Analysis and Application of Customer Development Techniques for Web Startups: Unknown Russia

Transcription

1 Analysis and Application of Customer Development Techniques for Web Startups: Unknown Russia Authors Lorenzo Nicolò Formenti Daria Kurochkina Course name Electronic Business (Seminar) Institution Universitè de Fribourg Facultè de sciences èconomiques et sociales Dep. of informatics Information systems research group Bd. de Perollès Fribourg, CH Examiner Prof. Andreas Meier Supervisor Dr. Luis Teran Date of submission 12 th May 2013

2 "The real voyage consists not in seeking new places but having new eyes" Marcel Proust i

3 TABLE OF CONTENTS Title page... i TABLE OF CONTENTS... ii LIST OF FIGURES... iv LIST OF ABBREVIATIONS... v 1. Introduction Background Problem statement Research questions Case Study: Unknown Russia Objectives Outline Theoretical framework The classic new-product introduction approach Concept & seed Waterfall product development Alpha & Beta tests Product launch and first ship Business Startups Key facts Business startups vs. large companies The waterfall development failure The Customer Development model Ratio The path to the epiphany Customer discovery Customer validation Pivot The Business Model Canvas The business model The canvas Case study: Unknown Russia The Business model s establishment Customer segments Value propositions ii

4 3.1.3 Channels Customer relationships Revenue streams Key resources Key activities Key partnerships Cost Structure The Evolution of the Business Model Customer segments Value proposition Channels Customer Relationship Revenue Streams Key resources Key activities Key partnerships Cost structure Conclusions Findings Limits BIBLIOGRAPHY APPENDIX Appendix 1.a - Unknown Russia s Business Model Canvas February Appendix 1.b - Unknown Russia s Business Model Canvas April iii

5 LIST OF FIGURES Figure 1 - The Product Development Diagram [Blank 2006, p.2]... 4 Figure 2 - The Waterfall Development model [Formenti/Kurochkina 2013, according to Blank]... 5 Figure 3 - Search vs. Execute [Blank 2012]... 7 Figure 4 - The Customer Development Model [Blank 2006, p.16]... 9 Figure 5 - Unknown Russia s Facebook followers by gender and age Figure 6 - Reader s segment sub-segmentation Figure 7 - Unknown Russia s website visits for March-April Figure 8 - Unknown Russia s Facebook advertisement activity iv

6 LIST OF ABBREVIATIONS CRM MRD SEO Customer Relationship Management Market Requirements Document Search Engine Optimization v

7 1. Introduction 1.1 Background The new challenges offered by the modern globalized world and the new styles of doing business have taken firms, entrepreneurs and the agents involved in global value chains to reconsider their approach to customers and, as a consequence, the traditional marketing theory. In modern markets, characterized by a growing demand for differentiated and customized products and services, customers have formed their expectations over quality, service and flexibility of supply. This fact implies the need to shift from a logic of product-oriented to a relational and customer-oriented marketing, where products are developed taking customer needs and wants as a starting point, in accordance with the firm s value creation and strategy. In the last decade, the widespread diffusion of web technology and the relevant innovations in IT systems, have led to the creation of new marketing challenges. New tools are now available to firms to compete in a radically new way: social networks, web communities and ecommerce portals have shaped the relational sense of marketing to new forms. Huge data flows, containing relevant information about consumers and their preferences are now available to companies to address their marketing efforts in a more efficient way. Millions of consumers can be reached and their behaviors regularly monitored. The presented issues and related challenges deserve even more attention in the case of business web startups, where the customer s needs and wants are still under identification and a successful product development have to be carried out relying upon such flows of information. 1.2 Problem statement Given the existence of such new practices and related challenges, it is questionable how the classic product and project management, traditionally applied to established and operating companies, may performs well in the case of startups. In fact, the development of a new product within an existing company is based over known facts about known customers. Their needs, wants, and purchasing behaviors are considered as starting points of development and may result in being powerful business drivers. Instead, in the startup building process the entrepreneur cannot rely upon such stock of information. According to the most recent techniques, he should establish a set of initial hypothesis, covering the whole set of business elements. Then, all of the hypotheses have to be tested on users and be turned into facts or discarded. In particular, considering the new approach of the Customer development, this process have to be repeated iteratively, adopting a try-fail-try again mentality to test the initial hypothesis by actually getting out of the building. 1 The aim is to create real interaction with the early adopters and learn from them, understanding what they look for, in order to build over time a solid customer base that allow to transform the original idea into a success story. The adoption of such new approaches is even more attractive in the case of web startups, where the traditional means adopted to create such interactive learning process, as questionnaires, interviews and focus groups, can be mixed with the modern tools of web analytics and the extraordinary interactive potential of social networks. 1 Mainstream slogan of Steve Blank, a Silicon-Valley serial entrepreneur and academician father of the Customer Development Model. 1

