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Customer discovery versus market research

Recently, someone asked me to explain the difference between customer discovery and market research. I used Henry Ford's famous example of "If I had asked people what they wanted, they would have said faster horses." quote to explain the value of both approaches.

Figuring out the need for something that does not yet exist

To explain the difference between market research and customer discovery, let's go back to the time, to 1905, when cars were not yet a common good. The technology existed. Car racing was popular. However, most people had never seen a car, let alone driven in one.

How do you then, as a Henry Ford, figure out that creating a startup that makes cars for the masses is a good idea?

How do you know you will be successful? There are two ways to find out: Market research and Customer discovery. Neither approaches are perfect. Yet, combined they are very powerful.

Market research

Let's start by explaining how to use market research in this case. Market research reports can be bought, for example from companies like Nielsen, yet they are typically very expensive and rather generic. With Google, and all other information and data analytics available, there is a lot of research you can do on your own.

... is about trends

Market research is about discovering trends by looking at the whole picture, populations, and averages.

You would study Gartner's hype cycles and Forrester forecasts to review technological trends. In 1905, you would have learned that among other steam engines are being replaced by gasoline and electric engines.

Moreover, you would learn that the mass production of bicycles has proven that it is now possible to use cold-rolled steel, accurately machined gears, ball and needle bearings, and pneumatic tires.

You probably also would learn that technology developments are making it possible to make more powerful engines, and that by moving these engines to the front of the car, from underneath, there is more room for these larger engines. Together, these improvements make automobiles faster, more reliable, and increasing the distance they could drive before needing to be refueled.

...and facts

Researching further, you may have found other relevant facts. Urbanization and population growth are driving the trends for public transportation. That horse powered trams are being replaced by steam engines and that the first metros are being built in cosmopolitan areas because the roads in cities are overcrowded.

More research will enable you to put some numbers to these trends:

By 1870 there was a 60,000 miles network of rail transport across the US, and approximately 100,000 horses pulling 18,000 streetcars on 3000 miles of track.

In comparison, there were just 144 miles of paved roads.

Anyone living in a city would be well aware of the inconvenience, smell, filth, and disease caused by horses. Metros seemed the solution.

In 1904 the electrified express trains of the New York City subway traveled at 40 miles per hour, more than 5 times as fast as horse cars, that averaged 6 miles per hour, and about 10 times more quickly than the 3 miles per hour of the horse omnibuses that were in use before the horse cars.

... and about the product

You may have come across the survey of the Minneapolis city engineer's department, which counted vehicles in 10 different 24 hours periods. Mean daily figures were 2722 horse-drawn vehicles, 3 horse riders, 786 bicyclists, and 183 automobiles.

You would have found a small uptake in the use of cars. Mainly in the cities. In 1900 there were only 8000 registered cars in the US. In 1905, that number had grown to 78,000.

By the way, in 1910 that number had skyrocketed to 468,000, and it would continue to grow at this astronomical pace with 9 million cars in 1920 and 23 million in 1929, but that is something you would not be able to know in 1905. The task at hand is, could you have predicted this growth from studying available trends and data?

...and possible usage

Data probably would also have shown that in the countryside, trains are a very popular mode of transportation. Especially for goods, as they allow farmers to get their produce to the cities faster.

Yet, steam engines and the like are not very commonly used on farms, as farmers don't have the scale and buying power to afford such machines. For the same reason, cars were not common in the countryside in 1905.

Only 17% of employed person regularly rode the horse cars from home to work because of the expense. Most people walked and forced them to live in the proximity of their work. Many would have loved to escape the city because cities were overcrowded, smelly, and breeding places of diseases.

...Estimating the total available market

Knowing all this information, you get the sense that something is brewing and that there are opportunities for the automobile.

However, it will still be very difficult to estimate the total available market (TAM).

There are about 20 million households in the US, with 43% of the people living in cities. Given its price point a $650 for the Oldsmobile Model B, it is clear that a car is out of reach for most people in 1905, with the average wage being 22 cents per hour.

