Validating the Sales Process

Ask startup Sales VPs what their top two or three goals are, and you'll get answers like, “To achieve our revenue plan,” or “To hire and staff our sales organization, and then to achieve our revenue plan.” Some might add, “To help engineering understand what additional features our customers need.” In short, you'll get answers that are usually revenue-and head count-driven. While goals like these are rational for an established company, they are anything but rational for startups. Why? In established companies, someone has already blazed the trail through the swamp. New salespeople are handed a corporate presentation, price list, data sheets, and all the other accoutrements of a tested sales process. The sales organization has a sales pipeline with measured steps and a sales roadmap with detailed goals, all of which have been validated by experience with customers. A sales pipeline is the traditional sales funnel. Wide at the top with raw leads coming into it, it narrows at each stage as the leads get qualified and turn into suspects, then prospects, then probable closes, until finally an order comes out of the narrow end of the funnel. Nearly all companies with a mature sales force have their own version of this sales funnel. They use it to forecast revenue and the probability of success of each prospect. Most experienced Sales VPs hired into new startups will attempt to replicate the funnel by assembling a sales pipeline and filling it with customers. What they don't recognize is that it is impossible to build a sales pipeline without first having developed a sales roadmap.

A sales roadmap answers the basic questions involved in selling your product: Are we sure we have product/market fit? Who influences a sale? Who recommends a sale? Who is the decision-maker? Who is the economic buyer? Who is the saboteur? Where is the budget for purchasing the type of product you're selling? How many sales calls are needed per sale? How long does an average sale take from beginning to end? What is the selling strategy? Is this a solution sale? If so what are “key customer problems”? What is the profile of the optimal visionary buyer, the earlyvangelist every startup needs?

Unless a company has proven answers to these questions, few sales will happen, and those that occur will be the result of heroic, single-shot efforts. Of course, on some level most sales VPs realize they lack the knowledge they need to draw a detailed sales roadmap, but they believe they and their newly hired sales team can acquire this information while simultaneously selling and closing orders. This is a manifestation of one of the fundamental fallacies of the traditional Product Development methodology when applied to startups. You cannot learn and discover while you are executing. As we can see from the example of InLook, and from the rubble of any number of failed startups, attempting to execute before you have a sales roadmap in place is pure folly.

The Customer Validation Team

The InLook story illustrates one of the classic mistakes startup founders and CEOs typically make: delegating the Customer Validation process solely to the VP of Sales. In technology companies, a majority of founders are engineers and assume they need to hire a professional in a domain where they have no expertise. And in the case of a VP of Sales, they're probably hiring a professional who is proud of his or her skill and Rolodex. So the founders’ natural tendency is to stay away and trust the abilities of their hires. This mistake is usually fatal for the VP of Sales and sometimes for the startup as well.

Sales execution is the responsibility of the VP of Sales. Sales staffing is the responsibility of the VP of Sales. Yet at this point in the life of a startup, you don't know enough to be executing or staffing anything. Your startup is still in learning mode, and your Customer Development team needs to continue to lead customer interaction through Customer Validation.

At a minimum, the company's founders and CEO need to be out in front of customers at least through the first iteration of the Customer Validation step. They are the people who, with help from the product team, can find their visionary peers, excite them about a product, and get them ready to buy. In enterprise or BtoB sales, if the founding team does not include someone with the skill to close an account, the company can hire a “sales closer,” a salesperson with the skills to close a deal.

Early Sales Are to Earlyvangelists, Not Mainstream Customers

In Customer Validation, your startup is focused on finding the visionary customers and getting them to make a purchase.

Unlike “mainstream” customers who want to buy a finished, completed, and tested product, earlyvangelists are willing to make a leap of faith and buy from a startup. They may do so because they perceive a competitive advantage in the market, bragging rights with peers in their neighborhood or in an industry, or political advantage within their company. Earlyvangelists are the only customers able to buy a yet-to-be-delivered, unfinished product.

Recall who these visionary customers are. They not only understand they have a problem, but they have spent time actively looking for a solution, to the point of trying to build their own. In a company this may be because there is a broken mission-critical business process that needs to be fixed. Therefore, when you walk through the door, they immediately grasp the problem you are solving is one they have, and they can see the elegance and value of your solution. Little or no education is needed. In other cases their motivation might be that they are driven by competitive advantage and will take a risk on a new paradigm to get it.

Earlyvangelists “get it.” However, they usually don't or won't get it from a “suit,” a traditional salesperson. Earlyvangelists want to see and hear the founders and the technical team. In exchange, you will not only get an order and great feedback, but visionary customers will become earlyvangelists inside their companies and throughout their industry—or as consumers, to their friends and neighbors. Treated correctly they are the ultimate reference accounts. (Until you reach the Chasm in Chapter 6.)

There's one important caveat about earlyvangelists. Some startup founders think of earlyvangelists as only being found in the research and development labs, or the technical evaluation groups of large corporate customers—or for a consumer product, someone lucky enough to work in a new product test lab where their job is to evaluate products for potential use. These are emphatically not the earlyvangelists I'm referring to. At times, they may be critical influencers in a sale, but they have no day-to-day operational role, and no authority for ensuring widespread adoption and deployment. The earlyvangelists you need to talk to are the people I described in Customer Discovery—the ones who are in operating roles, have a problem, have been looking for a solution, have tried to solve the problem and have a budget.

Customer Validation has four phases, as depicted in Figure 4.1. Phase 1 consists of a series of “getting ready to sell” activities: articulating a value proposition; preparing sales materials and a preliminary collateral plan; developing a distribution channel plan and a sales roadmap; hiring a sales closer; ensuring that your Product and Customer Development teams agree about product features and dates; and formalizing your advisory board.