8 1.3 Research questions Considering such issues, the following research questions will be addressed and answered, shifting the report into two main parts: 1. What is the Customer development approach and what are the main differences with the classic approaches of product development? A theoretical analysis of the customer development process will be provided and compared to the classic product management approaches. An introduction to the Business model canvas, a strategic and management tool that will be used in the application part to define and iteratively adjust the hypothesis according to the tests outcomes will also be presented. 2. How the Customer Development approach perform when applied to the web startup Unknown Russia? In particular: a) It gives the opportunity to build a company putting the customer in the middle of the development process. Does it help to produce a product that will meet the needs or solve the customer problem? b) Does the suggested try-fail-try again iterative testing of hypothesis show some degree of empirical consistency? c) Does the framework help to decrease development risks by building the business step by step, relying upon information achieved from interaction with customers? d) Can a business be started faster and without huge investments and the first business model built in short time? For such purposes, the methodology exposed in the next chapter will be applied in practice, in order to check for its suitability and capabilities and start the development of our newborn business. An in-depth description of the process will be presented, from the original hypothesis setting to gained results and conclusions, passing through the iterative testing and consequent adjustment. 1.4 Case Study: Unknown Russia Russia is the largest country in the world, but how many people have access to valuable touristic information about it? How many people do actually travel there? Russia recently opened up its frontiers to international relations in a western liberal style, but it is still perceived as distant and out of reach by the majority of travellers. Only 2.5 millions of international tourists visited the country in Strict visa rules are only one of the difficulties. The main problem is the lack of information about the country available in foreign languages. What turn out is that it is very complicated for self-organized tourists to visit Russia and travel inside the country. Unknown Russia is a web startup that has two main goals. The first one is to provide reliable and attractive contents in an interactive way for self-organized travellers, in order to fulfill the current supply failures. The second one is to motivate people to visit the country. It is defined as an open touristic community which is active in the Internet by a website and a Facebook page. The business was founded in February 2013 by Daria Kurochkina and a team of motivated travellers. 2 Source: Russian Federation s Ministry of Culture Federal Agency for Tourism (2012), available: accessed April

9 In the beginning, a Facebook page was established with the aim to test the appreciation of the idea by national and international travelers through the posting of self and external produced contents related to the country s less known but attractive events and places. Afterwards, in the early March 2013, a first website prototype was developed and launched on the base of the knowledge acquired during the first set of tests with interviews and web analytics monitoring on the Facebook page. 1.5 Objectives The main objective of this paper is to provide the reader with a basic knowledge of the Customer Development framework, in order to show how it performs in a real-world case application. The relevant fact is that such techniques were developed by Silicon Valley s entrepreneurs who were facing their own startup s challenges. In 2005 they formalized their experience and findings into the framework. Therefore, academic contributions and empirical testing evidences are still scarce. Although, we truly believe that they represent an attractive forward-oriented approach, where business development and customer relationship management are combined together in an attractive way. The project will allow us to gather relevant information for the development of the Unknown Russia business, through a coherent framework of empirical hypothesis testing and adjustments for the overall business development. 1.6 Outline In Chapter 2, a theoretical analysis of the Customer Development framework will be provided, relying upon the literature coming from its inventors and early adopters. The focus will be given to the first two phases of the process, customer discovery and customer validation, the ones that we expect to go through during the project. In the same chapter, the Business Model Canvas, a strategic and management tool that is used to define, visualize and iteratively adjust a set of initial hypotheses will be also presented. It is concerned with nine fundamental business blocks. In Chapter 3, the presented methodology will be applied in practice to check its suitability and capabilities for the development of the Unknown Russia startup. The process will start from the initialization of the canvas with hypotheses based on the founder s vision. They will be iteratively tested against reality by use of web (Google Analytics, Facebook page insights, Google AdWords campaign results) and no web tools (interviews, informal speaking). The original set of hypotheses will be adjusted accordingly and the process repeated until stable results about the main business drivers will be reached, taking into account the available time horizon. 2. Theoretical framework 2.1 The classic new-product introduction approach In the 20 th century, every company bringing a new product to the market used some form of product management. Models evolved over time, starting from early-century manufacturing activities to technology business nowadays, passing through the packaged-goods mass industry of the 50 s. Although, as presented in [Blank-Dorf 2012], a general four-steps scheme, adapted to different business types and products, has been adopted by the majority. 3

