The lean startup methodology has gained momentum over the past few years, quickly becoming one of the leading frameworks for launching a successful business.
Its popularity stems from its ability to reduce an entrepreneur’s exposure to risk. An essential factor when you take this sad truth into account…
“90% of online startups fail to ever make it past year one.” (National Business and Capital Services)
Unfortunately, entrepreneurs don’t typically have access to the same resources as big businesses.
For them, it’s no big deal if their new venture or prototype fails. Other areas of the company can absorb the costs and life continues as normal.
However, if an entrepreneur or SMB goes all-in on an idea that fails, it often spells the end of the company.
Such is #StartupLife…
However, it’s not all doom and gloom!
If you are a ThePowerMBA alumni or currently working through our online business program, you’ll know just how effective lean startup methodology is at mitigating risk.
Table of Content
- 1 What is Lean Startup Methodology?
- 2 The 4 Steps of the Lean Startup Cycle
- 2.1 Step #1 – Business Model Canvas
- 2.2 Step #2 – Formulating a Hypothesis
- 2.3 Step #3 – Minimum Viable Product (MVP)
- 2.4 Step #4 Learning
- 3 Lean Startup Summary
What is Lean Startup Methodology?
First coined by Eric Ries in his book The Lean Startup, the methodology is inspired by the principles of Toyota’s famous lean manufacturing model; reducing waste and optimizing resource allocation.
Ries realized that the majority of startups fail because they invest too much time, energy, and money into an idea that doesn’t work.
They put hours and hours of hard work into an intensely detailed business plan, build a team, pitch investors, and eventually start trying to sell it to customers.
However, as the saying goes… “no good plan survives the first contact with the enemy”
If we switch out “enemy” for “customer” we can quickly see why spending 2-3 years on that detailed business plan was a bad idea.
Entrepreneurs will be left wondering:
- What do they do if they suddenly find out customers are not actually interested in the final product?
- Do we really have to go back to the drawing board and start all over again?
- What about all that time, energy, and money we’ve put into this?
As Ries quickly understood, there’s a big difference between startups and traditional businesses.
For example, if you’re looking to open up a new craft beer place (we brought in Brewdog COO David McDowell to show you how if that’s your thing 😉) there’s already an established model to follow. It’s a business idea that’s proven to work.
On the other hand, startups typically bring a completely new, innovative product or service to market with zero precedent.
Therefore the big, burly business plan you spent years creating is going to be full of untested assumptions. You’re hypothesizing how the market will react to your solution.
So to save yourself the heartache, Ries suggests:
“Break down your plan into a hypothesis and run experiments to discover if they’re true or not”
Through a process of validated learning, you can carefully test your assumptions through a product prototype and analyze solid, empirical data obtained from customer feedback.
They don’t like it?
Then pivot in a new direction.
This way, if your initial idea is flawed it shouldn’t be fatal to your organization. You will be able to adapt and change to what the market is telling you.
It’s a methodology that’s been applied by thousands of companies worldwide, from government organizations and defense departments to marketing agencies and family-owned businesses.
All to great success.
Now, let’s take a look at the 4 steps of the lean startup model.
The 4 Steps of the Lean Startup Cycle
Lean startup methodology is a cyclical process broken into 4 separate stages:
- Firstly, entrepreneurs need to map their ideas onto the business model canvas. Analyzing this graphical depiction of the 9 key building blocks supporting every successful business ensures entrepreneurs consider all possible areas for potential innovation. (We’ve put together a 6000+ word guide – complete with examples – on how to build a business model canvas if you’re new to the topic).
- Secondly, entrepreneurs need to formulate hypotheses based on what they’ve discovered from their business model canvas analysis.
- Thirdly, they’ll need to test these hypotheses in relation to their business ideas. The best way to do so is by preparing a minimum viable product (MVP). An MVP is a bare-bones version of the product containing just enough features to be used by early adopters. It should be built using the minimum amount of time and resources and provide just enough feedback to validate the idea.
- Lastly, after evaluating the customers’ feedback, the incorrect hypotheses are replaced by new ideas and then retested. This cycle continues until a product-market fit has been found. This is ascertained after a clear customer segment is willing to pay for the value offered by the product.
Step #1 – Business Model Canvas
Founded by entrepreneur and Strategyzer co-founder, Alexander Osterwalder, the Business Model Canvas is a visual depiction of the 9 key building blocks that form the cornerstone of all businesses. It’s a blueprint to help entrepreneurs invent, design, but most importantly, innovate new and existing business models.
The 9 building blocks are:
- Customer Segments
- Value Propositions
- Customer Relationships
- Revenue Streams
- Key Resources
- Key Activities
- Key Partners
And when laid out on the canvas, you’ll end up with a template like this:
Filling in your Business Model Canvas Template
So, how does it work?