So expecting that every household will want and can buy a car is unrealistic. In 1905, nobody seems to need a car, as they were fragile, inconvenient, and did not have strong motors to handle unpaved roads in less than perfect conditions.

Maintenance may be available in cities. However, with the lack of a U.S. Mail Parcel Post service (which did not start till 1913), maintaining a vehicle in remote areas is a huge challenge.

It would have taken a visionary, to see that cheaper cars would enable people to move out of the city and live in the countryside, while driving to work. Especially, as at the time, you barely could get through city traffic by any means of transportation, with streets being as full as in the picture below.

The value of market research

The value of market research is in that it deals with factual data and paints a picture of the entire landscape. It shows what is there, including trends in adjacent industries such as public transport and bicycles.

In this case, the automobile market shows a picture of a landscape filled with opportunities. The need for speed and individualized transport are clear. However, how to exactly address this need is difficult to assess from this data. Is the solution a cheaper car or a faster horse?

The data also does not tell who has the biggest need. If you could make a cheaper automobile, who would be buying it? What would they be using it for?

Those are questions you will not be able to answer with market research.

Another challenge is that during your research, you will only find what you are looking for. What you don't know you need to consider, will remain unknown.

Customer discovery

Who has the biggest transportation need? That is a question that customer discovery can address.

Instead of looking at the big picture, customer discovery looks at the issue at the micro level. How do people currently get from A-B? What are workarounds? What problems are they facing? Why do these problems exist?

...Is about people

The research is done preferably in person. You interview those involved how they currently address certain tasks and what challenges they encounter.

To be clear, so in the case of the automobile, you would not ask a worker "would you like to drive a car to work".

While the answer to this question could be interesting, it would be of limited value. Most workers would have been clueless about what it would take to drive a car to work. In 1905, very few people would have been familiar with the price of a car, maintenance needs, fuel consumption, parking situation, etc, to answer such a question reliably.

... about what they are currently doing

Since in most cases, people cannot envision why or how they would use a new product, customer discovery is not about the solution. Instead, customer discovery is about discovering the customer's problems and needs when trying to do a task - in this example getting from A to B.

Thus, the questions you would ask commuters, for instance, would be "how do you get to work?". The answer may have been: "With the horse car". A follow-up question could have been: "How long does that take you?" In which the reply may have been: "Well, it can take anywhere between 30 minutes to 1.5 hours, because the horse car often gets stuck when the tracks get blocked. In addition, it can only drive at 6 miles an hour. I would like to take the metro, but it takes me a 15 minutes walk to get to the nearest station. So overall the horse car is the fastest option.".

...about learning who may have a problem

From multiple interviews with commuters, you probably soon would have figured out that in cities, the pace of traveling is not determined by the power of a car, but by the blockages on the road. So owning and driving a car would not have helped a commuter much, to get faster from A to B.

With commuters as an infeasible segment, you would move on to the next segment, for example, the countryside.

You again would not have asked them for their needs for a car. Most farmers would probably only associate it with car racing, they had read about in the newspaper and see no need for them to own a car to participate in such races! Cars in the countryside were rare in 1905.

...and who has a hair on fire problem

However, by asking about their transportation needs, you probably would have gotten an answer something along the following. "The closest town is a 2 hours walk, the railway station is 30 miles - a long days walk. It takes our ox wagon fully loaded about 3 days to get there. With our horse buggy, we can do it in 5 hours or so, if the weather is good and our wheels don't get trapped.

"In general, when the weather is rainy, you really feel the isolation here in the countryside. My sister lives just 10 miles away, yet, I have not seen her since spring. It is either too busy and the horses are needed for farming, or the weather makes the roads too bad to travel."

"Another problem is our produce. Last year, we had an awesome harvest. Yet, it was impossible to get it all to the rail station on time." Generally, when you are hitting a hair on fire need, people won't stop talking about the issues and challenges they are facing."