A. Get Ready to Sell: Articulate a Value Proposition

From the customer perspective, what does your company stand for, what does your product do, and why should they care? You probably had an idea when you started the company, but now you have some real experience interacting with customers, and can revisit your vision in light of what you have learned. Can you reduce your business to a single, clear, compelling message that says why your company is different and your product is worth buying? That's the goal of a value proposition (sometimes called a unique selling proposition). A value proposition builds the bond between you and your customer, focuses marketing programs, and becomes the focal point for building the company. More relevant for this step, it gets the company's story down to an “elevator pitch,” one powerful enough to raise a customer's heart rate. This value proposition will appear in all your sales materials from here on out. It is the sum of all you have learned about product/market fit in Customer Discovery. Don't worry about getting it perfect, because it will change, evolve, and mutate as you get feedback from customers, analysts, and investors. The idea of this phase is simply to acknowledge you need to craft and create one, and take your best shot at articulating it.

While a value proposition seems straightforward, it can be a challenge to execute. It takes serious work to get to a pithy statement that is both understandable and compelling. It's much easier to write (or think) long than to write (or think) short. The first step is to remember what you have learned in Customer Discovery about customers’ problems, and what customers valued about your solution. What were the top three problems your customers said they had? Did a phrase keep coming up to describe this problem or the solution to the problem? Based on your understanding of how customers work, spend their time, or use other products, where does your product affect these customers most? How significant is the impact on how they work? If there are existing competitors or ways to solve the problem that use pieces of other solutions, what do you provide that your competitors can't or won't? What do you do better?

InLook's value proposition was, “Helping chief financial officers manage profitability.” Short and to the point, it played right to the audience InLook was going after. A value proposition is (ideally) one sentence, and at most a few sentences. How did the founders know who their audience was? They went back to all they learned in Customer Discovery. The CFO was now their target audience (he wasn't when they first started Customer Discovery), “profitability” was an emotionally compelling word (they had a litany of words when they first started talking to customers), and managing profitability was a leverage point quantifiable in the minds of their customers (a point they were clueless about earlier).

One of the first tests of your value proposition should be, is it emotionally compelling? Do customers’ heart rates go up after they hear it? Do they lean forward to hear more? Or do they give you a blank stare? Is the value proposition understandable in the users’ language? Is it unique in their minds? In technology startups, one of the biggest challenges for engineers is to realize they want an oversimplified message, one that grabs customers’ hearts and wallets, not their heads and calculators.

Second, does your value proposition make or reinforce an economic case? Does it have economic impact? Does it sound like your product gives a corporate customer a competitive advantage or improves some critical area in their company? If it's a consumer product, does it save a consumer time or money, or change their prestige or identity? The InLook example used the words “manage profitability.” To a CFO these powerful words represent a quantifiable and measurable benefit.

Finally, does the value proposition pass the reality test? Claims like “lose 30 pounds as fat just melts away,” “sales will increase 200 percent” or “cut costs by 50 percent” strain credibility. Moreover, the claim isn't the only thing that must pass this test. Is your company a credible supplier for the product you're describing? When selling to corporate customers, there are additional hurdles to think about. Are your capabilities congruent with your claims? Are your solutions attainable and compatible with customers’ current operations? Do customers have complementary or supporting technologies in place?

One last thing to keep in mind is our continual question about Market Type. If you are offering a new product in an existing market, your value proposition is about incremental performance. Incremental value propositions describe improvements and metrics of individual attributes of the product or service (i.e., faster, better). If you are creating a new market, or trying to reframe an existing one, you will probably come up with a transformational value proposition. Transformational value propositions deal with how the solution will create a new level or class of activity—i.e. something people could not do before.

B. Get Ready to Sell: Prepare a Preliminary Collateral Plan

Once you have a value proposition, it's time to put it to work in sales and marketing collateral. This is the sum of the printed and electronic communications your sales team will hand or present to potential customers. To sell a product in the Customer Validation step, you need to prepare a complete set of sales materials, product data sheets, presentations (sometimes different ones for different groups inside a company), price lists, and so on. But unlike material you will produce later on in the company's life, this is all “preliminary,” all subject to change, produced in low volume at low cost. You just completed the first step in writing this material by coming up with your value proposition. You'll use it as the central theme in most of your sales materials.

Before any material is developed, figure out what sales material you need. Instead of randomly writing product specs and presentations, it's helpful to develop a “collateral plan,” a list of all the literature you will put in front of a customer in different phases of the selling process (see Table 4.1 for an example of a business-to-business collateral plan).

At my last company, E.piphany, I belatedly realized our positioning and strategy were a bit deficient; after presenting to the CIO we were thrown out of the fifth consecutive potential sale. In looking at our presentation I realized the slides were telling the CIO the same value proposition I had shared with his operating divisions: “You don't need your IT organization to give you information. Tell them to stuff it, and buy an E.piphany system.” Needless to say, sales were going to be difficult when we needed the backing of the CIO. We came up with a value proposition and presentation tailored to the CIO, the IT organization and technology gatekeepers.

In this example the sale was to a large corporation. The product was software used by employees but had to be installed and maintained by the IT department. Here the company must recognize there are two targets for its collateral: the earlyvangelist buyers and technology gatekeepers. If the sale is to a consumer, the collateral plan will focus on communications materials the sales channel will use. It can include shelf talkers, retail packaging, coupons, and so on. Regardless of the distribution channel or whether the product is sold to businesses or consumers, the collateral plan distinguishes with whom each collateral piece will be used and when in the sales process it will be used.

Don't worry about whether the collateral plan is perfect. It will change as you talk to customers, then change again as your customer base moves from visionary to mainstream. Test-drive all the collateral you produce, because what you write in the confines of an office often has little relevance in the field. Keep your collateral plan handy, as you'll be adding to it and updating it at each step of the Customer Development process.

It's helpful to realize visionary customers require different materials than mainstream customers. Visionary customers are first buying the vision and then the product. Therefore, make sure your materials are clear and detailed enough on the vision and benefits so your earlyvangelists can use your literature to sell your idea themselves, i.e., inside their own companies or to their friends and family. The Customer Development team and the founders should articulate the vision. For the product-specific details, Product Development should write the first draft. This way you can see if there are any surprises in what features the technical team would emphasize.