10 Figure 1 - The Product Development Diagram [Blank 2006, p.2] Concept & seed At the concept and seed stage, founders combine their passion and vision for the company coming out with new ideas that are worth to be developed and may become profitable. Once the most suitable is selected, the main issues behind the transformation of the idea into a final product are discussed. In particular, arguments go on with respect to the product or service concept, functions, features, benefits and potential customers. Market research, along with few customer interviews is carried out accordingly. As a consequence, a business plan is gradually defined, based on the answers given to the previous arguments and some additional guess: how the product will reach final consumers, which distribution channels will be adopted, considering market and competition issues as well. Finally, financial sections for the forecast of revenue streams and costs are set up to complete the picture Waterfall product development In stage two, product development, discussions turn into operations: departments start working on the first stage outcomes and focus on their specific functions. In particular, the marketing considers potential customers in a more systematic way, limit the market size and start to target defined segments. In this phase, focus groups, questionnaires or interviews may also be adopted to learn and receive a first set of relevant feedbacks. Sales demonstrations and materials (dedicated web page, presentations, data sheets) are created accordingly. Dedicated personnel start to be hired for mainly public relation purposes. At the end, a market requirements document (MRD) is worked out in coordination with the product management and delivered to the engineering department, in order to specify the product s final features and functions. As a consequence, the product development stage shows for the engineering team unique features and expands into an incremental process of interlacing steps, all focused on minimizing development risk of a defined feature set. [Blank/Dorf 2012, p.5] This is commonly recognized as the Waterfall development model. The waterfall development model originates in the manufacturing and construction industries, highly structured physical environments in which ex-post changes are prohibitively costly, if not out of reach. Although, it was first formalized by Royce in 1970 for the application to software development models, in which progress is seen as flowing steadily downwards, as a waterfall. The model is presented as not properly working in practice, because of its lack of iteration, step-back and flexibility and the author provides, in the same publication, some corrective measures. 3 It comprises nine subsequent steps that describe what an engineer team does during the product development stage described above. Briefly, marketing first rise requirements of how the product should perform and what functions it should fill, according to the previous market research. Engineers receive and translate such requirements into features, prerequisites for the design process, in which the product takes the definitive shape. Then, the team begins to work on the implementation phase that must be 3 Information about the waterfall model: Royce, Winston (1970): Managing the Development of Large Software Systems: Concepts and Techniques. In: Technical papers of Western Electronic Show and Convention (WesCon), August 25-28, 1970, Los Angeles, USA. Electronic version available: accessed March

11 fueled by patience, accuracy and intensity. Once the first prototype is ready, its functioning will be iteratively screened through testing and eventually fixed up. The last step is concerned with maintenance. Figure 2 - The Waterfall Development model [Formenti/Kurochkina 2013, according to Blank] Although, what is relevant to mention, in line with the original formulation by Royce is that Once a waterfall process starts, the proverbial train has left the station and the product is nearly impossible to revise. As a rule the train can run almost nonstop for 18 or perhaps 24 months or more, uninterrupted by changes or new ideas, no matter how good they might be for the business [Blank/Dorf 2012, p.5] Alpha & Beta tests In the third stage, engineers continue building the product along the waterfall steps, working in cooperation with a small group of potential users, either internal or external. The goal is to find out bugs and limits of the first developed design and to test the product s architecture functionality. Similarly to the software testing, alpha tests consist of simulated or actual operational tests made over potential customers, an independent test group or the development team itself at the company s premises. It is mainly meant as a set of tests for internal acceptance, a flexible double-check device. Beta tests come after the alpha type and work as external tests for final customers acceptance: engineers work with a limited group of outside users, receive some feedbacks and check if the product works as expected. The marketing department work towards the marketing mix, providing sales personnel with dedicated support materials. A definitive version of the product is launched and branding activities started. Then, public relations agency starts to make contacts with external agencies like press and blogs. Sales acquire the first beta customers, usually early adopters who might be also willing to pay for the privilege of testing a new product. The sales department starts to build a dedicated distribution channel outside. Finally, finance and control areas start to work towards achieving the revenue goals defined in the business plan and put general performance control for the project, seeking for additional capital and new investors. 5

