📢 Quick Introduction
A start-up is like a big project, where you’re creating a new product or service under extreme uncertainty. No matter the size, industry, or sector, if you’re creating a new offering under extreme uncertainty, then you’re automatically an entrepreneur, whose main task is to experiment rapidly until you create something that people are willing to pay for.
The best way to avoid wasting time on something that nobody wants is to run experiments, designed to figure out how to build a sustainable business before you run out of money and resources. The Lean Startup method teaches how to use a Build-Measure-Learn Feedback Loop, which will help you to see when it’s time to pivot and try a different strategy and when it’s ok to persevere and continue doing what you’re doing.
Here is a quick summary of how this Build-Measure-Learn Feedback Loop works:
👓 Star with a vision
Your startup vision should include a business model, a product roadmap, and an idea of who your partners, competitors, and customers will be. Only then you can start thinking about a product or service that you’ll offer.
The products/services you choose should then be used as experiments to help you learn how to build a sustainable business. By using your product or service, your first consumers will generate useful data and feedback that you can later use to optimise your offering.
It’s highly likely that your products will change as you go, but your vision should always stay the same and the products you build should always go hand-in-hand with that vision.
📌 Decide what hypothesis you want to test
To run successful experiments and gather useful data, you’ll need to first identify which hypothesis you should test. The two most common and important assumptions are:
- Value hypothesis – an assumption on whether a product is valuable to potential customers.
- Growth hypothesis – an assumption on how users find your product.
Once you’re clear on the hypothesis you want to test, you’ll want to enter the BUILD phase as quickly as possible and that means creating your first minimal viable product.
🚲 Create your first Minimal Viable Product
In this stage, avoid building complete, functioning products. Instead, start by creating your first minimal viable product (MVP) that would be good enough to show to your ideal customers, but not yet full of features and unnecessary extras.
This will let you run tests, gather valuable feedback, and learn what works and what doesn’t with a minimum amount of effort. It’s important to note that customers rarely know exactly what they want so chances are that they will not be able to tell you this directly. You should be able to figure this out by yourself using the data you gather from these tests though.
The goal here is not to find a product-market fit right away. Instead, view this phase as a grand experiment to find out whether the product or service you imagine and dream of building should actually be built.
✅ Experiment and use validated learning
You can figure out whether people want your product and whether they are willing to pay for it by following a scientific method of validated learning.
Every product, feature, or marketing campaign – everything that your startup does should be viewed as an experiment and should always be measured.
So, once you decide on the hypothesis you want to test and create a prototype (MVP), it’s time to deliver it to early adopters. They’re most likely to be willing to try your imperfect product and provide honest feedback on it (don’t target regular customers just yet – it’s too early at this point).
After you collect data from your first customers, you’ll know what features you need to add to your final product to serve them best. Try speaking to your customers as much as possible during this stage – this will let you craft a customer archetype and a list of attributes that characterise your target audience, both essential for your product development and marketing.
Don’t worry if your MVP doesn’t receive positive feedback. Remember, your MVP is just the first step of learning. It may show you that some elements of your product strategy are flawed and you may decide to pivot to a different method to achieve your vision – and that’s fine! If you’re worried that you may receive negative feedback that can affect your future start-up development, you can launch your first MVP under a different brand name and go public with your start-up once your product has proved itself with real customers.
To quickly summarize:
- Start with a hypothesis (either value hypothesis or growth hypothesis)
- Build a minimal viable product
- Test your hypothesis with early adopters
- Collect their feedback and use the results to validate your hypothesis
* NOTE: many may choose not to charge for their very first prototypes, but if you don’t start charging early on, you may later find out that even though people enjoy your product, they are still not willing to pay for it.
🧭 Apply Innovation Accounting
The financials in the start-up’s business plan include such projections as how many customers you expect to attract, how much you expect to spend, and how much revenue and profit you expect to generate. Innovation accounting will help you determine whether your experiments are leading you to real progress and in the right direction towards the ideal position that is written in your business plan.
To apply innovation accounting, first establish where you are right now with your basic minimal viable product – this is your starting point and you should track your progress from there.