Remember, don't spend money on flashy design or large print runs in this phase. The only worthwhile investment is a good PowerPoint template and the two or three diagrams illustrating your key ideas.

Here are guidelines on some of the principal items that go into the collateral roadmap:

C. Get Ready to Sell: Develop a Preliminary Distribution Channel Plan

The Customer Development process helps you create a repeatable and scalable sales process and business model. The distribution channel plan and sales roadmap (developed in the next step) guide that effort.

Back in the Customer Discovery step, you refined your hypothesis about distribution channels using the information you learned in customer interviews. This phase assumes you have evaluated all the distribution channel alternatives and narrowed your distribution channel choices to one specific sales channel. Now you use that information to develop a preliminary channel plan.

A distribution channel plan comprises three elements. Initially, as you set up these elements, much of your thinking will be conjecture, based on the information you collected in Customer Discovery. However, as you move into the next phase of Customer Validation and start interacting with your selected distribution channel, you will refine your initial theories with facts and cold reality.

The elements used to build your distribution channel plan are:

• Channel “food chain” and responsibility
• Channel discount and financials
• Channel management

Channel “Food Chain” and Responsibility

Remember the channel brief you created in Customer Discovery? (Look back at Figure 3.5 for an example.) In that brief you spelled out your initial hypotheses about how your product would reach customers. Now it is time to further refine your distribution channel plan.

Start by drawing the “food chain” or tiers of the distribution channel. What's a food chain? For a distribution channel it is made up of the organizations between your company and your customer. The “food chain” describes what these organizations are and their relationships to you and each other.

For example, imagine you are setting up a book-publishing company. You will need to understand how to get books from your company to the book-buying customer. If you were selling directly to consumers from your own Web site, the “food chain” diagram for your publishing distribution channel might look something like Figure 4.2.

However, selling through the traditional publishing distribution channel “food chain” would look like Figure 4.3.

Regardless of the complexity of the diagram, your next step is to create a detailed description of each of the companies making up your channel's “food chain.”

Continuing with our book-publishing example, the descriptions would look like this.

• National wholesalers: Stock, pick, pack, ship and collect, then pay the publisher on orders received. They fulfill orders but do not create customer demand
• Distributors: Use their own sales force to sell to bookstore chains and independents. The distributor makes the sale; the bookstore orders from the wholesaler
• Retailers: This is where the customer sees and can purchase books

It is useful to create a visual representation of all the information you have assembled on the distribution channel (see Figure 4.4).

One mistake startups often make is assuming their channel partners invest in creating customer demand. For example, in Figure 4.4, it would be a mistake to think your book wholesaler does anything other than stock and ship books. The same is true for the distributor. They take orders from bookstores, and in some cases may promote your books to bookstores, but they do not bring customers into the store to buy your books.

A channel responsibility map allows you to diagram the relationships in a complex distribution channel. A written description of these responsibilities, much as you created for the “food chain,” should accompany the diagram. It helps everyone on the team understand why you are using the channel and what to expect from it.

Channel Discounts and Financials

Each tier in the distribution “food chain” costs your company money since each tier will charge a fee for its services. In most channels, these fees are calculated as a percentage of the “list” or retail price a consumer will pay. The next exercise helps ensure you understand how the money flows from the customer to you. First, calculate the discounts each channel tier requires. Continuing with our book-publishing example, Figure 4.5 details these.

As you can see, a book retailing for $20 would net our publishing company $7 after everyone in the channel took their cut. Out of this $7 the publisher must pay the author a royalty, market the book, pay for the printing and binding, contribute to overhead, and realize a profit.

Channel discounts are only the first step in examining how money flows in a complex distribution channel. Each tier or level of the channel has some unique financial relationship with the publisher. For example, most regular sales to a bookstore are on a consignment basis. This means unsold books can be heading back to you. Why is this a problem? A mistake companies frequently make when they use a tiered distribution channel is to record the sale to the tier closest to them (in this case the national wholesaler) as revenue. An order from a channel partner does not mean an end customer bought the product, just the channel partner hopes and believes they will. It's like a supermarket ordering a new product to put on the grocery shelf. It isn't really sold until someone pushing their cart down the aisle takes it off the shelf, pays for it and takes it home.

If you have a channel returns policy that allows for any kind of stock rotation, you must make allowances in your accounts for a proportion of that sale to be returned. Your channel financial plan should include a description of all the financial relationships among each of the channel tiers (see Figure 4.6).

D. Get Ready to Sell: Develop a Preliminary Sales Roadmap

Developing a sales roadmap is all about finding the right path through unknown and dangerous terrain. A fog of uncertainty hangs over the early steps of the sales journey. In Customer Validation, you pierce that fog by gathering sufficient information to illuminate how to proceed, one discrete step at a time, then assemble that information into a coherent picture of the right path to take.

Your goal is to determine who your true customers are and how they will purchase your product. You're ready to begin building a sales team only when you completely understand the process that transforms a prospect into a purchaser and know you can sell the product at a price that supports your business model. With the sales roadmap in their hands, your sales force will be able to focus on actual sales instead of the hit-and-miss experimentation you will experience as you move through Customer Validation.

The complexity of your company's sales roadmap will depend on a number of things: the size of your customer base, budget, the price of your product, the industry in which you are selling, and the distribution channel you've selected. Sales to Intel or Toys R Us, for example, will require a more involved process than sales to local florists or pet stores. Creating a roadmap and validating it may seem like an enormous investment of time and energy, and a huge distraction from the challenges of building a business. But it could make the difference between success and failure. Better to know how to sell your product while your company is lean and small than try to figure it out as you are burning through cash sending your sales and marketing departments out.

The sales roadmap comprises four elements. As with the distribution channel plan, much of your initial thinking here will be conjecture based on the information you collected in Customer Discovery. However, as you move into the next phase where you actually sell your product, you will refine your initial theories with facts.