12 2.1.4 Product launch and first ship In the fourth stage, once the product works and the background apparatus has been set up, the product is launched, usually managing press events and communication campaigns. The project works now as a structure of functional areas. The marketing department carries out demand-creation programs; sales work to reach channel goals by establishing relations with external partners; research and development make efforts on continuous product and process improvement. The board starts to measure the project s performance in a systematic way, according to predictions and statements presented in the business plan. It must be pointed out that all of the activities described above are cash-burning ones, and the company must be able to sustain the growth relying upon solid financials and regular cash flows gained from other activities. More fund-raising is often required. In such events, executive officers look back at the company status and go out of the premises to meet institutions and potential investors. 2.2 Business Startups Key facts When we think about business in the modern sense, the first thing that comes in mind is an established and growing company. A company can be seen as an organization of persons who work towards a common goal. It is a structure of coordinated departments or areas, carrying out specific functions in search of continuous improvement, by means of more or less established routines. The structure is supposed to operate in the interests of shareholders. Usually, a company is moved by a mission, put in practice by the adoption of a strategy, that is the way in which different departments work together and relate to the environment outside, in order to deliver value to the final customers. The market is generally approached with a defined product portfolio, which is adjusted over time according to the generated revenue streams. In order to undertake such activities, additional funds can be raised within (self financing and capitalization) or outside the company (financial markets and institutions). Then, the performance of the apparatus is assessed by a dedicated department, in charge of performance control. Conversely, a startup does not show off as an established and operating organization. It deals with the transformation of ideas into a business, where a functional structure and routines have not been established yet. Here a product or service has not been developed, the market can be unknown, as a stable customers mass do not exist. Accordingly, a startup company or simply startup can be defined as a company, a partnership or temporary organization, designed to search for a repeatable and scalable business model. Within this definition, a startup can be a new venture or a new division or business unit in an existing company. [Blank 2012] Business startups vs. large companies Over years, methodologies have been developed and were commonly recognized by entrepreneurs and academicians on how to run and manage the whole set of business related processes within a company. Such methods concern all of the functional areas an already operating company is composed of. The techniques were used for about one hundred years, since the first MBAs programs have been offered by universities in the United States of America and applied indifferently to existing companies and startups. Although, as it comes clear from the definitions provided above, startups are not smaller versions of large companies, and they cannot be equalized to them in management 6

13 processes. In 2005, understanding such differences, Steve Blank presented in his book The Four Steps to the Epiphany, a specific approach to start up a business. 4 The classic approach to start up a company is to write a business plan, which consists of a suitable operating plan along with proper financial forecasts. Once conceived, it only needs to be executed. The belief was, and for some still is, such that if an entrepreneur is smart enough to work on proper data, spending time in undertaking a careful market research and work out the right predictions, the only needed thing is to hire people to implement and execute what is specified in the plan. Instead, according to the customer development theory, no business plan survives the first contact with customers. In fact, the first year of life of a business startup is something completely unpredictable: what you think is right on today, might turn out to be wrong tomorrow...a startup is an incredible, rollercoaster, unpredictable series of events that there is no way to put together in a 5-years plan. [Blank 2013]. All of this does not mean that operating plans and financial forecasts are something to be avoided and get away from. Instead, a startup business needs some real facts to be used as a basis to work it out. In particular, a business model, that is how an organization creates, delivers, and captures value is something granted for an operating company, that can continuously be tested against performance and customer feedbacks and adapted accordingly. Instead, it is something totally unknown for a startup, that means it is only a set of untested hypothesis. Figure 3 - Search vs. Execute [Blank 2012] On the one hand, an operating company, relying upon such model, is able to execute and undertake operations. On the other side, in order to build a suitable business model, a startup is required to search for it. In short, search versus execution is what differentiate a new venture from an existing business unit. 4 Even if The Four steps to the Epiphany is where Steve Blank s Customer Development model was presented first, the theoretical support suggested here is built considering the last Blank s updated publication The Startup s Owner Manual: the Step-by-Step Guide for Building a Great Company. 7

