PDF Summary:The Four Steps to the Epiphany, by Steve Blank

In The Four Steps to the Epiphany, entrepreneur Steve Blank tackles one of the most daunting challenges that new businesses face—the uncertainty of whether there’s a genuine market demand for their product. He writes that the key to identifying customer interest is understanding customer needs and behaviors through a process called customer development: a systematic model that startups can follow to validate their business ideas, ensure product-market fit, and achieve scalable growth.

In our guide, we’ll explore how the customer development process differs from product development, the four market types your startup may enter, and how to define your goals and mission. We’ll then explain Blank’s four-step process of customer development, which includes 1) finding your customer base, 2) testing your business model, 3) acquiring customers, and 4) establishing and growing your company. In our commentary, we’ll discuss complementary business principles and models, as well as advice from other experts such as Eric Ries, Clayton Christensen, and Michael Porter.

(continued)...

The Four Steps of Customer Development

Now that you’ve learned the importance of customer development; ascertained your market type, mission statement, and core values; and organized your team around your shared goals, you can begin the four-step process of customer development. These steps boil down to 1) finding your customer base, 2) verifying your customer base, 3) acquiring customers, and 4) establishing and then growing your business.

Step #1: Find Your Customer Base

As you set out to learn about your market and what direction your company should take, you’ll have to make some assumptions about your customers and how they’ll react to your product. It’s important to clearly identify these assumptions so you can gauge your progress and adjust accordingly throughout the process. Thus, the first stage in finding your customer base is to identify your assumptions.

(Shortform note: Blank’s process for finding your customer base through hypothesizing, testing, and modifying mirrors the scientific method process. The emphasis on clearly identifying assumptions before beginning the customer development process aligns closely with the scientific method’s approach to formulating hypotheses before conducting experiments. This methodology allows startups to systematically test their assumptions about their customer base and market, much like scientists test hypotheses in controlled experiments.)

Identify Your Assumptions

Blank explains that you’ll have to make assumptions about your product itself (benefits and features, release date, and so on), customers (types of customers, what problems you’ll solve for them), pricing, how you’ll create demand for your product, your market type, and how you’ll square up against your competitors. Write a one- to two-page document for each assumption.

For example, you might assume that your product will mostly appeal to teenagers—an assumption about the type of customers you’ll be serving.

The Lean Canvas Model

While Blank recommends creating a separate document for each of your assumptions, other experts suggest a more concise approach. In Running Lean, Ash Maurya recommends writing a single, one-page document encapsulating all of your assumptions, which he refers to as a Lean Canvas.

Maurya argues that lengthier business model documents can be time-consuming and can fail to keep up with changing trends. With the Lean Canvas model, you have a succinct, agile document that includes your assumptions about your product, customers, pricing, demand, market type, and competitors for easy reference and revision. However, Maurya does recommend creating a separate Canvas for each customer group you identify in order to meet their unique needs.

Test Your Assumptions and Make Appropriate Changes

According to Blank, your initial assumptions likely won’t stand up to scrutiny once you start gathering customer input. Reach out to your potential customers to get feedback on your ideas, and determine whether you’ve accurately guessed what their problems are. If you find they have problems you failed to guess or that the things you identified aren’t actually problems for them, do not try to convince them otherwise. Use the information to modify your assumptions about what they need. You should also test your assumptions about the market and your competition—meet with people from other companies in the same field, and examine existing data from analysts about your potential market.

(Shortform note: This step in the process of finding your customers reflects the data gathering stage of the scientific method (as discussed earlier). In The Black Swan, Nassim Nicholas Taleb emphasizes the importance of empirical skepticism during data collection, warning against logical fallacies like confirmation bias that could lead you to ignore data that don’t support your assumptions in favor of data that do. He argues that you should approach your testing with the aim of falsification—seeking to disprove, rather than prove, your assumptions. This can help startups more quickly identify flawed assumptions, accelerating their learning process so they can avoid wasting resources on ideas that don’t align with customer needs or market realities.)

Share the results of this stage with your entire team, and modify your assumptions documents accordingly. This may mean you need to make a hard pivot—you might need to make drastic changes to your product, shift your focus to a different type of customer, or switch to a different market type. After you’ve modified your assumptions document, seek out customer feedback again and repeat the process until your assumptions align with a profitable business model. This means you must have 1) identified a substantial problem customers face, 2) conceived of a product that will solve that problem, and 3) devised a clear plan for production and distribution that will provide sufficient revenue to outweigh costs and turn a profit.