The elements used to build your sales roadmap are:

• Organization and influence maps
• Customer access map
• Sales strategy
• Implementation plan

Organization and Influence Maps

Remember the organization and influence map briefs you created in Customer Discovery? Pull them off the wall and study your findings. By now your early hypotheses have been modified to reflect the reality you encountered as you spoke with potential customers. Use this information to develop a working model of the purchase process for your target customer. Take a closer look at your notes from your encounters with possible earlyvangelists. You might also want to bring in customer information from other sources such as a company's annual report, Hoovers, Dun & Bradstreet or press articles.

The E.piphany sales cycle is a good example of how an influence map is derived. Given E.piphany's software cost hundreds of thousands of dollars, an executive must have had a significant pain, recognized it was a pain, and have been committed to making the pain go away if E.piphany was to get a deal. Second, selling our product required “top-down selling.” Working your way up from low levels is not only more difficult but much less likely to end in success. Third, E.piphany changed the status quo: Our products impacted many people and many organizations. Typically, those who oppose change or who have a large stake in the status quo will oppose software others regard as progress.

The bad news: Multiple “Yes” votes were required to get an E.piphany order. Other enterprise software like sales automation or customer support just needed support from a single key executive or from a single user community to drive a sale to closure. With those packages IT personnel generally had input in the selection of a software package, but the users enjoyed substantial power in the decision-making process. An E.piphany sale was different. IT, though not the driver, was an active participant in the decision-making process and often enjoyed veto power. Likewise, our experience showed we needed to sell “high” and “wide” on both the user and technical sides of an account. After getting thrown out of multiple accounts we built a simple two-by-two matrix to show where we needed to get support and approval from each of our prospect accounts.

This matrix basically said even with a visionary supporting the purchase of the E.piphany product, we had to sell to four constituencies before we could close an order.

Without support on the operational side and “approval” by the IT technical team, we couldn't get a deal. If the IT organization became determined to derail an E.piphany deal, it would probably succeed. This insight was a big deal. It was one of the many “aha's” that made E.piphany successful. And it happened because we had failed, and a founder was part of that failure and spent time understanding the solution.

Our early sales efforts fell short largely because we ignored the fact that selling E.piphany into the enterprise was different from the sale of other enterprise products. The most glaring oversight was our failure to enlist the support of the IT organization. In our sales calls we had found it was easier to get people on the operational side excited about our products and win their support than it was to get IT professionals to buy into a packaged data warehouse and a suite of applications to serve the needs of marketing. In some cases we had taken prospects on the operational side at their word when they indicated they could make IT “fall into line” should they need to. In other cases, we skipped some needed steps and assumed several enthusiastic users could do our deal. Rarely did this prove to be true.

We took that sales failure and success data and put it together into an Influence Map. Remember by this time we had established that 1) we needed to win the support of four groups to get a deal done; 2) IT would probably be harder to win over than the users; and 3) low-level IT personnel would oppose us. So how should we proceed? The Influence Map in Figure 4.7a illustrates the execution strategy for E.piphany sales. It diagrams the players, and maps the order in which they need to be convinced and sold. Each step leveraged strengths from the step before, using momentum from groups that liked our company and products to overcome objections from groups that did not. The corollary was if we tried to shortcut the process and skip a sales stage, more often that not we would lose the sale.

Once understood, the Influence Map set the execution strategy for sales. Call on: 1) high-level operational executives (VPs, divisional GMs, etc.) first. Use that relationship as an introduction to 2) high-level technical executive (CIO or divisional IT executive), then 3) meet the operational organizations end users (the people who will use our product), and finally, 4) use that groundswell of support to present to, educate and eliminate objections from the Corporate or Division IT staff.

Customer Access Map

Now turn your attention to answering the proverbial sales question: How do you get your foot in the door? For a corporation, depending on the size of the organization you are approaching you may need to move through different layers or departments before you can set up meetings with the people you identified in the organization and influence maps. As you begin to develop an access map for the companies you are targeting, you may draw a lot of blanks. But once you begin to call on actual customers, you will be able to add information and perceive patterns. Figure 4.8 illustrates an access map in a corporate account.

For consumer sales, finding the right entry to early customers can be equally difficult. Rather than making random calls, think of organizations and special-interest groups you can get to inexpensively. Can you reach customers through organizations they belong to, such as the PTA, book clubs, antique car clubs? Are there Web-based groups that may be interested?

E. Get Ready to Sell: Hire a Sales Closer

In most startups it's likely the founding team is product-oriented and does not include a sales professional. While the founders can get quite far in finding visionary customers, they usually have no skill or experience turning that relationship into the first order. Now that you are about to sell, a key question is, does someone on the founding team have experience closing deals? Does the team have a world-class set of customer contacts? Would you bet the company on the founders’ ability to close the first sales? If not, hire a sales closer.

A sales closer is not a VP of Sales who wants to immediately build and manage a large sales organization. A sales closer is someone with a great Rolodex in the market you are selling into. Good sales closers are aggressive, want a great compensation package for success, and have no interest in building a sales organization. Typically, they are experienced startup salespeople who love closing deals and aren't yet ready to retire behind a desk.

The founding team and sales closer make up the core of the Customer Development team. It becomes their job to learn and discover enough information to build the sales and channel roadmaps. You may want to go once around the Customer Validation loop without a sales closer. Then when you understand where the lack of sales skills is stunting progress, hire the closer. But while the sales closer will be an integral part of Customer Validation, the founders and CEO still need to lead the process. Sales closers are invaluable in setting up meetings, pushing for follow-up meetings, and closing the deal. However, having a sales closer is not a substitute for getting founders to personally gather customer feedback.

F. Get Ready to Sell: Align Your Executives

Selling a product implies a contractual commitment between the company and a customer on product features and delivery dates. Before you leave the building to sell, the Customer Development and Product Development teams need to be in violent agreement about all deliverables and commitments the company will make. So it's essential executives review and agree on the following:

• Engineering schedule, product deliverables and philosophy
• Sales collateral
• Engineering's role in selling, installation, and post-sales support

G. Get Ready to Sell: Formalize Your Advisory Boards

In some cases you may have asked for advisors’ help on an informal basis in Customer Discovery. In this phase, you formally engage them. There are no hard-and-fast rules for how large the advisory board should be. There can be as many people on the board as you want. Think strategically, not tactically, about the sphere of influence and reach of advisors. Recruit only the advisors you need now, but make exceptions for “brand names” and “influencers” you want to cultivate. Don't believe you need a formal advisory board meeting. All you want right now is time and access.

