The lean startup ultimate guide – Everything you need to know about the lean startup
Welcome to the ultimate guide to the lean startup. Launching a new company, be it a hi-tech startup company, small or medium-sized family company or a business initiative inside a big organization, always included a series of hit‑or‑miss hypotheses about customers, the market, price policy and other business aspects.
According to recommendation’s that were used in entrepreneurship for decades, the best framework for successfully analysing these hypotheses was preparing a business plan, followed by obtaining investors, building a team, building a product and finally following the goal of reaching the highest possible sales.
Building by following this methodology, called the traditional new-product development model, doesn't work in entrepreneurs' favour. According to the research of the Harvard Business School, more than 75 % of companies started this way fail.
In the past decade, a new set of methodologies and recommendations arose as an answer to this big risk of startup company failure, and they strongly decrease this risk.
It's the lean startup company methodology, favouring experimentation over business planning, immediate customer feedback over the entrepreneur's intuition, and gradual cyclical and agile product development in collaboration with the market (based on the build – measure – learn cycle).
The lean startup methodology, together with concepts such as “pivot” and “minimum viable product”, are increasingly in use, amongst new-age startups as well as in study programmes at the best global business schools and big companies, namely everywhere where a new product needs to be developed in highly uncertain circumstances.
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1. The traditional new-product development model
The traditional new-product development model, presented in Steve Blank's Book The Startup Owner's Manual and The Four Steps to the Epiphany as a no longer effective model for startups, developed from the general concept of manufacturing and the basic process of manufacturing various new or improved products.
The traditional new-product development model is thoroughly established in the business world and is successfully serving mostly mature companies, where the customers and their problems are well-known, the competition is known and understood, and the specifications of the product and its improvements are clearly defined.
The traditional new-product introduction model consists of four key stages:
- Concept and business planning: In this stage, the business team defines its vision and describes the business idea, which becomes the basis for preparing a business plan. Through individual chapters of business planning, the foundations of business strategy are defined, from defining the specifications of the product and carrying out marketing research to preparing a marketing plan and all up to financial projections with detailed predictions of how financial results will be achieved.
- Development: In the development stage, planning and discussing stops completely, and hard work begins. A functional organization is formed in the company, where development engineers take care of product manufacture, marketing and sales implement various focus groups, prepare marketing materials and similar.
- Testing: Passing into the testing stage includes collaboration with a small group of users whose task is to test the product to see if it works perfectly. Marketing materials are completed, suitable external co-workers are hired, such as a PR agency, new people responsible for sales are employed, and everything is finally prepared for the first real product sales on the market.
- Market launch: In the last stage, the product is launched on the market, with big costs of marketing and advertising as well as opening events, the purpose of which is to create enough demand. Sales start being measured, and it is soon shown how truly interesting the product is for the market.
What's problematic with this model is that the large majority of products, even though they have extremely good quality, are not interesting for the market. Nobody wants to buy the built products.
The main reason for this is the conviction that the business team knows exactly what they're doing, what customers want, and which product functionalities customers need or which functionalities are the key competitive advantage on the market.
Thus the business team focuses exclusively on deadlines for launching the product to the market based on a business plan, and the team’s work only emphasizes good implementation, not learning about the market and customers, and quickly adapting to their needs.
The key entrepreneurship question, when we're talking about traditional new product development is what if the business team doesn't know exactly what customers need and the market wants.
Traditional new-product development also doesn't allow trying, mistakes and adjusting the direction (of the vision and strategies).
Blindly following the plan and clearly divided responsibilities based on the functional organizational structure (department for development, quality control, marketing, sales etc.) don't only lead to focusing exclusively on implementation but also often to unsuitable measurement of the newly founded company’s progress (focus exclusively on accounting metrics), wasting resources, and too early rapid growth.
The fact is that no business plan survives the first contact with customers, so we urgently need a different approach than blindly following a plan that's based on untested hypotheses of the business team.
Startups usually don't fail because they don't know how to make a quality working product, but because of a lack of customers and a business model that doesn't work.
When startups launch a new product to the market, it turns out again and again that the transition from a few early customers to the mass market isn't possible, that the product or service aren't solving a real problem, or that the distribution costs are simply too high.
So the main business challenge isn't to make a product based on a business idea, but to systematically get feedback from the market about whether the product is even interesting for potential customers.
The problem of traditional new-product development is that it's most often based on untested hypotheses that the business team has about the market and customers, and it doesn't enable rapid adjustments of the vision, strategies and functionalities of the product to the customers.
It also leads to many other business mistakes, such as wasting resources, developing functionalities no one is prepared to pay for (waste), and setting weak foundations for a young company.
1.1. Weaknesses of business planning
Within the first stage of the traditional new-product introduction model, the first step is preparing the concept and planning company launch, which includes preparing a business plan.
The business plan is where the business team writes its hypotheses, and it becomes the fundamental document of the company, which is why it has an especially visible role in the traditional new-product introduction model.
Writing a business plan is good practice for an entrepreneur, but it usually doesn't include a conversation with people who are key for company success – customers. Most starting plans turn out to be wrong in practice, so the entrepreneur needs something that isn't as rigid as a business plan.
If an entrepreneur spends a couple of weeks or months on writing a 60-page long document that’s based on untested hypotheses, this can only be a waste time and other resources.
In accordance with lean production, on which the lean startup is based, waste is any activity of the entrepreneur that wastes resources and doesn’t create actual value (something customers are prepared to pay for).
The most important question for the entrepreneur is whether the new company is progressing in the direction of a successful, long-term sustainable business operation. A common wrong measure for this progress is progressing according to the business plan and the set time and financial goal.
Such measurement is problematic because the plan is often set wrongly due to big uncertainty and untested assumptions. Product manufacture can be planned for a product that no one will wish to buy in the end.