(Shortform note: In The Lean Startup, Eric Ries explains that it can be difficult to identify when you need to pivot because you’ll rarely find yourself facing complete and utter failure. He recommends regularly meeting with your team to discuss whether you’re on the right track or whether a pivot is necessary. To make it easier to gauge when a shift is necessary, make sure you're using appropriate metrics rather than vanity metrics (as discussed in earlier commentary on The Lean Startup). Additionally, make sure your assumptions are clear, and don’t wait too long to pivot—the longer you pursue an unsustainable model without pivoting, the more time, money, and resources you waste.)

Continuing the example, if you’ve assumed your main customers will be teenagers, but then during the testing stage you find a greater interest in your product among older adults, you’ll share that information with your team and change your assumptions document to reflect this new knowledge. Then you’ll continue to test and refine until you’re confident you have a solid business plan.

Step #2: Testing Your Business Model With Your Customer Base

After you’ve found your customer base, it’s time to test your business and sales model to see if it resonates with that base. Blank explains that companies often jump the gun and hire large sales staff at this stage despite not yet having a solid sales model. This stage is not about selling: Rather, it’s about developing a sales plan that will be successful once you finish customer development and begin selling in earnest.

(Shortform note: In The Mom Test, Rob Fitzpatrick offers some advice on how to test your business model with your customer base. The Mom Test is a set of rules designed to elicit honest feedback from potential customers, helping entrepreneurs gauge whether their product truly meets customer needs. These rules are: 1) Don’t pitch your idea, 2) ask questions about the past, and 3) listen more than you talk. By applying these principles during the testing phase, companies may gather more reliable and actionable insights than simply attempting to sell an unfinished product. This could help refine both the product and sales strategy before scaling up, leading to a more successful launch and reducing the risk of premature expansion.)

Blank advises that for this step, you’ll develop your sales materials and plan, and then test it out by attempting to sell your (currently unfinished) product to early adopters. These are people at high levels of a company who have decision-making power and are willing to take a risk on the product you’re promising them. You only need a few of these to test your sales on; this step isn’t about generating an immediate profit, but about making sure you can sell the product.

(Shortform note: Blank doesn’t go into detail about why early adopters should be people at high levels of a company, but we might look to Geoffrey Moore's Crossing the Chasm for a possible explanation. Moore writes that before a new product is widely adopted by a mainstream market, it's tried out by early adopters, who he defines as leaders looking to use new technologies to gain a competitive advantage. If they adopt the product, other, more mainstream customers are likely to follow their lead. Blank may be advising the same strategy—reaching out to people who seek out novelty for leverage and who can influence a wider swath of customers with their approval.)

Blank explains that this is also the stage where you need to decide how you want to shape public perception of your product and your company—a practice known as positioning. Based on what you’ve learned in step 1 and from your preliminary sales to early adopters, decide how you want the public to view your product in comparison to competitors. The way you do this will depend in part on your market type.

(Shortform note: In Positioning, Al Ries and Jack Trout provide some additional advice about how to position your product and company. They argue that positioning is not just about the product, but about occupying a distinctive place in the mind of the prospective customer. This aligns with Blank’s emphasis on deciding how to shape public perception. Ries and Trout suggest that effective positioning often involves being first in a category or creating a new category altogether. This perspective can guide startups in developing their positioning strategy during the customer development process.)

Positioning by Market Type

Recall the four market types we discussed earlier: 1) new market, 2) existing market with a new product, 3) resegmented market with a cheaper product, and 4) resegmented market with a specialized product. Depending on your market type, you can determine how to shape public perception of your product. However, it’s not until Step 3 that you’ll begin implementing your positioning strategy.

Blank writes that when positioning your product in a new market, you need to explain what purpose your product serves on a basic level: What issue is it going to help your customer with, and how?

(Shortform note: In Play Bigger, the authors note that positioning in a new market can be especially easy when you clearly communicate to customers the problem you’re going to solve for them. This is because, in a new market, you’re often identifying a problem customers didn’t even know they had, and once they become aware of it, they feel compelled to solve it. When you help customers recognize an underlying problem or unmet need, and then position your product as the only solution, you can dominate your new market and even make older markets obsolete.)