You start by analyzing each of the 9 building blocks as they pertain to your business idea.
For example, imagine you have an idea for a new type of smartwatch. You need to ask yourself, who would wear it? How is it different from other smartwatches? What’s its unique value proposition? How much will it cost?
All these questions form a series of hypotheses. You don’t know the answers (yet) so must make a series of assumptions.
What the business model canvas does is help you organize these assumptions into logical components. Let’s break each one down individually to give you an idea of what I mean:
- For who are you creating value?
- What does your ideal customer look like?
- Who are your most important customers?
- Which of your customer’s problems are you best at solving?
- What value are we offering our customers?
- What is our MVP?
- How many customer needs are we solving?
- How are you reaching your customers?
- Through which channels do you plan on communicating?
- How are other companies contacting their customers?
- Which are most cost-efficient?
- Do you know how they preferred to be reached?
- Will they be impersonal and automated (think eCommerce)
- Will they be more intimate (local bike or book store)
- How will I continue to nurture these relationships?
- Are they expensive?
- How do you plan on making money?
- Is it going to be transactional?
- Are you thinking of using a freemium model?
- What are they currently paying?
- What are your pricing tactics?
- What are the key assets required to create and deliver this value to customers?
- Is it intellectual property?
- Is there a large human capital element involved?
- Do you require significant physical holding to deliver the UVP?
- What do you need to be good at to create this value for customers?
- Software quality?
- Building out memorable customer relationships?
- Building partnerships with other companies?
- Who must you collaborate with to deliver the UVP?
- Does it require non-equity strategic alliances?
- Which key resources are costliest?
- What are the most important costs inherent within the business model?
- Are they fixed costs?
- Are they variable costs?
Once you’ve gone through and analyzed each component in detail, and answered and considered as many questions as possible, it’s time to move on to step #2
Step #2 – Formulating a Hypothesis
Now you have an idea of what you think is “true” about your business idea, it’s time to segment your hypotheses into 3 risk categories.
Those who’ve studied design thinking will be familiar with the concept 😉
In descending order of importance, they are:
It makes sense, right? To first test out the hypotheses that pose the greatest threat to your business.
And arguably, the most important thing to know is do customers even want what you’re selling? Is it desirable?
If you can’t successfully prove this to be the case then you have no business model!
This looks at risks related to the attractiveness of your proposal. Typically, you’re going to start by reviewing your customer segment block from the business model canvas.
Are customers going to be interested in the product? Who are those customers?
Some example hypotheses are:
- “Women aged between 18-45 will be interested in our product”
- “People want to invest in stocks without using a broker”
- “The most important factor when purchasing a car is environmental sustainability”
The second tier of the hypothesis assesses the risks related to the viability of your model. In other words, understanding that not only are you solving a problem customers have but that it’s worth finding a solution for.
Other aspects to consider are customer acquisition. Where are you going to find them? Is it a sustainable model? And will it turn a profit?
Some example hypotheses are:
- “Customers will be willing to pay (X) amount for our product”
- “Selecting an exclusive pool of customers to onboard will raise intrigue about both the brand and product”
- “We can reduce costs by partnering with (X) brand”
Finally, you’ll want to assess risks related to our ability to deliver your UVP. Are you able to build the product and run the model? Do you have the necessary resources and skills?
If your solution requires building completely new capabilities (or areas outside of your expertise), then clearly the venture becomes a lot riskier.
Some example hypotheses to be tested are:
- “We can build (X) amount of product by (Y) date”
- “Our cars will be fully-autonomous by next year”
- “Field sales reps will be able to report all their data from their mobile phones”
Hopefully, you now have a clear understanding of how to formulate hypotheses. It’s time we put them to the test.
Step #3 – Minimum Viable Product (MVP)
The official definition of an MVP is:
“The version of a new product which allows a team to collect the maximum amount of validated learning with the least effort.”
Now, this might come across as something thrown together with a bit of plywood and sticky tape. But, through the development of an MVP startups can measure, learn, and validate their hypotheses by hitting the market as soon as possible, with ‘something’ that enables you to have real interactions with clients.
So, where do you start when building your MVP?
Core product value
You have to strip your product down to the bare bones and ask yourself…
“What is the core value my product offers customers?”
Then follow-up with a second question…
“What is the bare minimum I need to deliver that value?”
The intersection of these two answers is your MVP 😉.
Let me give you an example using ThePowerMBA.
Borja Adanero (the company’s CEO and co-founder) understood that the core value of the product was: higher business learning through quality content.
Now, to deliver the content as an MVP, he recorded the initial lectures using a webcam and basic editing software.
That was it.