Begin by assembling an advisory board roadmap, much like the collateral roadmap you developed earlier. As shown in Table 4.2, this roadmap is an organized list of all the key advisors needed.

In this example the roadmap differentiates how each advisor will be used (technical, business, customer, industry and marketing). Product Development may need technical advisors on the “Technical Advisory Board” as early as Phase 1 of Customer Discovery. The technical advisory board is staffed for technical advice and points to technical talent. These advisors may be from academia or industry. As the company begins to sell product, these advisors are used as technical references for customers.

Ensure key potential customers are on the “Customer Advisory Board.” These are people you met in Customer Discovery who can advise you about product/market fit from the customer's perspective. I always tell these advisors, “I want you on my advisory board so I can learn how to build a product you will buy. We both fail if I can't.” They will serve as a customer conscience for the product, and later some of them will be great references for other customers. Use them for insight and one-on-one meetings with the business and Customer Development staff at your company.

Distinct from customer advisors is an industry advisory board. These domain experts are visible name brands who bring credibility to your specific market or technology. They may also be customers, but they are typically used to create customer and press credibility.

Finally, you may want to have some general business advice from a “been there, done that” CEO. Executives who can give you practical advice are more than likely those who have run their own startups. Sales and marketing advisors are the perfect foils for testing what you've learned in Customer Discovery, Validation and Creation.

The number of advisors for each domain will vary with circumstances, but there are some rules of thumb. Both sales and marketing advisors tend to have large egos. I found I could only manage one of those at a time. Industry advisors like to think of themselves as “the” pundit for a particular industry. Have two give you opinions (but don't have them show up on the same day). Business advisors are much like marketing advisors but usually have some expertise in different stages of the company. I always kept a few on hand to get me smarter. Finally, our Product Development team could never get enough technical advisors. They would come in and get us smarter about specific technical issues. The same was true for the customer advisors. We made sure we learned something new every time they came by.

A. Sell to Visionary Customers: Contact Visionary Customers

The biggest challenge in this phase of Customer Validation is to spend your time with true visionary customers, not mainstream customers. Remember visionary customers not only recognize they have a problem, they're so motivated to do something about it that they have tried homegrown solutions and have budgeted money for a solution. Were there any key characteristics of visionary customers you saw in Customer Discovery? Would any of those help you identify where you can find more prospects? Use the same techniques you used in Customer Discovery: Generate a customer list, an introductory email, and a reference story/script. Even with all your preparation, assume one out of 20 prospects you call on will engage in the sales process. In other words, be prepared for 95 percent to say no. That's OK; you only need the other 5 percent. Of those, depending on the economic climate, 1 out of 3 to 1 out of 5 will actually close when you get around to selling. That's a lot of sales calls. (That's why your company is a startup.) The good news is by this phase you have a sales closer on board to handle the tedium of making contact and arranging meetings.

It is helpful at this point to distinguish earlyvangelists from other major categories of customers: early evaluators, scalable customers, and mainstream customers. Table 4.3 describes the differences among these groups in terms of their motivation, pricing, and decision power; the competition you face in selling to them; and the risks in selling to them.

Think of early evaluators as a group of tire kickers you want to avoid. Every major corporation has these groups. When they show interest in a product, startups tend to confuse them with paying customers.

Earlyvangelists have already visualized a solution – something like the one you are offering. They are your partners in this sales process. They will do their own rationalization of missing features for you as long as you don't embarrass or abandon them.

Scalable customers may be earlyvangelists as well, but they tend follow visionaries. Instead of buying on a vision, they buy for practical reasons. These will be your target customers in six months. They are still more aggressive purchasers of new products than mainstream customers.

Finally, mainstream customers are looking for the whole product and essentially need an off-the-shelf, no-risk solution. They will be your customers in one to two years.

B. Sell to Visionary Customers: Refine and Validate the Sales Roadmap

Can you sell three to five early visionary customers before your product is shipping? The key to selling a product on just a spec is finding earlyvangelists who are high-level executives, decision-makers and risk-takers. The earlyvangelists you are looking for now are those who could deploy and use the product. You don't need many of them at this point. Why? Because the goal is not to generate a whole lot of revenue (even though you will be asking for near list price); the goal is to validate your sales roadmap.

Let's return for a minute to Chip Stevens, the InLook CEO who left his office to develop a sales roadmap. Figure 4.9 illustrates the organizational map Chip developed for InLook's Snapshot product.

InLook's customer is the CFO, while the key influencers are the controller and the VP of financial operations. But in a series of companies, InLook discovered internal competition from IT, which championed its own homegrown financial tools. Additionally, InLook has learned many managers in the sales department believe financial modeling is their “turf” and have built a sales analyst group to provide this function. To be successful, InLook needs to eliminate opposition from sales and IT by educating the VP of Sales and the CIO.

Chip developed a sales strategy recognizing these competing internal interests and built on the interplay between purchasers and influencers in large corporate accounts (see Figure 4.10).

Chip found he could gain access by meeting with and acquiring an executive sponsor—either the CFO, controller or VP of finance if the executive felt an acute need for InLook's software solution and had the vision and budget for the project. In addition, the executive sponsor would greatly influence the end users who generally want something their boss wants. Finally, the executive sponsor could represent the production solution to the CIO and help eliminate objections from and gain the support of the IT organization. Although a company's IT organization would not initiate a project to solve the CFO's problem, IT was a critical influencer in the sales process. So next InLook needed to meet with a company's IT executive and win his approval. Chip had also learned IT's attitude was a useful way to qualify accounts. If InLook could not win the IT support early in the sales cycle, it needed to think long and hard about investing more sales time and resources in that account.