For the other three market types, your customers will already understand the purpose of the product, so the goal is to demonstrate how it’s superior to competing products.

• For a new product in an existing market, clearly delineate how your product is better than competitors.
• For a resegmented market with a cheaper product, explain how the lower cost will provide the customer with a greater value.
• And for a resegmented market with a specialized product, explain the unique value your product offers your customers that existing products don’t.

Applying Porter’s Competitive Strategies to Positioning by Market Type

Blank’s advice for positioning your product in an existing or resegmented market aligns with another of Michael Porter’s recommendations in Competitive Strategy—namely, the competitive strategy you choose for your business. Porter describes three such strategies, each corresponding to one of Blank’s three markets, as well as advice on how to implement each strategy.

Positioning a new product in an existing market aligns with Porter’s strategy of offering something unique to the market. Porter suggests conducting market research to identify ways you can differentiate your product and your company from your competitors.

Positioning a cheaper product in a resegmented market aligns with Porter’s strategy of setting lower prices. To achieve these lower costs without lowering your quality standards, Porter recommends cutting operational costs by streamlining internal processes, negotiating lower prices from suppliers, and maximizing cost advantages through tactics like bulk purchasing and more efficiently using resources.

Positioning a specialized product in a resegmented market aligns with Porter’s strategy of targeting niche markets. To capture niche markets, Porter advises identifying customers whose needs aren’t being fully met and aligning your product to meet those needs, then marketing your products in a way that speaks directly to that group.

Assess Next Steps

Before moving on to Step 3, confirm that you’ve accomplished what you need to in Step 2. If you’ve identified flaws in your sales plan, failed to come up with a sales model that you can repeat and expand, failed to identify how you want the public to perceive your product, or noticed any other issues in your plan, don’t move on to the next step. Instead, repeat Step 2 again, or even return to Step 1.

(Shortform note: As mentioned in earlier commentary, the customer development process reflects the scientific method in many ways. Both processes are iterative, meaning they rely on continuous review and repetition of steps when necessary. The more you repeat a step, and the more you review the results of each step, the more your knowledge will grow, which can lead to greater insights and innovations as well as a greater understanding of each phase in the process. So while it may seem daunting to start over at the beginning, the nature of this process means that each step will likely become easier each time you do it.)

Step #3: Acquire Customers

Once you’ve found your customer base and tested your business model, it’s time to make a plan for acquiring customers, explains Blank. This is when you’ll apply all the information you’ve gathered so far and actually introduce your product and your company to the market. This step includes four essential elements: establishing your objectives for the first year of your business, implementing your positioning strategy, launching your product, and generating demand for your product.

Setting Objectives for Year One

At this stage, writes Blank, set your goals for the upcoming year. This includes how much money you intend to make, how much you intend to spend, and how much of the market you intend to capture.

According to Blank, your market type will determine your year-one goal for how you’ll capture the market:

• For a new market, you’ll need to build the market from scratch, educating customers about it and relying on early adopters to spread the word about it.
• For a new product in an existing market, your goal should be to capture as much of the market from existing competitors as you can.
• For resegmenting a market, you have to not only capture as much as you can from existing competitors, but also spread the word to customers about the new value you're introducing into the market.

Using the Ansoff Matrix to Set Growth Objectives

Companies struggling to identify the appropriate goals for their startup may benefit from using the Ansoff Growth Matrix. The Ansoff Matrix is a two-by-two framework used to plan and evaluate growth initiatives, helping stakeholders conceptualize the level of risk associated with different growth strategies. This tool categorizes growth strategies into four quadrants, which can be applied to Blank's four market types: market penetration (existing products in existing markets), product development (new products in existing markets), market development (existing products in new markets), and diversification (new products in new markets).

All of Blank’s market types involve new products, but the growth matrix can be adapted for his model: Blank’s advice for new markets corresponds to market development, while his approach for existing markets corresponds to product development (distinct from the product development process described elsewhere in this guide). For resegmented markets, the strategy combines elements of both market development and product development.