Then, create and execute experiments to tune and improve one of the drivers of your business growth model from the baseline towards the ideal. Then, you’ll need to decide whether you want to pivot or persevere. If your start-up is making good progress towards the ideal, then persevere. If not, it may be a sign that you need to pivot. If you decide to pivot, remember that the whole process will need to start all over again – you’ll need to reestablish your baseline and then tune the engine from there.
Ignore vanity metrics and only focus on actionable, cohort-based metrics. It may be worth running split-test (A/B) experiments that allow you to test different versions of your product/marketing materials by offering them to two groups of customers at the same time (e.g. 50/50). You just need to observe the changes in behaviour between these two groups to see which experiment is working better. You can also run the same experiment but test it on two very different groups of consumers to see which group is more reactive to it.
The metrics you track should be:
Actionable – show clear cause and effect. You should know what exact actions would be necessary to replicate the results.
Accessible – everyone in your startup should be able to understand them. The reports should use tangible and concrete units. Each cohort analysis should say, for example, “among the people who used our product in this period, here’s how many of them exhibited each of the behaviours we care about”.
Auditable – managers and entrepreneurs should be able to spot-check the data with real customers. Only 5% of entrepreneurship is about the big idea, the business model, and the whiteboard strategizing… The other 95% is the work that is measured by innovation accounting: product prioritisation decisions, deciding which customers to target or listen to, and focusing on constant testing and feedback.
* It’s best to start from the riskiest assumptions in your business plan (e.g. media business selling advertising will have two assumptions: 1) can it capture the attention of the defined customer segment on an ongoing basis? and 2) can it sell that attention to advertisers? The first assumption is riskier and thus you should start by producing content first and only then focus on advertising and sales).
If your consumers are spreading the word about your product/service and bringing in new customer, then it’s highly likely that you’ve achieved a product-market fit. There are a few ways how your consumers can drive your start-up’s growth:
- By spreading word-of-mouth about your product or brand.
- By using/wearing your product which then drives brand awareness.
- Advertising that is funded using the revenue generated by your business (if you spend less on acquiring new customers than the revenue your consumers generate, then you can use the excess to get more customers via advertising).
- Through repeat purchase or use (you may offer your product on a subscription basis or it may need to be purchased repeatedly for the consumer to be able to use it).
Ideally, you’d focus only on one engine of growth and try to do everything you can to make it work for you. This means that every new version of your product, feature, or marketing effort should focus on improving that one engine of growth that drives your business. You’ll need to collect unique sets of metrics for each to evaluate whether you’re just about to achieve product-market fit, which you can do through the build-measure-learn feedback loop using innovation accounting.
There’re 3 engines of growth:
1️⃣ The sticky engine of growth – it’s when you rely on having a high customer retention rate, hoping that once they buy from you, they will continue to do so. It might mean that you’ll focus on getting more and better listings, features, or add-ons to create more incentives for your consumers to come back to. If that’s the case, you’ll need to focus on improving your customer retention rate and carefully track the fraction of customers in any period that fails to remain engaged with your products (attrition and churn rate).
2️⃣ The viral engine of growth – it’s when the awareness of your product grows via word-of-mouth or user-generated content and it happens naturally as a side effect of people using your product. This engine of growth is powered by the viral loop, which is determined by a viral coefficient. This means that you need to focus on increasing the viral coefficient as the higher it is, the faster the product will spread and bring in new customers.
3️⃣ The paid engine of growth – it’s when you increase your rate of growth by increasing the revenue from each customer OR by decreasing the costs of getting the new ones. This engine of growth is powered by a feedback loop – your customers pay a certain amount of money for your products over their lifetime as your customers. You can invest the revenue you generate from them to buy advertising.
🤔 Pivot or Persevere
You should hold regular “pivot or persevere” meetings with your team to make sure that you’re not pushing something that is simply not working for longer than you have to. For example, if you see that the effectiveness of your product experiments is decreasing, then it might be a good time for you to pivot.
Even though it’s a difficult decision to make, you’ll want to pivot faster, because making constant changes to your business strategy will help you get more validated learning at a lower cost and shorter period of time. This is much better than slowly running out of business and having fewer chances to test your business strategy.