The third move in InLook's strategy focused on finance managers who would use the product. They were generally enthusiastic about the software since it made their lives easier. Finally, InLook needed to engage the IT technical staff. If InLook executed properly on steps 1 through 3, the chances of getting approval from the technical staff were greatly enhanced, and not by accident: InLook has them surrounded. The users want the product, the finance executive wants it, and the head of IT has granted approval. (See the sales roadmap in Figure 4.11.)

So far Chip had managed to avoid falling into the trap of early sales: the pressure to customize the product for each of your visionary customers. Your challenge is to sell the product your company will deliver at first customer ship. This means the standard product you have spec'd, not one with lots of special features. The distinction is important. One of the insidious traps of a startup is promising different customers a set of unique extensions or modifications. While it is sometimes essential to make such promises to get an order or two, the trap is you are building custom products. Building custom products is not a scalable business unless you explicitly revise your business plan. It's dangerous to proceed until Customer and Product Development get in sync on the product strategy.

Of course, sometimes these custom feature requests are good news. If enough customers have asked for the same set of “custom” features, then they are not custom at all. The customers have been trying to tell you what the product requirements really are. This is the time to pivot and incorporate those requests into your spec and declare them features. While you're out selling to customers, keep in mind a few pricing goals. Anyone can give a product away to get an order, but your goal is to sell an unfinished, undelivered product for as near to list price as you can. Does this sound unrealistic? Only if you believe it is. Remember, you are looking for customers who will leap across the table and grab you by the collar to get early access to your product. They need what you are selling. The line from a first customer is usually, “We need a big discount because we are your first customer.” You should turn this around and say, “You need to pay list price because you are going to be the first ones to use it.” If that doesn't sound rational to the customer, you haven't found a visionary. Feel free to be flexible on the terms (no payment until delivery, no payment until it works as spec'd, etc.). But be tougher on discounts.

Why bother with getting near full price for your product? Part of testing the sales roadmap is testing the customer sales and approval process. You want to see whether your organizational map and selling strategy are correct. Hopefully as you work through this process you will close some orders. Your goal is to secure some orders from customers before you move on to the next step.

You can't know how well you're doing unless you keep win/loss statistics on sales calls and share them with the entire Customer Development team. Understanding why a customer said “no” is more important in this step than understanding why a customer said “yes.” The goal is to understand where in the sales process you get turned down (introduction, product presentation, organizational issues, not-invented-here issues, technical issues, pricing) so you can refine your sales roadmap.

C. Sell to Visionary Customers: Refine and Validate the Channel Plan

In Customer Discovery and again in the first phase of Customer Validation, you guessed at how your product might reach customers, and you articulated a channel strategy. Now it's time to validate it in front of your channel partners by seeing if you can get a preliminary order or at least a firm commitment. Trying to get orders from these partners earlier, before you had enthusiastic customer response, would have been counterproductive. The partner response would have been predictable: “That sounds really interesting, but will there be any demand for this product? What do your customers think?” What your potential channel partner would really have been saying is, “Can I make money from your product? If so, how much?” Now that you have directly sold to customers and begun to understand why they would buy, you can answer these questions. So you're ready to go out to the channel and bring home an order.

There's one caveat in getting an order from a channel partner. One of the traps entrepreneurs fall into is confusing the role of channel partners with the role of a customer. This means convincing a channel partner to carry your product, or a big system integrator to work with your company, is emphatically not the same as getting a customer to buy your product. While channel partners may place orders for your product, they only do so if there is customer demand pulling the product out of their channel. End users pay the bills; channel partners take you seriously only when you can add to their revenue. While you may think this is blindingly obvious, lots of startups fall into the trap of thinking their sales problems are over once they have a channel partner signed up, and pop the champagne corks when they get their first “stocking” order from an indirect sales channel. Wrong. While you are a startup there is no demand for your product. No one is banging on the door of your partners asking for your product. Channel partners do not create this demand; only your startup can. This is an easy concept to grasp if you think of indirect channels as nothing more than shelves in a grocery store. Until customers become familiar with the brand, they will never look for the product.

Keeping all this in mind, update your channel/service partner presentation with information about early customer orders. Then hit the street and present to them. Your goal is to come back with a committed relationship (usually evidenced by an order).

A. Develop Positioning: Product Positioning

Most technology-driven startups believe they need to have the professional “marketing people” from a public relations agency execute this “positioning” phase. In reality, the first pass is best done by the Customer Development team with feedback from Product Development. Right now, no one is closer to the customer. No one better understands what problems customers have said the product solves. No one else has struggled to get an order and find the repeatable sales roadmap. Your Customer Development team is more qualified than anyone to come up with a first pass of what makes the product and company unique. It's only later, in Customer Creation, that you need to bring in the “experts.”

While you have been getting feedback from customers and channel partners in Customer Discovery and Customer Validation, you've continually asked yourself whether you were selling into an existing market, resegmenting a current market, or creating a new market. You wrote your first version of a positioning statement when you created the sales presentation, answering why an early customer should buy the product. Think about your customers’ reaction to how you described your product. Did it generate excitement? Was it credible?

Now it is time to put a stake in the ground and formalize your product positioning based on Market Type (see Table 4.4). Your positioning doesn't have to be perfect, since you will refine it further in Customer Creation.

When InLook came up with new product positioning for Snapshot, they realized they had something innovative and unique, with no direct competitors. However, they were defining a new market. And in a new market focusing attention on detailed product features before customers understood what problem their product solved would be a distraction. The claims of a better, faster, cheaper product would simply be lost as customers tried to figure out what the product did and why they should care. Therefore InLook decided to position their product as providing “profitability visibility” for CFOs. The phrase resonated with their potential customers, who thought it sounded like something they might need. Time and again, the InLook sales team got invited in to explain what and how profitability visibility worked.

The end result of this product positioning exercise should be a “product positioning brief.” Similar to the briefs you developed in Customer Discovery, this one-page document should cover the product positioning and its rationale. As you develop sales literature (data sheets, sales presentations, website), this brief will be used to keep all the messages “on point.”