Each quadrant corresponds to a different level of risk and potential reward, aligning with Blank’s descriptions of market types and their associated year-one goals. For example, market development comes with a high risk due to the time and money you have to invest in it. However, you can use customer-acquiring strategies to mitigate this risk, such as expanding your product into foreign markets—a strategy you could base your year-one objective on. For product development, you can set a year-one objective to acquire customers through extensive research and development (though this too is risky as it comes at a high cost).

Implementing Positioning Strategy

Next you’ll need to begin implementing the positioning strategy you identified in step 2, explains Blank. He recommends that you hire a public relations team to put this into action.

(Shortform note: Experts offer some tips on how to choose the best agency for your public relations needs: First, identify your goals, target audience, and budget to help you determine the kind of PR team that can meet your objectives. Then, research different firms online and in industry publications, looking for qualifications like a strong track record, a favorable reputation, and good client retention. Make sure that your PR agency fits with the culture of your company, such as your brand imaging and messaging. This will make them better-equipped to carry out your positioning strategy as Blank recommends.)

Blank says to make sure you hire people who are on board with your work so far, including your market type and positioning strategy. They’ll gather data from outside the company about how your product is viewed. At the same time, you should gather the same data from within your company to make sure everyone is still on the same page and to elicit new ideas that could help you going forward.

(Shortform note: Implementing positioning strategy relates to the concept of “integrated marketing communications” (IMC). IMC emphasizes the importance of consistency across all customer touchpoints. While Blank focuses on PR, this strategy would hold that positioning should be reflected in all communications, including advertising, sales, and customer service. Understanding IMC can help startups ensure that their positioning strategy is consistently implemented across all channels, not just through PR efforts.)

Launching Your Product

Next, Blank explains how you’ll launch your product and your company. He emphasizes that this stage is the culmination of all previous strategic efforts and should be approached with careful planning and consideration.

Here again, your market type will determine the type of launch you should use.

For a new market, your launch will be a long process that relies heavily on your early adopters. The goal is to educate and engage early adopters, leveraging their excitement to inject your new concept into public awareness, which is how you create a new market.

For an existing market, Blank recommends a much more direct approach in which you hit the market with your product in conjunction with aggressive marketing and advertising. This is a much faster process than his recommended method for a new market, but it also has heavy costs at the front end.

For resegmenting a market, Blank explains that you’ll have to make more nuanced decisions about your launch process. How you proceed will depend on whether there’s an existing customer base poised to buy your product. If there is, you can use the same aggressive strategy as you would entering an existing market with a new product. However, if you have to create this customer base, you’ll need the slower, early-adopter-centered approach he recommends for a new market.

Using Diffusion of Innovations Theory and Attack Strategies for Your Launch

There are some theories and strategies that can help you better determine how to launch your product in your given market.

The diffusion of innovations theory can help explain why the process of launching in a new market is so time-consuming. This theory, developed by communication theorist E.M. Rogers, describes how new ideas or practices (or in this case, products) gradually spread throughout a population based on how they’re communicated. This spread happens through five steps: awareness, interest, evaluation, trial, and adoption. The theory also identifies five important groups of customers: innovators, early adopters, the early majority, the late majority, and laggards.

The theory underscores the importance of appealing to innovators and early adopters, who will then help popularize it with later adopters. This approach can help startups in a new market determine where to focus their marketing efforts, as well as what type of pace they should expect in their launch process.

When it comes to existing markets, experts describe a number of different strategies you can use to attack the market. These include frontal, flanking, encirclement, bypass, and guerrilla attacks. Which attack you use will depend on your resources and your competitors. For example, if you’ve identified a weakness in your competitor’s product, you can use a flanking attack strategy to highlight this weakness to consumers and elevate your product in comparison. This can be a resource-efficient strategy for smaller companies, but those with more resources might prefer a frontal attack strategy, in which you match the strengths of your competitor and present your product as equally good or better than theirs.

And for resegmented markets, you can apply both the diffusion of innovations theory and the different types of attack strategies to forge the best path forward. For example, when resegmenting with a specialized product, you might determine that there is an existing customer base, but it’s in the preliminary stages in which early adopters are still helping to cultivate interest among others. Seeing that your competitors are already staking out their market share, you might decide to use a bypass attack strategy to highlight your product’s unique features, leaving your competitors in the dust as customers flock to your more innovative offerings.

