Running Lean
Introduction
In the world of startups, building successful businesses remains a challenge despite the low cost of product development. What sets apart the winners from the losers is not just a better initial plan, but rather the ability to find a plan that works before resources run dry.
One of the key reasons why startups are hard is the difficulty in understanding customer needs. As Henry Ford famously said, if he had asked people what they wanted, they would have said faster horses. Customers may not always know what they want, but they can certainly articulate their problems. Asking customers for their input is important, but ultimately, it is not their responsibility to know what they want, it is the entrepreneur’s job to figure that out.
Running Lean offers a systematic process that allows startups to iterate from their initial plan (Plan A) to a plan that actually works, all while ensuring that resources are utilized effectively.
Step 1: Document Your Plan A
The first step is to document your initial vision. As entrepreneurs, we are most passionate about the solution box and what we are naturally good at; however, our job isn’t just building the best solution, but owning the entire business model and making all the pieces. This can be done using the Lean Canvas, a one-page business model diagram that is fast, concise, and portable, designed to be a quick and evolving document that captures the key elements of your business model.
Sketch your initial canvas in less than 15 minutes, leaving sections blank as needed. Think in the present and adopt a customer-centric approach.
(1) Problem and (2) Customer Segments
List the top one to three problems your customers face and the jobs they need to be done. Identify existing alternatives and any other user roles that will interact with your customers.
It’s crucial to start with a specific customer in mind, focusing on defining the early adopters rather than mainstream customers
Problems
- Sharing lots of photos / videos is time consuming
- Parents have no free time
- There is a lot of external demand for this content
- Existing alternatives: Facebook, Flickr Pro, etc.
Customer Segments
- Parents (Creators)
- Family and friends (Reviewers)
- Early adopters: Parents with young kids
(3) Unique Value Proposition
Target early adopters and highlight the finished story benefits that customers derive after using your product. Create an instant clarity headline that captures the end result the customer wants, a specific period of time, and addresses their objections. Choose your words carefully and study other good unique value propositions for inspiration.
First-time visitors spend eight seconds on average on a landing page. Your UVP is their first interaction with your product. Craft a good UVP and they might stay and view the rest of your site. Otherwise, they’ll simply leave.
The fastest way to share you photo / videos without the uploading
(4) Solution
Because all you have are untested problems, it is fairly common for them to get reprioritized or completely replaced with new ones after just a few customer interviews. For this reason, it is commended not getting carried away with fully defining your solution just yet. Rather, simply sketch out the simplest thing you could possibly build to address each problem. Sketch out the simplest thing you could build to address each problem identified.
Keep in mind that an MVP (Minimum Viable Product) does not mean a half-baked or buggy product. Deliver enough value to justify charging for your product from day one, as getting paid is the first form of validation for your business.
MVP Top features
- Instant, no-uploading sharing
- iPhoto / folder integration
- Better notification tools
(5) Channels
The initial goal of a startup is to learn, not to scale. So, at first it’s OK to rely on any channels that get you in front of potential customers. Many startups are obsessed with building virality and referral/affiliate programs into their product from day one. While referral programs can be very effective in spreading the word about your product, you need to have a product worth spreading first.
Consider the channels that will help you build a significant path to customers. Differentiate between freer and paid, inbound (pull) and outbound (push), direct and automated, and direct and indirect channels.
Friends
Birthday parties
Adwords
Word of mouth
(6) Revenue Streams and (7) Cost Structure
Model the runway you will need to define, build, and launch your MVP. Plan to deliver enough value to justify charging for your product, and consider the price as an integral part of the product itself. Calculate your cost structure based on the present, focusing on the revenue streams and cost structure inputs to determine a break-even point.
Cost Structure
- Hosting on Heroku: $0
- People cost: $10k / mo
Revenue stream
- 30 day free trial then $49 / yr
Break even point: 2000 customers
(8) Key Metrics
Remember to focus on the metrics that measure progress and identify hot spots in your customer lifecycle. Utilize Dave McClure’s Pirate Metrics, which include Acquisition, Activation, Retention, Revenue, and Referral.
