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A lot of Start-up businesses use a Ready-Fire-Aim process!  They just start and cross their fingers it will work out.  The Lean Start-up methodology takes a different and incremental approach so that you can systematically feasibility test the proposed new business. 

There is a lot of business wisdom relating to how best to launch a start-up business.  One particular school of thought has become known as “Lean Start-ups”.  It takes its name from applying the same principals as used for Lean Management and Six Sigma improvement processes to a Start-up scenario.

No matter if your start-up is a small or locally based start-up or a world-wide internet one; the principles are the same.

Start-up Evolution

Roughly speaking, there are three stages to any start-up:

Stage 1. Do I have a worthwhile problem

Business is about providing a solution to a problem.  A new business is about finding a problem & solution fit important enough to be worth solving.

A problem worth solving boils down to three essential questions:

  1. Is it something that the customers want and ideally must have.  That is, is it a must have product?
  2. Will they pay for it, or if not, who will.  That is, is it viable?
  3. Can the problem be solved.  That is, is it feasible?

If you can’t satisfy these three tests, your business is unlikely to be successful.

Stage 2. Match the product with a market

Essentially we are asking here, can you build something people want in significant and viable quantities.

Stage 3. Consider how to scale this business

Scale the business so that it accelerates as rapidly as possible to take advantage of the market before competitors chase after you.

Product/Marketing Match

Customers can’t be forced to buy your start-ups product so we have to see if it is sufficiently compelling to have people buy it.

You may have ideas about what will work but that is not robust enough to bet a lot of your resources, like money, that it will work.

Also, if your product is new, people have no real idea if they want it or not because they can’t envisage its usefulness to them.

Until you find a match between the product that you have and what the market is interested in, you should focus almost entirely on learning about how to adjust your product to what the market wants.  You may go through several iterations of what you have to offer before you find a match between the product, what the product supplies and what the market wants.  These iterations may need significant changes in what was your initial direction and this has led to the term "pivots" to refer to these substantial changes in direction.

We should differentiate between a pivot and an optimisation of your business.  In the early days, when you were learning what works, pivots were about finding a product or plan that works. Once you have found that, you then go on to optimise the business to grow as rapidly as possible.

In the early problem testing phase of your business, you are trying to validate or invalidate various hypotheses that you think will work.  For example, you may have an hypothesis that red is more attractive than blue as a colour for the product.  You then set up an experiment to decide which does best.  If blue turns out to be the winner then you pivot so that blue is your chosen colour thereafter.

The way that you find out whether your product is ideally suited to the market is to do a number of experiments

The idea of the experiments is to "fail fast".  The reason for this is that you don't want to spend a lot of time using money and other resources experimenting with some product configuration that subsequently fails down the track.  It is much better to fail very quickly, if you are going to fail at all, so that you can try a pivot and a different hypothesis.  Therefore, the best things to test are the ones where the probability of success less 50%.  If you test something that has a 90% success probability and find that it passes, and later test the 50% probability and find that it fails, you have wasted that time and resources.

Put differently, this first stage of problem/solution fit is one where you test major or radical changes rather than minor changes at the margin.  There is plenty of time to do marginal changes later but they are not going to have as much impact as a major change will have on the direction your product takes.

Segment Your Customers

Any business start-up cannot have the ambition to be all things to all people. 

You have to reduce the clientele that you could service and the product range that you can offer down to the very best clients and the very best products.  Otherwise you will be so diffuse that you won't make very much impact on the market at all.  Also, your resources, like time and money, will be distributed on this ‘shotgun’ approach and be less effectual than the ‘rifle’ approach that narrows down your focus.

When doing this, you should think about the difference between customers and users.  Users will use your products but a customer will pay for it.  Clearly you need to focus on customers rather than users if you want to make a financial gain from your product.

You will also need to split very broad consumer segments into smaller more focused ones.  It is going to be very difficult for you to develop a general-purpose product that suits everyone.  It is far easier, to choose a highly focused product that is attractive to a much smaller, but nevertheless economically viable, target group.

Develop a Basic Business Plan

Lean start-ups have focused on a technique referred to as a “Business Canvas” or alternatively a “Lean Canvas” as a way of putting together a basic business concept quite quickly and comprehensively.

For videos introducing this concept visit:

These are slightly different approaches.  The longer videos cover in more detail.  The Lean Canvas is narrated by Ash Maurya, an acknowledged expert in this area.

See also a case study of Ubers Business Canvas https://www.youtube.com/watch?v=b-NYrkVR0u8  (3:47 minutes)

If you want to try free software to help you manage both your lean canvas and its later development see https://leanstack.com/

For an alternative but less systematic rapid planning approach see Rapid Planning Recipe

Bolt together your MVP

MVP stands for “minimum viable product”.

