The Lean LaunchPad Lecture 5: Customer Relationships Steve Blank Jon Feiber Jon Burke

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2 images by JAM customer segments key partners cost structure revenue streams channels customer relationships key activities key resources value proposition

CUSTOMER RELATIONSHIPS what relationships are you establishing with each segment? personal? automated? acquisitive? Retentive??

We Call Customer Relationships Demand Creation Get, Keep and Grow How will customers hear about your product? How much will it cost to acquire a customer using these strategies? How does market type impact my demand creation strategy?

Customer Relationship Definition Get Keep Grow

6 Get Customers

Who needs to hear about you? Suppliers Channels Government Partners End User Influencer / Recommender Economic Buyer Decision Maker

Demand Creation Getting Free Users Search Engine Optimization (SEO) Blogging / Sharable content Social Media / Gaming Mechanics Communities Proven viral coefficient >1 Demand Creation

Demand Creation Paying For Users Public Relations Demand Capture  SEM  “Free” products (e.g. widgets)  Biz Dev  Affiliate Marketing Market Education  Webinars  marketing  Trade Shows  Analyst Reports  Direct Sales  TV / Radio Demand Creation

“Get Customers” Funnel Get Customers Funnel - Physical

Demand Creation Feeds the Sales Funnel Paying Customers $ Demand Creation Acquisition

12 Keep Customers

Earned and Paid Media Get Customers Keep Customers Customer check-in calls Customer satisfaction survey product updates Loyalty Programs Keep Customers Funnel - Physical

14 Grow Customers

Earned and Paid Media Get Customers Keep Customers Customer check-in calls customer satisfaction survey product updates Loyalty Programs Grow Customers Grow Customers Funnel - Physical

16 Get Customers

“Get Customers” Funnel Viral Loop Get Customers Funnel – Web/Mobile

Earned and Paid Media “Get Customers” Funnel PR SEO Advertising Blogs/Website Tradeshows Viral Mktg SEM/PPC Affiliate Mktg Viral Loop Demand Creation Feeds the Sales Funnel

19 Keep Customers

Contests, events Blogs, RSS, s Product updates Affiliate Programs “Get Customers” Viral Loop Earned and Paid Media Loyalty Programs Keep Customers Keep Customers Funnel - Web/Mobile

21 Grow Customers

Keep Customers Contests, events Blogs, RSS, s product updates Affiliate Programs Grow Customers Loyalty Programs Viral Loop Earned and Paid Media Grow Customers Funnel - Web/Mobile

How many come through the first step? How much does that cost? What is the conversion between each level? How much in revenues can you get out of each acquired customer?

Demand Creation by Market Type Create, drive demand into your sales channel Existing Resegmented New Educate the market about what’s changed Drive demand into channel Educate the market Identify/drive early adopters into your sales channels Clone Copy a business

Market Type ExistingResegmentedNew CustomersKnownPossibly KnownUnknown Customer NeedsPerformanceBetter fitTransformational improvement CompetitorsManyMany if wrong, few if right None RiskLack of branding, sales and distribution ecosystem Market and product re- definition Evangelism and education cycle ExamplesGoogleSouthwestGroupon Market Type determines:  Rate of customer adoption  Sales and Marketing strategies  Cash requirements How does market type influence demand creation?

Team Deliverable by Next Week - Web  Get a working web site and analytics up and running – Track where your visitors are coming from (marketing campaign, search engine, etc.) and how their behavior differs – What were your hypotheses about your web site results? Actually engage in “search engine marketing” (SEM) Spend $20 as a team to test customer acquisition cost. Ask your users to take action, such as signing up for a newsletter. Use Google Analytics to measure the success of your campaigning. Change messaging on site during the block to get costs lower, team that gets the lowest delta costs wins. If you assume virality show viral propagation of your product and the improvement of your viral coefficient over several experiments What is your assumed customer lifetime value? Are there any proxy companies that would suggest that this is a reasonable number?

Team Deliverable by Next Week For non-web teams : Get prototype demo working. Build demand creation budget and forecast. What is your customer acquisition cost? Did anything change about Value Proposition or Customers/Users? What is your customer lifetime value? Channel incentives – does your product or proposition extend or replace existing revenue for the channel? What is the “cost” of your channel, and it’s efficiency vs. your selling price? Everyone: Update you blog/wiki/journal What kind of initial feedback did you receive from your users? What are the entry barriers? Present and explain your marketing campaign. What worked best and why?