- Acquisition: Sign Up
- Activation: Created first gallery
- Retention: Shared an album and/or video
- Referral: Invite family and friends
- Revenue: Paid after trial
(9) Unfair Advantage
Consider what sets your product apart from the competition and make it an unfair advantage. This advantage should be something that cannot be easily copied or bought, giving your business a unique edge in the market. While you may have to leave this box blank initially, it is important to think carefully about how you can make yourself different and truly matter to your customers.
Community
Step 2: Identify the Riskiest Parts of Your Plan
Once you have a list of possible business models, the next step is to prioritize where to begin and for that, it’s vital to comprehend the potential risks and how they could impact your venture — risk is the existence of more than one possibility that may involve a loss / undesired outcome. Sharing your models with someone, seeking external advice, and conducting interviews can offer valuable insights.
Risks in a startup can be divided into three general categories: product risk (getting the product right), customer risk (building a path to customers), and market risk (building a viable business). While what is riskiest in a model will vary depending on the type of product being built, the following risks (ordered from from highest weight to lowest) seem to be universal and a good starting point for ranking the models:
- Customer Pain Level (Problem)
- Ease of Reach (Channels): Consider taking advantage of an easier path to reach one customer segment over others; while this doesn’t guarantee a viable business model, it will expedite your learning process and get you out into the market faster.
- Price/Gross Margin (Revenue Streams/Cost Structure): The more profit you retain, the fewer customers you’ll need to break even.
- Market Size (Customer Segments): Opt for a customer segment that represents a sufficiently large market.
- Technical Feasibility (Solution): Review your Solution box to ensure your planned solution is not only feasible but also represents the minimum feature set required to present to customers.
Even though the “videographers” customer segment had the highest potential margins (revenue $99 / mo), it also represented the model that would be technically most challenging because existing technology hadn’t been proven to work with really large files (large size is typical of video files). The “consumer” segment represented the weakest value proposition and was a hard monetization model to pull off. Based on these rankings, starting with the Parents and Photographers customer segments was prioritized.
Finally, you should end up with a single completed Lean Canvas that lays out a plan that you believe should work.
Step 3: Systematically Test Your Plan
A startup’s journey involves three phases: Problem/Solution fit, Product/Market fit, and Scale. The moment a startup reaches product/market fit is the ideal time to chase significant funding and to bring the focus onto broadening the venture and optimization. Prior to this point, the startup’s priority should be learning, testing assumptions, and making necessary changes for product improvement.
A crucial point for startups is that validated learning doesn’t necessarily need massive data. Instead, they can glean essential insights from a handful of customer interviews. Although positive feedback doesn’t guarantee long-term success, it does endorse pursuing the hypothesis for further validation via quantitative data. So, to learn, you can methodically run experiments visiting every box on the canvas, tackling risks in stages:
- Stage 1: Understand Problem
- Stage 2: Define Solution
- Stage 3: Validate Qualitatively
- Stage 4: Verify Quantitatively
Stage 1: Understand the problem
What do you need to learn?
- Problem: How do customers rank the top problems?
- Existing Alternatives: How do customers solve these problems today?
- Customer Segment: Is this a viable customer segment?
Various techniques can help gauge problem resonance, such as using a teaser landing page, a blog post, or Google/Facebook ads. A more in-depth understanding can be gleaned through structured customer interviewing techniques. Problem Interviews allow for in-depth exploration of customers’ reactions to the issues your product aims to solve. In these interviews, you should present problems in a story format and ask customers to rank them. The aim is to decipher how they currently address the issue, rate it by importance, and understand the discrepancy if any. Exploring existing solutions can offer crucial insights for your product positioning. Once the data is collected, summarize findings.
Stage 2: Define the solution
What do you need to learn?
- Early Adopters: How do identify early adopters?
- Solution: What is the minimum feature set to launch?
- Revenue Streams: Will customers pay your solution? What price will they bear?
It’s time to create a substantial, lifelike demo of your product/service. This hands-on visualization will better convince and convey the product’s benefits to the customers. Avoid using too much fluff and only focus on real or realistic-looking data. Setting a price for your solution is a tricky act — suggest a price that showcases your UVP but also incites some sort of resistance from the customers. Utilize your demo to trigger interest and secure solid customer commitments. When hosting solution interviews, you might want to rope in early prospects whom you’d conducted the problem interviews with; this would provide a more substantial comparison. If the solution doesn’t resonate with their problems, consider reverting to problem understanding mode. Document the interviews carefully — the feedback will refine your future moves such as enhancing or eliminating features, adjusting pricing, and more.