Generating Demand

To generate demand, Blank writes, you first need to ensure that your strategy aligns with your first-year goals. Then you’ll implement this strategy depending on your market type.

• For a new market, you’ll bring customers over to your market by communicating to them what your original product can offer.
• For an existing market, you’ll find current customers in the market and direct them into your new share of the market.
• For resegmenting a market, you’ll combine these two strategies, communicating to customers what you can offer them while also pushing existing customers into your share of the market.

Finally, at the end of Step 3, consider your progress and determine whether you’re ready to move on from this step. If you find that customers aren’t responding to your messaging, your product isn’t positioned as you intended, or your strategies haven’t generated enough demand, repeat the earlier parts of Step 3 until you get the results you want. However, if everything is going according to plan, you can move on to the final step in customer development.

Tips for Generating Demand in Each Market Type

To effectively generate demand across different market types, companies should develop targeted marketing strategies, leverage digital tools, and focus on clear communication of their value proposition. For new markets, creating educational content through content marketing can inform potential customers about the product’s unique offerings. Using search engine optimization (SEO) and social media platforms can increase visibility and reach a wider audience.

In existing markets, developing partnerships with influencers can direct current customers to the company’s new market share. Implementing referral programs and leveraging customer testimonials can encourage word-of-mouth marketing, which is a particularly effective way to draw in current customers.

For resegmented markets, it’s important that you combine these strategies while emphasizing your product’s new value proposition. Offering free trials or demos can lower the barrier to entry for new customers, while retargeting strategies can re-engage potential customers who have shown prior interest in but haven’t yet committed to your product. You may find that many of these strategies are useful across all the market types, but that they are particularly well-suited to a specific one.

Step #4: Establish and Grow Your Business

Once you’ve found your customer base, tested your business model, and effectively acquired customers, you can focus on the last stage of customer development: establishing and growing your business.

Blank identifies three key actions necessary for a startup to successfully transition into a larger company. First, the company must expand its customer base from the early adopters to the broader market. This shift requires a different approach to sales and marketing, as well as the ability to scale operations to meet increased demand. For example, a company that has appealed to their early adopters through business-to-business referrals might switch to viral marketing to reach mainstream customers.

(Shortform note: Cultivating a fanbase for your company can provide a crucial foundation for transitioning from early adopters to the broader market. In Superfans, Pat Flynn explains that superfans are deeply devoted customers who integrate a brand into their identity and daily life. These passionate supporters can offer significant benefits to a company, such as ensuring longevity, acting as brand ambassadors, and providing valuable feedback. Flynn proposes that customers progress through levels of engagement before potentially becoming superfans, and companies can foster this loyalty by creating value, building personal connections, and fostering a sense of community among fans.)

Second, Blank explains that the organization needs to develop its structure and executive operations to support growth. Implement processes and procedures that allow for efficient operation at a larger scale, while still maintaining the flexibility and innovation that characterize successful startups. It’s a delicate balance between establishing necessary structure and avoiding stifling bureaucracy.

(Shortform note: Netflix shows how a company can scale its operations while still maintaining flexibility and innovation, and avoiding bureaucracy. In No Rules Rules, former Netflix CEO Reed Hastings explains that Netflix eliminated traditional controls to foster a more flexible and innovative environment as the company grew. According to Hastings, Netflix focused on hiring only top talent and retained them through competitive salaries and market-based pay adjustments—with highly capable employees, the company is able to grant them more autonomy. The company also empowers employees by sharing sensitive information and trusting them to make independent decisions without seeking approval.)

Third, says Blank, the company must create departments that can respond quickly to changes in the market and customer needs. These units help maintain the mindset of information-gathering that drove the company’s initial success. They allow the organization to stay responsive to external factors such as competition, evolving customer preferences, and market trends.

(Shortform note: To create the specialized departments Blank recommends, startups could leverage insights from organizational theory such as David Teece’s framework for dynamic capabilities. According to Teece, dynamic capabilities involve three key activities: sensing (identifying opportunities), seizing (mobilizing resources to capture value), and transforming (continuously renewing the organization). These capabilities are unique to each company and difficult for competitors to replicate, going beyond standard best practices. They can help companies become more robust and responsive to the external factors Blank describes.)