28 Examples

implantable drug infusion pumps with remote physician control for chronic pain patients at home “the right dose at the right time and place” Christian Gutierrez (EL), Ellis Meng (PI), Carol Christopher (IM), Tuan Hoang (FE)

Patients Training Hospitals Unit sales Trade shows Clinicians Institutions Support Services Pain clinics Clinical data KOLs Formulary Acceptance FDA IP Advocacy Groups Foundations OEMs Wireless Developers Manufacturing Costs Product Dev Costs FDA/Clinical Trials Chronic Pain v3FS Team Payors Marketing Costs Faster relief Efficient patient management and Dosing flexibility Access to high-value therapies and pharmacoeconomics Reduce length of hospital stays and pharmacoeconomics Support Proprietary knowledge Human Resources

Patients Training Hospitals Unit sales Trade shows Clinicians Institutions Support Services Pain clinics Clinical data KOLs Formulary Acceptance FDA IP Advocacy Groups Foundations OEMs Wireless Developers Manufacturing Costs Product Dev Costs FDA/Clinical Trials Chronic Pain v4FS Team Payors/ICA Marketing Costs Faster relief Efficient patient management and Dosing flexibility Access to high-value therapies and pharmacoeconomics pharmacoeconomics Support Proprietary knowledge Human Resources Electronic records Electronic health record providers Bundled kits CMS (Medicare)

Getting out Dr. Stan Louie, Drug Formulation Expert (USC Pharmacy) Dr. Giovanni Cucchiaro, Anesthesiologist (CHLA) Dr. Diana Hull, Physician (Group Health in Washington state, formerly at Kaiser California) Thomas Hsu, Insurance Specialist (Network Medical Management; a California ICA) Two chronic pain patients  Pump user and creator of support forum  User of oral narcotics and patches Dr. Frances Richmond (Director Regulatory Science Program, USC) Richard Hull (formerly at company selling Lapband) Clinicians Institutions/patients Regulatory Entrepreneurs/ Industry

Patients Product flow/Channel Fluid Synchrony Electronic Health Records Partners/ OEMS Partners/ OEMS Hospitals (Anesthesiologists Neurosurgeons) Pain Clinic (Anesthesiologists Neurosurgeons) Pump + Controller Support Services Bundled Kits Electronic Records

Channels (Direct) Direct to institutions Some formularies involved in purchase decisions Some doctors make purchase decision directly Device company/Doctor relationship is key Heavily influenced by : Clinical study results Regulatory approval Reimbursement Hospitals Pain Clinics

Patient Care Flow (Now) Fluid Synchrony Hospitals (Anesthesiologists Neurosurgeons) Pain Clinic (Anesthesiologists Neurosurgeons) Scheduled follow-up Patient Discharged Surgery/Rx/ reprogramming Trial period/ Home setting Weeks/months Key factors: Reimbursement, state regulations Pump + Controller Support Services Bundled Kits Partners/ OEMS Partners/ OEMS

Patient Care Flow (Proposed) Fluid Synchrony Electronic Health Records Hospitals (Anesthesiologists Neurosurgeons) Pain Clinic (Anesthesiologists Neurosurgeons) Pump + Controller Support Services Bundled Kits Electronic Records Scheduled follow-up Patient Discharged Surgery/Rx/ reprogramming Trial period/ Home setting Partners/ OEMS Partners/ OEMS Weeks/months Actionable feedback to doctors/institutions E-prescription / closing loop Key factors: Reimbursement, state regulations Days

Regulatory considerations PMA510K Trial size100’s of patients CostsUp to $100,000 per patient $10-50 MM$1-10 MM Time ~ 3-4 yrs + post approval follow-on ~ 2-3 yrs PMA approval with grouping of FDA approved drugs. Clinical trials results used to obtain CMS (Medicare) approval 510K restricts technology to predicate devices Can be more difficult to market against incumbents European CE mark is easier to attain (safety and performance only)