The essence of Lean start-up is that you do as little as possible to begin to test your proposed business model and you gradually ‘bolt on’ attributes to the model as you prove or disprove elements of your proposed model.

By using an MVP, you invest as little as possible to see if the proposal works.

At the end of the test cycle, which we describe next, you have ‘bolted’ together a business prototype with the characteristics that seem most likely to succeed; or you have proved it won’tEither is a positive outcome.

Remember we want to ‘fail fast’ so that you have wasted as little time and money as possible on an idea that will not fly.

Your MVP doesn't need to necessarily be a completed product, it might be a mock up, physical prototypes that give the concept, drawings, videos or internet landing pages.  The challenge is to come up with the minimum possible solution that will give a group of people enough of an idea about your proposed product to be able to make sensible comments.

Testing Your Business Canvas

Most likely virtually everything in your Business Canvas has largely unknown appeal to your customers so we need to begin to test if what you think is true is in fact true.

If you undertook a Business/Lean Canvas design earlier on, you would have identified a number of different boxes on the Canvas covering such things as the nature of the problem, what channels you will market in and revenue streams.  Each of the boxes on your Canvas needs to be tested to a greater or lesser extent to ensure that your Business Model is not weak on any of the several important criteria. 

Some things may be immediately obvious to you, based on your experience and knowledge, so do not necessarily need a great deal of testing.  Once again, you probably should test whatever cell you feel most uncertain about first because if it falls over quickly, you have minimised the lost time and other resources.

A Test Cycle

When doing basic testing of your proposed business we want to adopt a cycle of tests

We begin with an idea that we want to test, which we will call our hypothesis.  The hypothesis is that, for example, red is better than blue as the colour for the product.  It should be a straight forward hypothesis that is comparatively easily tested so that you know that you have proven it or disproved it clearly. The worst case is where your results are foggy and it could go either way in which case you need to put that hypothesis to one side and try another.

As previously discussed, the best hypotheses to begin with are the most mission critical and/or the ones where you have very little idea which way the results will go.

You want to "fail fast" so that non-viable ideas are rejected as soon as possible.  This approach also aligns up neatly with the 80/20 Rule (see The Amazing 80/20 Rule) which says that 20% of your ideas are going to have 80% of the impact.  The challenge for us here is to find those 20% of mission critical ideas and set them up as hypotheses. (see the article on A/B Testing to learn more about good hypotheses to test).

Step 2 of this cycle is to then build a product that you can use to test the hypothesis.  In our trivial example, you would build a red one and a blue one so that the markets can test.

Next, put that hypothesis out to a set of potential customers to see which one they find the most attractive. 

We then want to measure the outcome of the testing of our hypothesis.  Ideally it is a black and white decision about which one is the best alternative. 

Step 3 in the cycle is to learn what works and to implement what you have learned in the next cycle of testing.  If we learned that the popularity of blue widgets exceeds red by a 2:1 factor, then we might decide to make all the products blue in the future.  We should not be overly simplistic here, as it might happen that blue widgets are much more expensive to produce than red widgets in which case there might be an economic argument.  If we come to this sort of dilemma, it may well mean that we tested the wrong hypothesis to start with and maybe the hypothesis should have been based on economics rather than just on popularity or colour, which is a measure of popularity potentially.

 

Related image

This cycle of build, test, measure the outcome, learn from the results, change the product continues for as many cycles as we continue to learn important lessons.

If you have designed your approach so that you have tested the most mission critical hypotheses first, and then the next most and so on, you will come to a point where testing further hypotheses adds very little additional value to the knowledge that you are gaining.  The 80/20 Rule (see The Amazing 80/20 Rule) teaches us that as few as 20% of the hypotheses that you might test will contribute 80% of the information.   Beyond a certain point, therefore, it is not particularly necessary, or even rational, to continue your testing so you can move onto the next phase.

When building your hypotheses, you also need to ensure that each time you run the same test but with a different audience, you get the same (or very similar) outcomes.  Until that happens, you can’t trust the results. 

Finding a Test Audience

When testing your MVP, you can start initially with your first-degree contacts which are people that you know personally and feel will give you some constructive feedback.

They are likely to be ‘gentle’ with you so don’t necessarily be excited by their response.

There is a body of knowledge about how to conduct these interviews.  We encourage you to read some of the Lean Start-up literature on this topic.  It is too big to cover in detail here.