14 2.2.3 The waterfall development failure The waterfall development life cycle has been previously described as a subsequent step-bystep process by which engineers manage the realization of new products, starting from guidelines expressed in the MRD. The statement of such requirements implicitly assumes that the customer s problems or needs are something known to the entrepreneur. In large companies this might be true. Although, in most startups, all that founders can rely upon is their vision and what they tend to do is to confuse a day one faith-based vision with facts about customer s problems and needs. The consequence is that the most of startup entrepreneurs, adopting the traditional methodology to product development, start to work on the implementation of the product in a waterfall style, with every possible feature they have considered as desirable. They take every single guess they made on customers as proven fact, investing huge amounts of resources on a race to first customer ship, before even talking to a single customer. It must be noticed that, in the case of software products, around the 85-90% of product features are unwanted or unneeded by customers [Blank 2013]. This is an enormous amount of waste of time and money and what may result from the waterfall model application to business startups. Therefore, the adoption of the waterfall development model makes all the sense in case of existing companies with established business patterns and routines. Instead in the case of startups, it straightforwardly failed, for the same reasons identified by Royce in the 70 s: the lack of flexibility and step-back iteration. In conclusion, startup founders, in order to succeed, need to turn the guesses into facts, by getting out of the building. The point is to check by means of direct interaction with customers if the established hypotheses were right or wrong. In case they turn out to be wrong, founders have to change them into new ones that have to be tested again. The try-fail-try again iterative process constitutes the theoretical foundation of this project, to be applied to a real world case. 2.3 The Customer Development model Ratio According to S. Blank, many startup fails more from a lack of customers than from a failure of product development. Entrepreneurs go out of business not because they are not able to deliver a product to the market, but because they do not build a customer base that is willing to pay enough money for such product. What is even more relevant, is that specific functions have been developed within firms to manage the engineering risk, which is the largest one for a company. Although, no methodologies exist to manage this newly recognized customer risk. Such search for the business model, for the entrepreneurial truth, was first suggested by Steve Blank in 2005 and is called Customer Development. Most startups, relying upon the classic product introduction model, lack a structured process for testing their business models hypotheses. Instead the customer development framework allows to rapidly test assumptions and make corrections in near real time The path to the epiphany The framework is designed to improve the limits that the product development model faces when applied to business startup cases. In particular, a major difference between the framework and the traditional...model is that each step is drawn as a circular track with recursive arrows. The circles and arrows highlight the fact that each step in Customer Development is iterative The nature of finding a market and customers guarantees that you will get it wrong several times. Therefore, unlike the product development model, the 8

15 Customer Development model assumes that it will take several iterations of each of the four steps until you get it right [Blank 2006, p.16]. Figure 4 - The Customer Development Model [Blank 2006, p.16] As figure 4 shows, the model is constituted by two pieces, each one comprising two subsequent but not irreversible steps. The first of the pieces is strictly related with the search of a suitable business model and the second with its execution. Briefly: - Customer discovery is where the initial founders vision is caught and translated into a series of business model hypotheses. Then a plan is developed to test customer reactions to those hypotheses and turn them into facts (or eventually into new hypotheses). - Customer validation, instead, is supposed to test whether the outcoming business model is repeatable and scalable. Sales processes are proven to be repeatable and scalable if a target market of willing customers exists for the company. - Customer creation is the start of the execution. It is meant to create a proper end-user demand and drives it into the sales channel to scale the business. The process varies greatly depending on the characteristics of the market: some startup enter existing markets, others create markets from scratch and others try to re-segment existing markets by focusing on niches or competing on price. Each situation requires different strategies. - Company building is where the transit take place from a startup business to an operating company, from an informal entity to the one operating as an organization by a defined functional structure. The focus is on bringing the previously validated business model to full execution. As shown in figure 4, the model is embodied with the existence of a pivot in between step one and two. A pivot represents the need for a step back during the customer development process. A pivot may arise within one single phase as well as while moving from the first to the second phase. If one or more hypotheses turn out to be wrong, this requires the entrepreneur to move backward, change or adjust failed hypothesis, and test it again. It must be pointed out that pivots may happen, as well as failures, but this is simply part of the game. In fact, the customer development model embraces the way startups actually work, with moving backwards playing a valuable and natural role in learning and discovery [Blank/Dorf 2012, pp.25]. Given that such dynamics constitute the startup core drivers, our focus will be on the first two steps of the process, both for the theoretical review and the related real-world application. 9

16 2.3.3 Customer discovery In this first step, the founder s vision of the company have to be translated into a set of coherent hypotheses about every component of the business and experiments have to be established in order to test the validity of such assumptions. Once brainstorming and guessworks are over, founders actually get out of the building in order to empirically test customers reactions over guesses. Of all of the statements of Customer Development, the fact of getting out of the building is the most crucial one. In contrast with traditional approaches, only by moving away from the chair s comfort the startup entrepreneur can gain an in-depth understanding of customers. The true engagement and collaboration with customers is something fundamental. Although, the initial product specification has to come from the founder s visions and not as an outcome of collected features from the customer perspective, in order to guarantee a solid product identity. A product has to be defined, and then customer discovery is to be used to find a target market for that vision. In particular, the phase started by testing the customer perception of the problem and the customer s need to solve it. The goal is to check if a sufficient critical mass of customers is present and can be developed. Then, if the answer is positive, it takes to show customers the product or service when it is still at a basic development stage. The idea is to prove that the product is able to meet the needs or solve the problems of customers and that is good enough to persuade them for purchase. For web/mobile applications or products, the first step is to create a web platform prototype. Then, customer discovery begins when the first low-fidelity version of the website is up and running. The website is used to test the business model hypotheses against customers or users [Blank-Dorf 2012, p.26]. Web and mobile businesses conduct customer discovery differently from those in the physical channel. They can reach hundreds or thousands of users by combining online and face-toface interaction. They can conduct more tests on customers, with more granular customerresponse data [Blank-Dorf 2012, p.62]. As it will be shown, the presence on social networks along with the use of web analytics tools can also play a major role in this part of the process, working as real-time monitoring sources and improvement benchmarks. The customer discovery process comes to the end once customers confirm the importance of both the problem and the way to solve it, at the same time Customer validation The second step is meant to prove if the business model is repeatable and scalable, that means to embody the customers mass and participation needed to actually run the business. During this phase, through a series of more systematic tests extended to a broader number of users, the company tests its ability to scale, that means to grow, expand and establish itself in the market. Core features are related to product, customer acquisition, pricing strategies, and channel activities. A sales plan is also developed and first marketing efforts carried out. It s reasonable to mention that how such tests are carried out strictly depends on the business model adopted in the previous phase and no strict guidelines exist with respect to this. In the case of web startup, an online demand creation plan is validated, relying upon the most suitable metrics among users clicks, views or likes. The previously launched version of the website become high fidelity and close to be definitive, as a result of continuous improvement and development [Blank-Dorf 2012, p.27]. 10