Take-aways Channel is direct in this existing market Channel for e-health is more complex and evolving State-to-state regulations can impact incentives Can pose problems as electronic records systems vary across the country Next Steps Understand costs associated with reaching doctors/institutions directly Understand structure of e-health channel Develop regulatory pathway (timelines and cost profile)

Patients Training Hospitals Unit sales Trade shows Clinicians Institutions Support Services Pain clinics Clinical data KOLs Formulary Acceptance FDA IP Advocacy Groups Foundations OEMs Wireless Developers Manufacturing Costs Product Dev Costs FDA/Clinical Trials Chronic Pain v4FS Team Payors Marketing Costs Faster relief Efficient patient management and Dosing flexibility Access to high-value therapies and pharmacoeconomics pharmacoeconomics Support Proprietary knowledge Human Resources Electronic records Electronic health record providers Bundled kits

Manufacturing platform for rapid, cost-effective, and scalable production of therapeutics in tobacco “insero” = to plant ”gen” = gene Lucas Arzola (EL) Karen McDonald (PI) Vasilis Voudouris (Mentor)

What We Know We have a novel technology platform with numerous market opportunities Our working hypothesis – that we can scale up and commercialize our platform for production of life-saving therapeutics Jon Feiber – “Since you are a platform technology, it makes sense to engage in ‘market discovery’ and ‘customer discovery’ at the same time during the next weeks” Challenging this hypothesis by speaking with as many experts and customers as we can This week: explored decision making and distribution channels in the case of a pandemic

The Business Model Canvas Speed Cost-Effectiveness Robustness Scalability Safety Ease of Customization U.S. Supply R&D Manufacturing Regulatory Approval Licensing Marketing Tobacco Suppliers Gene Synthesis Companies CMOs - Purification - Fill & Finish - Packaging - QA/QC CROs - Clinical Trials FDA IP – Patents, Trade Secret Manufacturing Facility Capital Investments Manufacturing Costs Licensing Costs Marketing Contract Manufacturing Fully Integrated Manufacturing (Sales) Licensing (Royalties) U.S. Government - CDC - HHS BARDA - DOD DARPA Foreign Governments NGOs Vaccine Manufacturers -Established and Emerging Biotech Distribution through Government and Pharma Companies Long-Term Contracts with Government and Vaccine Manufacturers Target Product – seasonal & pandemic flu vaccines

Getting Out of the Lab! Cast a broad net by talking to many different experts and customers: (1) Executives from large companies NameTitleInstitution Michael GirardSustainability ManagerAerojet Michael JacobsonDirector of Corporate ResponsibilityIntel Joseph KierenDirector of Corporate Real EstateAT&T (2) Entrepreneurs and angel investors from Sacramento NameTitleInstitution Andrew HargadonProfessor of ManagementUC Davis Wil AgatsteinProfessor of ManagementUC Davis Larry PalleyFormer General ManagerIntel John SelepOperations ManagerHP Thomas AlbertsConsultantSBDC Cary AdamsHead of MedStart ProgramSARTA

Getting Out of the Lab! (4) Experts in vaccine manufacturing NameTitleInstitution Ann ArvinPCAST Vaccinology Working Group (Key Opinion Leader on Vaccines) Stanford Misa SuguiAssociate ScientistMedImmune Floro CataniagLaboratory ManagerMedImmune (3) Experts in the commercialization of biotech platform technologies NameTitleInstitution Greg McParlandConsultantDSM Ventures Fernando GarciaSenior DirectorAmyris

Channels and Distribution Conversation with Dr. Ann Arvin – Key Opinion Leader on vaccines In the case of a pandemic:  Vaccine manufacturers have to be producing vaccines for seasonal flu – regulatory approval, QA, and validation need to be in place  When a pandemic occurs, the government (BARDA) negotiates a manufacturing contract with vaccine companies – number of doses, formulation, price, and time are agreed upon  CDC provides the elucidated strain to the manufacturer  FDA considers the pandemic flu vaccine to be a variation of the seasonal flu vaccine – new regulatory approval is not necessary  Vaccine manufacturers work with the new strain to ramp up production as quickly as they can – takes 4-6 months  Sterility and quality testing is performed for the produced vaccines – some tests are done in-house and some are done by outside laboratories  Vaccine is released