From others, you may have heard about education needs. " Going to school is an issue, the nearest town 6-10 miles away."

From the conversations with commuters, farmers and laborers, you would have learned that in the city there were many alternatives. There, a car was a nice to have. Something to show you are rich. Whereas from your interviews with people living in rural areas, you would have learned that transportation was a big challenge. Transportation was a hair on fire problem for farmers, who had to get their produce to the cities. Better transportation would also avoid isolation and provide youth access to better education in rural areas, however, it is doubtful those needs would be sufficient to justify the cost of a car at the time.

Another not to miss benefit of customer discovery, is that you would have experienced some of these challenges yourself. Just by traveling to the countryside, you probably would have experienced that the roads in rural areas were bad, really bad. That traveling was extremely time consuming and that many areas were inaccessible, even for carriages with high axes.

The value of customer discovery

The value of customer discovery is in learning what people actually do, value, and need. It is looking at a problem on a micro scale. In addition, by listening to the problems people encounter when trying to do a certain activity, you may find challenges and issues you had otherwise never thought of.

It enables you to learn that the transport problems of a city dweller are not the same as that of a farmer. That in itself is not difficult to understand. However, the implications for your product are more difficult to assess from such a generic statement.

Without customer interviews, how would you have known that horsepower, sturdiness, and maintainability were much more important than speed? That even the price point was not the biggest issue - the first model T at $950 was actually more expensive than the Oldsmobile. The 3 times more horsepower made it useful and therefore worth the expenditure.

It would take a great observer to realize that you would have to make cars with high axes so that they could handle dirt roads. And a visionary to realize that you would need to build a network of dealers of service stations selling tires, batteries, spare parts, to maintain cars in these remote areas. Yet, without visiting these places, you probably would not have been even aware of these issues.

Learning what you don't know you don't know

Thus, the great value of customer discovery is that it enables you to learn what you don't know. Things you never considered.

The downside of customer discovery is that you may focus on small irrelevant facts, lose the forest for the trees, or get overwhelmed by the challenges. The lack of roads, distribution channels, parcel mail, gasoline, etc. in 1905, may have made you dismiss the rural market too.

The value of combining both

So, according to Ford, in 1905 if he asked people what they wanted, they would have said faster horses.

However, by asking "why", you would have probably discovered many of the transportation challenges of the time that I mentioned above. Nobody would have mentioned the car as the solution. Ford was right about that.

I doubt that with market research alone, one would have found that the best opportunity and service addressable market (SAM) would be the 6.5 million farmers in the US at the time.

With just market research, you would have been clueless who to built these cars for and what requirements they would have to meet. You probably also would not have known that you would need to build a network of service points to maximize the serviceable obtainable market (SOM) in rural areas.

I also doubt that with just customer discovery alone, one would have been willing to bet on investing in setting up production facilities to build cars at a scale like Ford did. It would have been too risky, given of all the challenges farmers faced.

The power of combining both

The power of market research and customer discovery is in the combination. You will be able to see the big picture and get a sense of the size of the opportunity, from researching the trends that are ongoing and knowing the driving forces behind these trends such as technological developments and population growth. Through customer discovery, you know who to target and how to make a solution that people will actually need. You will know the hair on fire problem of your customers.

Wisdom in hindsight is that the value of the Ford Model T was in its use by farmers. They needed the car. While in 1909, the number of motorized vehicles owned by farmers was about zero, by 1924, the 6.5 million farmers in the US, were equipped with 4.2 million automobiles, 370,000 trucks, and 450,000 tractors.

Hence, if you are not as visionary as a Henry Ford, you may want to use a combination of market research and customer discovery, to know what to invest in and what innovations to create.




P.S. I owe a big thank you to Robert Gordon, for writing the book the Rise and Fall of American's Growth, which inspired me to use the example of the automobile for this blog. All facts mentioned here are from his book.

P.P.S If you are interested in learning the concept of customer discovery while applying it to your own innovation project - you may want to consider signing up for our innovation PROGRAM.