17 2.3.5 Pivot Back to our previous statement, it is necessary to further clarify the concept of pivot. A pivot is defined as a major change of one of the business model blocks based on learning from customer feedbacks. It may happen, but it does not necessarily mean an irreversible failure. In fact, pivots come as a normal part of a startup process: it is common to get the wrong assumptions and misunderstand who really your customers are, what problems and needs they have, and which product features would help them. If it s the case, the entrepreneur should notice the only partial fit of the business model to the market s requirements and will be required to stop, in order to make changes in the hypotheses set and test it back again. 2.4 The Business Model Canvas The business model In general, a business model can be defined as a conceptual tool that contains a set of elements and their relationships and allows expressing a company's logic of earning money. It is a description of the value a company offers to one or several segments of customers and the architecture of the firm and its network of partners for creating, marketing and delivering this value and relationship capital, in order to generate profitable and sustainable revenue streams. [Osterwalder 2004, p.15]. In the case of startups, a coherent business model is suggested through the specification of the hypotheses and requires the adoption of a clear and recognized operative tool for both team members and externals, to facilitate hypotheses statement, communication, testing and improvement. The so-called Business Model Canvas was recognized as the most suitable tool for the Customer Development running. It is defined as a shared language for describing, visualizing, assessing, and changing business model [Osterwalder-Pigneur 2010, p.12]. It was designed as a dynamic scorecard for strategic and management purposes, elaborated by a group of strategy practitioners coming from forty five countries, and presented in A. Osterwalder s Business Model Generation The canvas As shown in appendix, the canvas template is implemented as a nine-block matrix. The nine blocks cover the four main areas of a business: customers, offer, infrastructure, and financial viability. [Osterwalder-Pigneur 2010, p.15]. The canvas has to be considered in a dynamic way because continuous search through iterations are the key point of Customer Development. As described in [Osterwalder-Pigneur 2010, p.18-41], nine building blocks and related business components can be identified as: - Customer segments it basically defines different groups of people or organizations which an enterprise aims to reach and serve. As it is commonly recognized, no company can survive without customers and they end up with represent the heart of a business model. In order to satisfy customers, a company should group them into different segments, with similar attributes, behaviors, needs, and wants. A company may focus on a broad target market or on a narrow defined segment, depending on its value proposition and competitive advantages. Different types of available market segmentation can be adopted: mass market, niche market, segmented, diversified or multi-sided market. Once groups of customers are identified, the business model will be carefully designed and developed over time around a strong understanding of the target. 11