B. Develop Positioning: Company Positioning

Now that you've decided how to position your product in one of the three Market Types, you need to articulate a company positioning the same way. What's the difference between positioning the product and positioning the company? Product positioning focuses on the attributes of your specific product in a Market Type. Company positioning answers, “What does your company do for me?” and “Why does your company exist and how is it different?”

I like to write the first version of a company positioning statement as simply as possible, keeping the customer always in mind. I describe why I started this company in a way every one of my potential customers would say, “Tell me more; it sounds like you're solving a problem I have.” The founders of InLook decided since they were in a new market, one they were creating, they could name this new market. They decided their company positioning was that they were creating the profitability management market. They described this market by viscerally grabbing CFOs who understood on a gut level that early visibility of profitability was a significant need for CFOs and the lack of these tools put companies at financial risk.

Table 4.5 illustrates company positioning by Market Type. Like product positioning, your company positioning doesn't have to be perfect, since you will refine it further in Customer Creation.

As a consistency check for company positioning, revisit the mission statement you wrote in Customer Discovery. Does it explain why your company is different or special? In addition, compare your company description and mission statement to those of your competitors. What is their company positioning? Are you missing something?

As with product positioning, the end result of this company positioning exercise should be a “company positioning brief.” As you develop marketing literature (press backgrounder, sales presentations, website), this brief will be used in conjunction with the product brief to keep all the messages consistent.

C. Develop Positioning: Make Presentations to Analysts and Influencers

Industry analysts and industry influencers are part of the foundation of credibility a startup needs. What is an industry analyst? In the technology arena there are firms that charge customers to provide an “independent” and dispassionate analysis of markets, trends, or specific products. These firms vary in size and influence. In some technical markets (for example, enterprise software) a sale to a large company is very difficult until one of the large analyst firms (Gartner, Meta, Yankee) has blessed you. If you are in the entertainment business the analyst might be Kagan. If you are looking at consumer product sales it might be the NPD group. Industry influencers are a less formal category. In each industry a handful of people influence what gets talked about. They may be bloggers on Hacker News or they may write for Techcrunch or PandoDaily. They may be individuals in companies but speak at lots of conferences; they may be the writers at trade publications who have the most unique ideas; or they may be university professors.

You started identifying analysts and industry influencers in Customer Discovery. The goal in this phase is to meet with them, and get their insights and feedback on the initial positioning (market, product, and company) you have just created and their thoughts about your product features. You also want to see if you can get them to sing your song (and if not, you want to understand why). Even though early adopters will be evangelizing your product inside their company or to their friends and family, it helps to have other “outsiders” who will say, “Yes, we've heard of them, and while it's too early to say how good their product is, we think their idea is quite valuable.” You also need to line up industry analysts and influencers as references for the press you will be getting in the Customer Creation step.

All this would have been difficult before you had real customer contacts, feedback, and orders, but now you have something to say and an idea of how to say it. First, contact the analysts and influencers you've been tracking since early in Customer Discovery. Hopefully, you've kept a database of who they are and have met them at conferences, seminars, and trade shows. You've also spent time understanding what opinions they hold on your market and product space (if not, don't use the meetings in this phase to get up to speed; do your homework first).

Before contacting analysts, make sure you understand what companies and industries their firms cover, and what particular area or companies the analysts you are calling cover. (There's nothing worse than going to see someone who is simply the wrong person or even in the wrong company. It reflects badly on you and your company. It tells everyone you didn't invest the minimal amount of time to do your homework.) Develop a short script explaining why they should meet with you. If you understand what they cover and why your company is going to shake up their market, and can explain why your company is important, the “what's in it for them” is obvious; they won't want to miss an influential and important company. Make sure you reference your early customers, and the problem/pain points you solve. When they agree to meet with you, ask how much time you will have, what presentation format they like (formal slides, demo, whiteboard talk, etc.), and whether the presentation should focus on technology, markets, customers, problems, or all of the above.

Next assemble the analyst presentation, remembering this is not a sales presentation. The focus will be on market and product positioning as well as details of product features. You want to influence analysts’ thinking, not sell them a product. Each analyst organization has a view of the market you are in—make sure you have and understand that slide (you should know it well enough to draw it on the board). If you are creating a new market, get the slides describing their view of the adjacent markets you will affect.

Preparing to meet an industry influencer may require the same formal preparation as meeting an industry analyst, or it may be lunch at a nearby pub. Do your homework, and understand how the influencers acquire their information and how they disseminate it before you meet with them. Adjust your meeting style accordingly.

When you meet with the influencers and analysts, remember the goal is to gather feedback (and wild enthusiasm). You also want to use the interaction to gather intelligence about the marketplace. Make a mental checklist of what is critical for you to learn from them. For example, what other companies are doing anything like what you're doing? How does your vision fit with market needs? With customer needs? How should you position your product, market, and company? How should you price the product? How do others price theirs? Who in a company should you sell to? What obstacles will you face inside a company? What obstacles will you face as you try to build your company? Getting funded? Hiring? Competition? What do they think you should do next?

Once you have feedback from analysts and influencers and several real customers, you can move to the final phase of Customer Validation.

A. Verify: The Product Solution

At the end of Customer Discovery, you verified that the product as spec'd met hypothetical customer needs, but you hadn't at that stage asked for an order. Now, at the end of Customer Validation, “verifying the product solution” means showing you have product/market fit with a product customers will buy. Of course, there's more to product verification than that. Review all the objections and feedback you have received from customers about the product and the conclusions you have come to about first-release features, subsequent features, and so on.

Be sure to address questions like these:

• Given the customer orders to date, does the product you are first shipping meet the needs of the market? How closely did your product match customers’ pain? Did you lose deals because of missing features? What features stood out as clear “home runs”? Did you lose because your product wasn't important enough to buy until it was a “whole product”? Do you want to emphasize different features? Has the VP of Product Development heard customer issues firsthand? Did you oversell? Are customers happy?
• Did you lose deals over delivery schedule issues? Does your plan for future releases have the right features in the right order?
• Did you lose any deals over pricing? Was there any objection to your pricing? (If not, your product may be priced too low—you should always get a modicum of grumbling.) Besides the absolute price of the product, do you have the right pricing model?