No fancy audiovisuals. No top-tier CEOs leading classes. And no extensive professional networking ops.
Just Borja, a webcam, and recording software.
But this was all that was needed to test his hypothesis.
He was able to ship the product to customers quickly, on board their feedback, and improve the product.
Remember you just need to deliver something that customers can react to, enough for you to gauge their response and learn how to improve your prototype.
Types of MVP
Interestingly, an MVP doesn’t have to be a physical prototype (as was the case with ThePowerMBA).
There are many use cases of MVPs being created without the existence of a physical product.
Let’s take a look at a few examples.
One of the best methods for validating your hypothesis is a landing page.
For the unfamiliar, a landing page is:
“A page on your website dedicated to converting visitors into leads”
When it comes to gathering customer feedback, it can be an absolute goldmine. Just take Zappos as an example.
The company’s founder, Nick Swinmurn, had an idea for online shoe retailing. This might seem crazy to us now but at the time, people didn’t buy shoes online.
So, how could he test his idea (selling online) while reducing risk (purchasing a ton of potentially unsellable stock)?
Swinmurm came up with a brilliant plan.
He created a basic web page containing photos of the shoes he wished to sell online. A deal was struck with a local store that agreed to let him photograph the shoes, in return for the shoes to be purchased directly from that store.
It was a great way to test the viability of his MVP without having to purchase a single pair of shoes.
One of the signature cases for lean startup methodology is undoubtedly Dropbox.
Founders Arash Ferdowsi and Drew Houston hatched a bold plan to pretend they had a working product in an explainer video.
Before building an entire hardware infrastructure, developing apps, building APIs, etc. they first wanted to validate their desirable hypothesis that people were interested in a file-syncing service.
It was an overnight sensation.
Over 70,000 people left their emails and news of the service went viral…
Another way to test your MVP is through crowdfunding.
However, it’s also a great technique to introduce new, innovative products to early adopters, gather their feedback, all while reducing your exposure to risk.
While planning and executing a crowdfunding campaign will take time and effort on your part, it’s going to be far easier and more beneficial than a traditional product launch.
Step #4 Learning
The final step of the lean startup methodology is, of course, learning. How can you insert customer feedback back into the Build Measure Learn Cycle to ultimately ensure product-market fit?
- Should you pivot (change direction) or persevere (continue with the existing model)?
- Do you need to add any features or take some away?
- Should you charge for the product, or give it away?
- Is an advertising model suitable for the business or would freemium better serve your audience?
The answers to these hypotheses can only be validated through customer feedback. If your initial hypotheses were wrong, then you must pivot, and head in a new direction.
Types of Pivot
Pivoting is about creating a new set of assumptions and hypotheses to test. It’s about being agile enough to change based on different types of customer feedback.
As it turns out, Eric Ries came up with 10 different types of pivot, with the 5 most popular frequent being:
This is where a feature of the product (perhaps considered non-essential) actually resonates a lot more with your audience than predicted.
Focus is therefore redirected into scaling this particular feature, perhaps even building the entire product around it.
As the name suggests, this is the reverse process of the above. After customer validation, it turns out that the primary feature is of little interest to customers.
Companies need to “zoom-out” and pivot around a different feature and refocus their energies elsewhere.
This is typically when a company realizes that the product does indeed solve a real problem, but for a different set of customers than originally planned.
For example, you may have thought a business-to-consumer (B2C) approach worked best, when in fact it’s business-to-business (B2B) that gained more traction.
Or after testing your hypothesis, you might need to broaden or narrow your customer base.
A common cause for pivoting is that the problem being solved turns out to be inconsequential to customers.
Or, entrepreneurs discover that there is in fact another, more pressing need to be solved. The product is then quickly adapted and changed to meet this new need.
A platform pivot is when the application or platform housing the product needs changing. Some examples of platform pivoting would be eBay, Airbnb, Uber, and the Android Store.
Lean Startup Summary
If you’ve made it this far down, I guess congratulations are in order! Reading through 3000+ is no small order.
So, for a quick recap. Lean startup methodology is the process of validating preconceived ideas by carefully testing a customer’s reaction to an MVP. This feedback is then analyzed to determine whether a company should persevere with the same idea or pivot.
This framework allows you to get your product to market quickly with minimum risk.
Facebook wasn’t the first social media company. Henry Ford didn’t build the first automobile. But they both ended up winning.
“Those who were able to learn faster overtake those that went first”
And as Eric Ries himself puts it…
“Your speed and ability to learn are the moat of 21st-century entrepreneurship – Eric Ries, ThePowerMBA
Speaking of Eric Ries, he’s actually teaching a specific course of our online business program on lean startup methodology.
So if you’re looking to get your own business venture off the ground while reducing your risk exposure, I highly recommend you check it out.