There are several types of pivots:
- Zoom-in Pivot- where a current feature becomes the new product.
- Zoom-out Pivot – where the current product becomes a feature of the new product.
- Customer Segment Pivot – where the target customers change.
- Customer Needs Pivot – where the customer base remains the same, but the product changes to suit them more.
- Platform Pivot – where the product changes from a single-use product to a platform for the other products.
- Business Architecture Pivot – Geoffrey Moore observed that most companies follow either a high margin, low volume model or a low margin, high volume product. Former is usually for B2B, and the latter is usually for B2C. A business architecture pivot is jumping from one to the other.
- Value Capture Pivot – where the way business makes money changes.
- The Engine of Growth Pivot – where how the business reaches new customers changes.
- Channel Pivot – where the distribution channel for the product changes.
- Technology Pivot – where the underlying technology to do the task changes.
As a startup, it’s best if you either have a small inventory of products or only make your products available when there is a demand for it. Lean production (pull) can solve the problem of potential unexpected stock-outs by achieving small batches all the way down to single-piece flow along the entire supply chain.
So, the best way to think about the product development process is to respond to pull requests in the form of experiments that you need to run to learn how to build a sustainable business. Once you know what experiment you want to run, you can then design and run it using the smallest batch that can get the job done. This will help you detect any problems early on and provide you with quick feedback from the customers, without risking too many resources, money, time, and effort.
When you’re just starting off, your customers will be early adopters – the most forgiving customers of all, who are willing to try your product before it’s perfect. But as you grow, you’ll enter the mainstream and will need to adapt to your changing customer base.
You need to plan in advance and solve all the problems early on to ensure that possible quality problems or product defects will not slow you down or create bigger issues, such as public customer complaints or negative reviews.
There is something you can use to ensure that you prepare your start-up team for growth and minimise the risks of mistakes. It’s called the 5 WHYs method and it can help you understand the root cause of the problem that you may encounter as you go, which can then give you the information needed to fix these problems quickly.
This method works by answering the question “why?” 5 times in a row, until you find the root cause that created the problem you’re dealing with. This will allow you to not only correct it, but also build the right process and training manual to ensure that the same problem or issue doesn’t repeat in the future when it can cost you much more than just time!
This is how the 5 WHYs would work if the machine stops working):
- Why did the machine stop? (there was an overload and the fuse blew)
- Why was there an overload? (the bearing was not sufficiently lubricated)
- Why was it not lubricated sufficiently? (the lubrication pump was not pumping sufficiently)
- Why was it not pumping sufficiently? (The shaft of the pump was worn and rattling)
- Why was the shaft worn out? (there was no strainer attached and metal scrap got in)
Chances are that you’ll not be a startup forever. You’ll eventually need to deal with new product development, product launch, scaling the product for adoption, product improvement, and product maintenance.
While it’s relatively easy to innovate while you’re a startup, it’ll become more difficult as the company grows bigger – more processes will need to be followed and more approvals will need to be gained, which will slow things down.
However, even if you’re a bigger company, you can still create a decent environment for innovation if you’re willing to provide all required resources and authority to your internal innovation teams so they could work and run experiments independently.
As an organisation, you’d create an innovation sandbox that works as follows:
- The innovation team can create a true split-test experiment that affects only one part of the product or only certain customer segments.
- The team must see the whole experiment from start to finish.
- The experiment should run only for the specified period of time.
- No experiment can affect more than a specified number of customers.
- Every experiment must be evaluated on the basis of a single standard report of five to ten actionable metrics.
- Every team that works inside the sandbox and every product that is built must use the same metrics to evaluate success.
- Any team that creates an experiment must monitor the metrics and customer reactions (support calls, social media reaction, forum threads, etc.) while the experiment is in progress and abort it if something catastrophic happens.
If the innovation experiment is successful, it can later be reintegrated into the parent company.
If you want to explore some of these concepts in more detail (which I highly recommend if you’re currently building a start-up or are working at one), then you can grab a copy here 👇
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