18 - Value Propositions it is concerned with the bundle of tangible and/or intangible assets that the company offer to the selected customer segments, in order to meet their wants and needs. In particular, a bundle of selected products and services have to be offered to match the requirements of the identified target group. On the one hand, a value proposition may be innovative and representing a new and disruptive offer. On the other hand, it may be similar to existing ones and in competition with them, but should come with added features and attributes that make it worth it to choose it. Key values may be either qualitative (design, brand, accessibility, customer experience,) or quantitative (price, cost reduction, speed of service). - Channels - the focus is on how the identified value proposition is delivered to the market, that is the way the company communicates with and reaches the identified customers segments. In fact, the key areas of communication, distribution, and sales channels define the way a company interface with customers and the way customers experience it. In this way, finding the right channel mix is something crucial. A company can choose among adopt its own channels, external partner channels or a mix of both. Owned channels can be either direct, such as an in-house sales force or a website/app, or indirect, such as retail stores operated by the organization. Partner channels, instead, are mostly indirect and span a broad range of options such as wholesale distribution, retail or partner-owned websites. After-sales services also constitute a core element in many modern businesses. - Customer relationships - this block is dedicated to the types of relationships the company aim to establish with the targeted customer segments and the way that is chosen to interact with them. Relationships can be of a wide range of types, spacing from personal, as face to face interaction, to automated, as automatic mail systems, and driven by different motivations, depending on the development stage of the market. The will to acquire new customers is usually relevant in the industry s early days. Instead, the attempt to retain the existing ones and improve loyalty becomes more relevant in periods of saturation and maturity. As reasonable, the internal stage of development of the business plays here a fundamental role and must be taken into account when choosing the way to entertain relations. In practice, several categories of customer relationship exist and are usually combined in use: personal interaction/assistance, self-service, automated services, communities, and, beyond the traditional customer-vendor approach, co-creation. - Revenue streams the block at hand deals with the cash flows the company is able to generate from each selected customer segment. The key issue that has to be addressed here is for what value is each customer really willing to pay. Usually, each revenue stream is generated adopting different price mechanisms. Two main groups can be identified: fixed menu pricing, where predefined prices are based on static variables and dynamic pricing, where instead prices change over time, based on market and demand conditions. Basically, the goal is to charge the customers a price that is as close as possible to the actual willingness to pay for the good or service offered. In this sense, the type of price mechanism used can make a difference in terms of revenue generated. Considering revenue sources, It is also useful to distinguish between transaction revenues, resulting from one-shot customer payments and recurring revenues, resulting from payments that go on in time, such as a good s sale and the purchasing of after-sales services. - Key resources - it deals with the relevant assets that a company is required to own in order to make the business model work. Such assets and resources can be either 12

19 tangible or intangible, and comprise everything a company needs to create and offer a value proposition, reach markets, maintain relations with customers and earn money. They may range from high-tech machinery or brilliant computer scientists to distribution facilities or patented know-how. As clear, key resources differ according to the type of the adopted business model and the industry. They can be: physical, such as manufacturing facilities, buildings, vehicles and machines, which are often capital intensive; intellectual, as brands, proprietary knowledge, patents, and customer databases; human, consisting in skilled or nonskilled people, crucial in knowledge-intensive and high-value generating industries; financial, such as cash, credit lines and securities. - Key activities every business model calls for a set of Key Activities, consisting in the most important actions a company must take to operate successfully. Like Key resources, they are required to offer a value proposition, reach markets, maintain relations with customers and earn money. Again, they differ according to the type of adopted business model and industry. In particular, production activities are related to designing, making and delivering a product in substantial quantity and quality; problem-solving activities, concerning the study of new solutions to both internal operative issues and individual customer problems; platform/network related activities, dominating in business models where a platform is adopted as a key resource, being it a network, a matchmaking platform, a software, a website or even a brand. Activities of this kind are concerned with information management, platform management and promotion and service providing. - Key partnerships the purpose of this block is to describe the network of suppliers and partners that make the business model work. In short, companies create alliances and search for partners for mainly three reasons: optimize processes and reach economies of scale, reduce overall risk, costs and uncertainty or acquire assets that it is not proper to build in-house. According to the players involved, It makes sense to distinguish among four different types of partnerships: strategic alliances between non-competitors, strategic partnerships between competitors, as joint-ventures to develop new businesses and buyer-supplier relationships to assure reliable and on-time supplies. - Cost structure it describes the most relevant costs incurred by a company while operating with a particular business model. In fact, creating and delivering value, maintain customer relationships and generating revenue all incur costs. After having properly defined key resources, key activities and key partnerships this costs can be calculated relatively easily, or at least estimated. In particular, It is convenient to distinguish between cost driven and value driven cost structures. On the one hand, cost driven business models focus on minimizing costs wherever possible, adopting low-cost value propositions, maximum automation and extensive outsourcing. On the other hand, value driven approaches are typical of companies that are less concerned with the cost implications of the adopted business model, but are rather focused on value creation. Premium value propositions and customized goods/services are here the core points. In operative terms, as a startup go through the Customer Development phases, it will use the Business Model Canvas as a dynamic tool, fullfilling each of the previously described blocks with related hypotheses, starting from the founder s initial conceptions and mission. Afterwards, the main task is to get out of the building, test such hypotheses against reality, and adapt the blocks contents accordingly, to finally define a suitable and working business model. The application of the explained theory will be presented in the next Chapter. 13