Channels and Distribution Getting the vaccines to the patients  Vaccine manufacturers have contracts with wholesalers (i.e. McKesson Corp.) to distribute the vaccines – distribution is not a cost for the manufacturers, they hand over the product  In the case of a pandemic, vaccines are also distributed through local contracts with the state health departments  They distribute the vaccines to hospitals and clinics, where they can be administered to the patients

Organizational Strategy Conversation with Greg McParland – Former CEO of biotech platform company: the virtual biotechnology company model “Starting out and for as long as you can, you should be a virtual company. You can have contracts to outsource the downstream part of the process (purification, fill and finish, packaging, etc.) ” “Keep your core technology and focus on using your manufacturing platform for protein production”. Common practice in biotechnology – almost every company has contracts with CROs, CMOs, marketing and distribution arrangements, etc. More flexibility – move quickly from failed avenues of research to more promising projects Startups partner with big pharma companies to complete clinical trials and take product to market “If you build it, they will come” – but only build the essential core that lets you control your technology platform

More Feedback Conversation with Dr. Ann Arvin – Key Opinion Leader on vaccines  Pain point: Reliability issues with traditional egg platform - willingness to move away to a different manufacturing platform  Pain point: Current platforms are not fast enough, cannot have an impact in case of a pandemic - sense of urgency in finding a manufacturing platform that can produce vaccines faster and at a large scale  Given this landscape, we still believe our technology can solve a significant problem in the vaccine market Conversation with Dr. Misa Sugui & Dr. Floro Cataniag – MedImmune  Pain point: attenuated virus platform is harder to work with, safety measures are more stringent – would prefer recombinant subunit vaccines  Wish: a faster process for vaccine production (our technology can help with this)  Wish: a faster process for clinical trials and for approval of new drugs (this we can’t do anything about)  MedImmune is a possible partner - always looking for new vaccine production technologies and new products to incorporate in their pipeline

More Feedback Conversation with Fernando Garcia – Amyris  Biotech platform technology company  First target product: drug for malaria, partnered with Sanofi to commercialize  Change in strategy: they have transitioned into making biofuels  Why have they made this transition? We will follow up with one of the founders of the company to find out

Next Steps We believe we have a good feel for our value proposition We need to better understand how we can sell to customers and how to establish these relationships, how partners’ decisions are made – meeting with Sanofi Head of External R&D Keep searching for a business model that will allow us to commercialize our technology – looking for meetings with companies that distribute/sell flu vaccine antigens for research and diagnostic use, trying to determine market size We need to talk to many more experts and customers…

Business Canvas

Interviews ActionMotion Customer Interaction Meetings: 1.Director of R&D of C/A partner 2.NETL Methane Hydrate RG 3.Ed Faust, Global Marketing, Siemens 4.Former GE Employee 5.Berkeley sensors group 6.Tim Fogarty, Director of IW Energy Planned Customer Interaction Meetings: 1.Jeff Farbacher, CEO Accutran 2.Ed Faust, Global Marketing, Siemens 3.Charles Noll, Marcellus Shale Coalition Hypothesis Testing: 1.Ed Faust, Global Marketing, Siemens Planned Hypothesis Testing: 1.Dr. Gilad Kusne, NIST 2.Ann Truschel, Corporate Insurance Broker 3.Tim Fogarty, Director of IW Energy

Direct Marketing Possible Not Possible [Too expensive] -Every significant market segment has specific marketing agencies directed towards selling them goods Chemical Chemical, Physical, Thermal ….

Direct Marketing Possible Not Possible [Too expensive] -Every significant market segment has specific marketing agencies directed towards selling them goods Chemical Chemical, Physical, Thermal ….

Direct Marketing Possible Not Possible [Too expensive] -Every significant market segment has specific marketing agencies directed towards selling them goods Chemical Chemical, Physical, Thermal …. Direct sales to plants typically is a very hard way to generate scalable business in the sensors market. Typically much better to bundle product into offerings from larger sensors businesses Agrees with current approach to this first market! Direct sales to plants typically is a very hard way to generate scalable business in the sensors market. Typically much better to bundle product into offerings from larger sensors businesses Agrees with current approach to this first market!

Org. Chart – Current C/A Partner CEO, CTO, CFO, etc. etc. etc. Global Director of R&D CEO, Director of R&D Director of Marketing Director of Product Service Engineers, etc. etc. etc. Director of R&D