Afterwards, build your MVP by prioritizing the essential features and forgoing optimization at this point. While building up your product, set up a marketing website as well. This should evolve a visitor into a prospect, and contain elements like a solid UVP, definitive call-to- action, supportive visuals, and testimonials for credibility. Focus on collecting actionable metrics. It’s not about vanity metrics like mere website hits or downloads, but understanding the actions that drive specific results. This means tracing back the actions of your customers to their feedback. Remember, real people lie behind every metric — make sure to connect with them and understand the ‘why’ behind the metrics.
DropBox founder posted a 3-minute video teaser on Hacker News and a compelling landing page; this experiment proved his solution may work, as it lured in tens of thousands of early adopters, securing crucial funding, and ultimately culminating in a full release just 18 months later.
Stage 3: Validate qualitatively
What do you need to learn?
- Unique Value Proposition: Do customers make it all the way through your activation flow? Does your MVP demonstrate and deliver on your UVP?
- Channels: Can you bring on more customers using your existing channels?
- Revenue Streams: Do customers pay for your solution?
Before launching your Minimum Viable Product (MVP), conduct MVP interviews with your target users. These are beneficial for understanding the market acceptance of your product’s unique value proposition (UVP), usability of your site, price acceptance, and customer conversion capability. A crucial step is to validate the full lifecycle by driving sufficient traffic and deeply understanding your customer conversion funnel. Pinpointing and resolving bottlenecks in the funnel can enhance customer experience and improve conversion rates. So, are you ready to launch? Well, you’re good to go when at least 80% of your early adopters consistently sail through your conversion funnel.
What’s next? Start testing other channels to drive traffic to a much wider audience.
Stage 4: Validate quantitatively
Achieving product/market fit in the startup world involves an iterative process that requires weekly reviews, identifying problems, and prioritizing goals. An important marker of a startup’s progress is the Sean Ellis Test, which shows if over 40% of users would be ‘very disappointed’ without your product — a strong indicator of scalable growth.
Startup founders must strive to avoid becoming ‘feature pushers’. Instead of adding new features indiscriminately, they should focus on refining the Minimum Viable Product (MVP) and only add new features that answer to validated needs or demands. In managing the feature pipeline, startups should limit the number of features concurrently in development and follow a ‘Feature Lifecycle’. This approach, which enforces work-in-progress limits, allows for robust feature management and ensures a measured rate of development. Expect some features to fail and need reworking or even discarding — it’s part of the process. The ultimate goal is to ensure each feature bolsters, rather than detracts from the product’s value.
Once early traction is confirmed, focus should shift towards sustainable growth through a few distinct engines: Sticky (high retention), Viral (high referrals), and Paid (high margins). If you have implicit virality built into your product — that is, users repeatedly bring in other users as a natural side effect of using your service (e.g., Facebook and Twitter) — you might consider investing in a viral engine of growth. Often, that also drives the lowering of signup friction, such as making the service free to maximize user growth.If you have a recurring use model — for example, a Software as a Service product — it might be worthwhile to invest your effort initially to drive up the lifetime value of your customers by reducing your churn rate. At some point, you will hit a ceiling of diminishing returns, which might be your cue to switch to another engine of growth, like paid. In these types of products, even though you might have some referrals, the referrals do not repeat beyond one or two degrees (i.e., the viral coefficient is less than 1).If you have a one-time-use product that isn’t also viral, such as the wedding photographer and divorce attorney examples, your only bet is to invest in the paid engine of growth. Again, your product might exhibit word-of-mouth referrals, and you may even have repeat customers, but neither of these are key to driving sustainable growth. Once you’ve selected your key engine of growth, put a stake in the ground: Declare the key metric and improvement you want to achieve. Then, align your next set of experiments toward that goal.
Along with continually tuning and resetting your engine of growth to meet customer adoption challenges as you attempt to “cross the chasm” between early adopters and mainstream customers, you will inevitably also be faced with new challenges as you grow your company. The key is to build a continuous learning culture of experimenters versus specialists, where it’s everyone’s job to be accountable toward creating and capturing customer value.
If you want to go deeper into this topic, you can read the book on which this post was based: “Running Lean” by Ash Maurya