There is a natural concern with any entrepreneur that someone will "steal my idea" if you start talking to people.  This is not nearly as big a risk as you might assume.  You only need to consider how much effort you have had to put in to get your business plan to this point to realise that if you are half way successful at what you are doing you will be a long way ahead of any competitor.  Someone already in the same industry is not going to drop everything, and change their business model, to compete with you.  You are very likely to have quite a bit of time to begin to put your plan into motion before existing competitors realise that you are a threat and "me-to" competitors launch their own start-ups with something sufficiently different to be able to compete with you.   You will have the so-called "first mover advantage", which suggests that the first one to the marketplace who can keep the momentum going will almost certainly be the market leader for a long time in that market niche.

Once you make your MVP available to the general public, you will get the so called ‘very early product adopters’ or VEPAs signing up for it first.  It is easy to think that your product will be very successful based on the response from your VEPA's.  However, the “Diffusion of Innovation" teaches us that VEPA's are very tolerant of products that are difficult to use, may have weaknesses in them and which have little documentation on how to use. But VEPA's only represent 10% of the total population that may consume your product so you have to make sure it will work with the remaining 90% of the market.  The shift from VEPA to later customers is so significant, and possibly difficult, that it is the subject of is own research often referred to as "crossing the chasm" after a well known book on that topic (“Crossing the Chasm”, Geoffrey Moore)

See a Youtube video by Moore at https://www.youtube.com/watch?v=bhT9JGcHsHs (14 mins)

For a more visual example from Moore see https://www.youtube.com/watch?v=izP5n1SBEaI (4 mins). Watch the first video first as this one does not really explain the theory.

Testing Pricing

One of the hypotheses that you are clearly going to test is how much you can sell your product for

You may well think that you can ask your test customers this question but you are not going to get a very sensible answer.  If your product is an innovation, people have no real understanding what the price is because it doesn't exist.  Apple was a classic example of this when they repeatedly introduced products that didn't exist before at high prices.  Imagine being asked how much you would pay to buy an iPod when an iPod didn't exist; it is very difficult to set a price.

Conventional pricing wisdom says that you find a price that the market will pay and subtract from that the cost of the product and that leaves your profit margin.  If that profit margin is not sufficient, you do not have a viable product.  However, in this instance where we have no market price to measure ourselves against, that tactic will not work very well.

An alternative approach can be suggested by the 80/20 Rule (see the discussion on 80/20 Multipliers .  Essentially, this approach suggests that you strike a price that gives you a reasonable profit margin and launch a mid-range version of your product at this price.  Based on the results that you get from that; you can predict reasonably accurately the number of people who would buy a less well featured product at a cheaper price and those that would pay a considerably higher price for a much more featured product.  This is the approach used by car companies.  They have a mid-price range car that sells a quantity of X and a budget version that sells more than X and a high-priced version that sells considerably less than X but at a higher per car profit margin.

This is a strategy often used by internet start-ups where you see that they offer a product entirely for free.  This gives them a benchmark sales volume based on zero price.  They then offer various upgrades that offer increasingly more functionality but at an increasing price.  They therefore harvest their target market in its entirety.  Anyone who likes the product can get it for free, which means that competitors will find it very difficult to compete because you can't sell something for less than free.  You therefore have the opportunity to corner that entire niche.

Keep in mind that price is one of the essential hypotheses to test.  You may well feel that you can't possibly charge for the present MVP because it is so minimalist.  But until you cross the price bridge and begin to charge, you have no real idea if the product is viable.  It is clearly not very practical to charge for your product in the first cycle of testing when you are trying to get the major bugs out of it by pivoting very often.  However, once your product design has settled down, you do need to begin to test early on for price because this will be one of the major hypotheses to test to establish if your business model is economically viable.

Useful Metrics

As your business starts to grow through its early stages, you need to measure certain things that will allow you to determine its likely future.  We introduced the Measure stage in the three-part cycle - Build, Test, Measure - discussed earlier in this article.  You need to setup various metrics (see the Metrics Recipe  article) to measure what is happening.

Resources

There is a lot more written on the topic of Lean Start-ups than we can reasonably cover in Profit Savvy.

If this topic is of interest to you, look through the ever expanding range of books and YouTube videos on the topic.

The YouTube video series of 184 videos in a playlist by Steve Blank below is an easy to follow and comprehensive visual approach to the topic.  Steve Blank is a founding father of the modern approach to start-ups.

YouTube Start-up Playlist https://www.youtube.com/playlist?list=PLZ9qNFMHZ-A6c0ia7KsZnx1y2VKpnk_zy (Note: video's have been uploaded by Alireza Saberi)

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