20 3. Case study: Unknown Russia 3.1 The Business model s establishment The theory that was presented before was applied in practice on the web startup Unknown Russia. It is an open touristic project that provides information about Russia for travellers. Daria had a first touch with Customer Development techniques reading Steve Blank s The Startup s Owner Manual. She found it an appropriate approach that encouraged her to turn an idea into a startup business. In February 2013, the first Business Model Canvas was filled with the set of initial hypotheses based on self-experience and guesses. A compact version of the canvas described in the next section is available in appendix 1.a. In this Chapter the process of building the web startup Unknown Russia will be presented following the steps of Customer Discovery Customer segments For whom are we creating value? Who are our most important customers? In the case of Unknown Russia the customer will be named as user. In the Internet and social resources, the user is the key element who can help to promote and grow a project. Unknown Russia is mainly an information resource. This is why it is desirable that a content that is meant for travellers is produced by other travellers, in order to provide valuable information. The company is meant to occupy a self-organized tourism niche in the touristic market. In the beginning two customer segments were identified: writers and readers. The first segment consists of Russian tourists knowing the places inside the country who will write articles about them inspired by the idea of the project. The second one is represented by international backpackers who prefer self-organized tourism and search for information in the Internet Value propositions Which one of our customer s problems are we helping to solve? Which customer needs are we satisfying? While travelling in different countries, Daria heard many times that foreign tourists face problems in finding proper information about Russia: many people did not know where to go, how to go and what to do inside the country. A small research was carried out about what information and services are available in the Internet. The main guides, like Lonely Planet, provides not up-to-date information, some articles are two to four years old (for example, the mentioned Russian president is still Medvedev) and only the most popular destinations are presented. Instead, it is important to provide actual information so that travelers can truly rely on it. Moreover, most of the touristic companies promote their trips and they are not interested in sharing real useful information. Consequently, if a foreigner wants to visit non-mainstream destinations in Russia then he will have difficulties to access the information. An alternative might be Wikitravel, an online encyclopedia about touristic destinations. It contains very good quality content but to find it out the tourist has to know the right search keywords. But as it was written before there are not many people who know more than three or four places to visit in Russia. What value do we deliver to the customer? What bundle of products and services are we offering to each Customer Segment? The value we want to deliver to the segment Reader is useful and practical information about Russian unknown places, events and facts. The information, for example about the place, 14

21 should be provided in the way to allow travellers to find it and encourage them to visit this place. Each article should be available on several foreign languages. Translation can be made by a writer or automatically by online resources, with the possibility of further editing by hand. Another part of the company's Value Proposition is the opportunity of interaction with Russian travellers Instead, value for the segment writer is constituted by the opportunity to share the knowledge about their country, help other people to travel, and get satisfaction by foreign acceptance. Nowadays many people are sharing their knowledge in Internet about all life aspects because in real life it is very difficult to build audience and gain reputation Channels Through which Channel do our Customer Segments want to be reached? The awareness about our resource among users was planned to be raised by social platforms, search engines, and private networks. A Facebook page was created to check the potential demand for our content. Twitter was another popular social engine that was decided to adopt for promoting Unknown Russia. The web site should become the main part of the project and the main channel for value delivery to users. From the beginning the Search Engine Optimization (SEO) became one of the important principle of the project in a way that people would be able to find our resource in the Internet using keywords. Google AdWords campaigns were planned to run when the website would have minimum content. Other channels to reach both writers and readers are touristic forums and blogs. For instance, by publishing a post related to the theme of the concrete forum and providing the link to our resource we can reach an audience of persons who might later on become users. The last channel that was recognized is the founders private network or, in other words, friends. In fact, the project s team includes several travellers who have contacts not only with other travellers in Russia but also abroad Customer relationships What type of relationship does each of our customer Segments expect us to establish and maintain with them? According to Osterwalder, several categories of Customer Relationships exist. Two of them were actually adopted: communities and co-creation. They involve the both of the customer segments, readers and writers, in several business processes: content creation, content promotion, information spreading. The Facebook page and the website are meant to be communities that allow users to share their knowledge and establish connections among each other. Moreover, It would also help the company to understand better its users and future customers. Instead, co-creation means that the company s Value Proposition will be created not only by company members but also by active users, as it was said writers Revenue streams In the beginning, two revenue streams were defined: advertising and donation. Any popular Internet resource attracts companies who are willing to pay to advertise on the resource. In this case, the project Unknown Russia should get a critical mass of users to become attractive for such kind of companies. The critical mass was defined at the level of 1000 visitors per day on the website and more than followers of the Facebook page. Nowadays more and more open web resources rely upon donation-based revenue streams. We believe that when the customer uses services without the subscription-limitation pressure 15