The most important exit criterion is whether the sales closer believes other salespeople can sell the product as spec'd in a repeatable manner.

B. Verify: The Sales Roadmap

You have assembled your sales materials, found visionary prospects, combined an organizational map and selling strategy into a sales roadmap, and tried to sell and close customers. In this phase, verifying the sales roadmap means summarizing everything you have learned and checking to see whether you have the selling process nailed or need to go around the loop again. Review the answers you've obtained as you developed your sales roadmap:

• Did you get the organizational or consumer map right? Did you identify the right decision-makers? Did you understand the other key players? Did you lose deals because other influencers objected? Do you have a repeatable process identifying the key players consistently?
• Did you get the selling strategy right? Do you have a repeatable process taking you from person to person and group to group? Can you forecast the probability of an order based on this strategy?
• Did the organizational map and sales strategy result in a sales roadmap with a step-by-step sales forecasting process and sales pipeline?
• Most importantly, did you get orders? Whether the orders came by following a process or the process came by understanding how you got orders is irrelevant. Do the orders prove that a sales organization can scale and grow by simply following the sales roadmap? Can they sell it without the founding team calling on customers?

If you are confident you've nailed the sales roadmap, you can proceed. If not, go around the loop again.

C. Verify: The Channel Plan

Now that you have sold to customers either through an indirect channel or with a direct sales force, you understand how your distribution channel will work. Are your assumptions about the distribution channel correct? For example:

• What will the cost of the distribution channel be? Is this cost factored into your business plan?
• Are there other channel costs you didn't expect? Regardless of the channel there are almost always surprises (stocking costs, store advertising costs, extra pre-sales support, etc.).
• Can you articulate all the variables involved in using this sales and distribution model?

For example, how long is the sales cycle? Will a sale take more or less time than you originally planned? What is the average selling price? What will the revenue be per salesperson or store per year? If you anticipate building a direct sales force, how many people need to be in a sales team (salesperson, technical presales, post-sales integration, technical support, etc.)? How many teams will you need?

• If this is an indirect channel, can the channel scale? How will you train and educate the sales channel?
• What kind of demand-creation activities (advertising, PR, trade shows, etc.) will be needed to drive customers into the channel? How much will it cost to acquire each customer? Have you accounted for these costs in your business model? (While it may seem obvious, customer acquisition costs need to be less than customer lifetime value. Dollars spent in branding cannot scale a flawed or unprofitable business model.) If this is an indirect channel, are there hidden channel costs (channel incentives) or demand creation costs such as in-store displays and promotions?
• Were your assumptions about service/system integration correct? How much will this cost you per customer? Regardless of the channel, how much direct support will you need to provide?

D. Verify: The Business Model

Having orders in hand, you're probably feeling like the end is in sight. Your product solves real customer problems, and you believe you have a repeatable and scalable sales and distribution process. However, just as at the end of Customer Discovery, there is the small matter of making money. Now you have real numbers on the most critical variables of your business—how much customers will pay for your product, and how much it will cost you to sell it. It is imperative you rerun your financial model based on these facts and test how profitable your business model is.

The outcome of this testing process consists of two documents: (1) an updated sales and revenue plan and (2) an operations plan to scale the company. Without trying to be exhaustive, here are some key issues to address as you prepare these documents:

• How much additional funding do you need to reach profitability? How much funding do you need to get to positive cash flow? Is this amount realistic given your expansion plans?
• Now that the Product Development team is delivering a product, are the Product Development costs still the same? Are the costs to develop the first version still the same? How much will it cost to implement the complete vision of the product?
• Is any manufacturing involved in building the product? How much will the product cost to produce? How does that cost compare to your original plan? What manufacturing partners will you use?
• Is the projected selling price (taking into account what customers will pay) different from your initial business plan assumptions? Over the next three years, how many units will a customer buy? What do you believe the lifetime value of each customer will be?
• When you add up all the components of the business model, is it profitable enough for your needs?

E. Iterate, Return, or Exit

As grueling as Customer Validation is, you may need to iterate it again or even return all the way to Customer Discovery. This is the time to stop what you are doing and be reflective, think seriously about how you are doing. Did you really meet the Customer Validation objectives or are you just moving the goal posts so you can get to the next step? When you go to the next step, you are about to seriously crank up the burn rate of your company.

Were you able to sell the product? If not, the problem may be a lack of understanding of the sales process. Take everything you learned in Phases 1 through 3 of Customer Validation, modify your sales roadmap based on customer feedback, and return to Phase 1 of this step (Get Ready to Sell) and try it again.

However, in some cases there may be nothing wrong with the sales roadmap. The problem may be in the product itself. If you have exhausted all options in selling and positioning, you might need to reconfigure or repackage the product offering. This requires a loop all the way back to the first step, Customer Discovery. Once there, use the core technology and come up with another product configuration, then modify your product presentations and go back to Phase 3 (Product Presentation) and do it again.

Even if you have been successful selling, check your product delivery timing with your Product Development team. Schedules inevitably change, never for the better. Can you still deliver what you just sold when you said you would, or did you just sell vaporware? If you sold vaporware, at best your company secured a few pilot projects. Continuing to sell as if nothing has changed is a bad idea. As your schedules slip, the position of your earlyvangelists in their companies or with their friends and family weakens, and you will have no usable references. The good news is if this happens (and it happens more often than you think), you're in a recoverable situation. You don't have to fire a large sales staff, and your burn rate is relatively low. (You always want to have enough cash to get this phase wrong at least once.) The solution is to shut down any additional selling for a while, admit mistakes, and turn pilot projects into something useful – first for the customer and then as a marketable product.

But if everything checks out, the end of Customer Validation is a major milestone. You have proven you have understood customer problems, found a set of earlyvangelists and delivered a product customers want to buy, developed a repeatable and scalable sales process, and demonstrated you have a profitable business model. And you've captured all of your learning in writing. You're ready for Customer Creation.