to buy something like this?" direct, distributor, partner? What would they need to feel comfortable making the purchase? What would a potential deal look like?
Validate Financial Model
evaluate margins, fixed costs and variable costs, customer-acquisition costs
sensitivity analysis - "how fragile is my business model?"
I don't know how to accurately predict, control, or model CAC.
full-on sales mode -- goal is to develop a repeatable business model, meaning that you put money or effort in, and you get money out—predictably.
keep talking to customers
track metrics such as CAC, retention rates, sales per customer, etc.
Phase 5: Scale It
The very process of growing will change your company in fundamental ways that will make what you did in the early days obsolete in the later days.
The process of "nailing it" is recursive.
As startups grow, the nature of how they operate begins to change. As a company grows, a shift occurs from facing an unknown problem/solution at the onset, which required radical exploration, to facing a known problem/solution that requires execution. As a company gets bigger, the nature of what it has to do to be successful changes.
Key areas include:
market-scaling, "crossing the chasm""
- Moving from the early adopter to early majority and then to mainstream customer requires shifting from delivering a minimum feature set solution to delivering a full-product solution; re-apply the NISI process
- A common tactic for positioning yourself as a market-leader is to redefine the market category so that you are the leader in that niche. Only rename a category after you've nailed the business and are in the process of scaling. Don't redefine the world as your first step. Only do so when you must communicate and convince the early majority that you are the leader in the new space.
Same as "inventing a new product ladder" from Positioning - Once you start selling, create a big image or stay home. You want to communicate that you are established and reliable when you start trying to capture the early majority.
New Markets vs Established Markets
The NISI process should be modified depending on your context. In particular, the speed of the process, the types of customers you talk to, or your strategy for attacking the market and scaling your business.
New markets are created by a disruptive technology that serves new customers or an opportunity that was previously unnoticed or underserved. Whether or not it is a new market doesn't necessarily depend on your technology or product, but rather how the technology or product is applied, eg. 1.3-inch hard drive in the PDA market (established market) vs video-game market (new market).
New markets are high-risk, high-reward. They are dangerous for startups because you are exploring uncharted territory, defining a new category, educating consumers, and trying to change behaviors.
- Keep your resources aligned with the pace and stage of the market. Capturing new markets takes time, patience, and resources because consumers have to be educated about the new market. eg. It took eBay several years to catch hold
- Consciously define the market. Most of the time in a new market, customers may be uncomfortable with exactly what the business is—they don't see where you fit, and therefore ignore or reject it. Focus on defining the marketing in the language of the problem and use analogies, partnerships, and stories to legitimize it.
When customers understand your product category, your job can be to define why it wins versus the competition rather than educating your customers on why need it in the first place.
- Shape the market by co-opting competitors and forming partnerships
- Even in a "new market", substitutes and alternatives (eg. the old way of doing things) matter. Switching costs and hidden incentives (eg. new technology that replaces someone's job)
Established markets are markets where products exist and where you intend to compete by offering a product that serves a niche within the existing market or is a complement to an existing product.
- A startup's greatest advantage is speed — speed of execution and speed of innovation
- Target a niche rather than the core of the market. Over time, established markets tend to consolidate and become dominated by a few large players. The nature of the consolidation process means that as large firms move to the middle of the market, the edges of the market remain unserved. Startups should attack these niches, because large companies rarely have the speed or ability to serve the niche as well as the entrepreneur who focuses on the niche.
Consistent with "market leaders rarely stay tied" theory from Positioning. - Consider attacking the low end of the market first. Customers at the top of the market aren't willing to risk their business on an unproven startup. In contrast, customers who are fighting the big players in the industry are constantly looking for an edge and are more willing to work with a startup that could give them an advantage. Gradually, the startup becomes trusted and robust enough to serve the high end of the market. - Create a business that is symbiotic with the market leader (eg. Heroku add-on) - The two basic competitive strategies, low-cost and differentiation, do not mix well
Crisis and Focus
Many investors and entrepreneurs will admit that most successful companies faced a crisis before they succeeded.
The value of a good crisis is that it forces you to focus and renew your commitment to make the time to really nail the product and reshape the company.
"If you can just avoid dying, you get rich." —Paul Graham
When a startup takes off, companies often lose their focus and shift from becoming a market-driven company to be driven by sales or engineering or other factors. Losing connection to the market, the entrepreneur makes changes that add significant friction to a once sleek machine. Eventually the idea becomes an amalgamation of idea, and as the features and markets expand, the company is no longer a rocket ship capable of breaking orbit but rather resembles a barn with engines on it—burning fuel, but unable to achieve a sustainable orbit. In this state, it takes every last ounce of energy and sweat for the entrepreneur to levitate the barn a few hundred feet in the air. The barn will never break free of gravity and reach orbit unless it is transformed into a rocket ship again.
I can be surprisingly hard for entrepreneurs to develop the resolve, focus, and unity to undertake the NISI process. Time and again, CEO's and entrepreneurs nod in agreement upon hearing the steps that we outline in the NISI process, yet most lack the resolve to actually run the process. It is the cris that leaves them no choice: - crisis makes the team laser-focused on saving the company by understanding the real customer need - urgency and commitment from the crisis is crucial to the NISI process since people leave their pride and egos at the door and focus on intellectual honesty, and creates the commitment to muser the time and energy to devote to the NISI process - cutting down during a crisis creates more time and lowers burn rate, giving the entrepreneur more time to experiment and find the right market
Develop intellectual honesty in order to avoid becoming a model, packrat, or junkie:
- models - intelligent, well-spoken, credentialed. pays lip service to the process but under the surface believe they already have the answer
- packrats - chases down and tries to satisfy every last customer. unable to fire the customers that distract from the real value proposition
- junkies - focus all of their energy on pleasing investors and bankers instead of focusing on the customer and building real value
"As serial entrepreneur Mike Cassidy argued, what makes him successful is precisely the fact that he knows he doesn't know everything."
Many entrepreneurs are tempted to switch markets because they can't find customers but the truth is that often they just haven't had the discipline to run the NISI process and understand their customers. Once they have run the process, then they can answer the question: should we go more narrow or should we switch?