No matter how well-prepared the business plan is, if it plans to manufacture a product that isn’t interesting for the market, then the business plan is practically without value.
The main actual weaknesses of the business plan can thus be summed up in the following points:
- Reality rarely unfolds according to plans.
- If entrepreneurial success means trying and discovering approaches that don't work, how can the entrepreneur then even prepare a relevant business plan.
- At the beginning, the entrepreneur doesn't really have an idea of how the company will even look in the future, because the company develops together with market demand.
- Nearly no one reads business plans anymore, not even venture capital investors. The most successful global investors claim that business plans are too long and that successful flexible companies adapt to the market faster than it takes to read a business plan.
- 5-year planning is impossible and pointless. Even yearly planning is problematic and that much more impossible in the long term.
- In the real world, most business plans don't survive the first contact with customers. The environment changes too quickly and a business plan is nothing but a bunch of untested hypotheses.
- In a world of high uncertainty, it's incredibly difficult to plan, so it is crucial to adapt and improvise.
The value added of a business plan has decreased mostly with the change of the environment, which became significantly more unpredictable and rapidly changing. In such an environment, planning (especially long-term planning) is a thankless task.
This is why it's incredibly important to understand these changes of the business environment and the laws of today's markets, so that we can better understand the need for new methodologies of launching a newly founded company.
1.2. Transition into a complex knowledge society
The most advanced nations today are in the so-called post-information economy or the knowledge economy (society), where innovation and creativity are crucial for success. In this, information and knowledge are tools for creativity as the central component element of innovation.
Thus the most advanced geographic areas marked with a high measure of creativity have three key elements (3T – technology, talent, tolerance), namely these are rapid technological development, a high concentration of talented (educated, entrepreneurial, ambitious) individuals, and a high level of tolerance (to diversity, difference and failure).
Tolerance has a big influence on accepting diversity and entrepreneurial risk. Those environments that significantly stand out in these criteria can be said to have an incredibly strong creative class.
As an interesting fact, California reaches incredibly high positions in all three elements (technology, talent, tolerance), so it's not weird that lean methods originate exactly from the best local private university Stanford.
Across the world, there are more and more geographic hubs driven by the creative class, and with help of globalization and global connection a hypercompetitive global business environment is being created.
Hypercompetition is marked by uncertainty, market instability, rapid non-linear technological development, and a short lifespan of competitive advantages. And hypercompetition is driven by the creative class.
Globalization is what led to hypercompetitiveness, together with rapid technological development, rise of transnational corporations, political liberalization of markets, strong demand on global and local markets, low entrance barriers, and a large number of providers (strong competition).
In technology, as one of the strongest accelerators of these changes, we mostly have to highlight communication and information technologies as well as a significant drop in transport costs. The central dynamics of the new economy (knowledge society) is thus an unstoppable cycle of competing, innovating and raising productivity.
Consequently, the following are some of the extremely important business, social and other trends for all entrepreneurs, brought about by the creative economy and hypercompetition:
- a large number of products on the market and complete market saturation, amongst which we must especially emphasize the incredibly big offer of cheap goods (a good example of this is the choice between dozens of different cereal types on shopping shelves),
- customers are highly informed and participate in the market,
- completely new forms of global company organization,
- high marketing buzz,
- high level of individualization (the so-called egonomy),
- high level of interactivity (connection between technological devices and their omnipresence),
- work specialization (and the rise of the creative class),
- knowledge has become the most important good (talent),
- rise of cities (where technology, talent and tolerance are concentrated),
- consumers are mostly interested in fun and new experiences.
It's the new age we all live in, with all the pros and cons. Brand Cooper goes even a step further and says that today, we live in the so-called value economy. The company that consistently creates the most value for a certain market wins. This goes for established companies as well as for young, newly founded companies.
A fact that should be especially emphasized is that customers have special power in the value economy. Customers demand products that exceed all their expectations, they wish to have a personal relationship with the provider and to be treated respectfully but above all, they want to influence the design and further development of the product.
The recommended strategy for companies that compete in a hypercompetitive environment is thus that they develop internal abilities for facing rapid changes, meaning that the organization needs to become (or stay) flexible, dynamic, adaptable, and learn constantly. This is all the more true for newly founded companies.
1.3. Lean startup – answer to changes in the environment
If an entrepreneur wishes to create a truly successful product and company, their key task is to reduce various risks. Entrepreneurship is a risky business, and as such one of the key missions of entrepreneurs is to gradually and systematically eliminate risks. The key in this is that when developing a product, the entrepreneur focuses on the biggest risks first.
As mentioned before, the biggest risk in newly founded companies is rarely the manufacture of the product or solution. In today’s times of cheap manufacture, the entrepreneur can very quickly create a product with enough time, money and effort.
The biggest risk for entrepreneurs is that they’ll create a product that absolutely no one wants to buy. When the entrepreneur is in the beginning, they only have a hunch about the problem that potential customers face, a suitable solution and maybe even the most logical customer segment.
Exactly because they are only entrepreneur’s hunches, developing the solution too quickly, choosing the customer segment or even the entire business model too early can most often lead to failure.
A good plan, solid strategy and implementation of a marketing plan seem like the right strategy at the first glance, because these are the things that successful big companies have. But applying these traditional tools to newly created companies doesn’t make sense, because the latter face too much uncertainty.
The bigger the uncertainty, the more difficult it is to predict the future. This is why planning can be exact only when it’s based on a long, stable history of the company in a relatively stable environment, which doesn’t apply to newly created companies.
If entrepreneurs build a product that no one will want to buy, it makes absolutely no difference if it’s made on schedule and with planned resources. This statement clearly indicates the fact that the fundamental task of the entrepreneur is to learn which product to make at all – that is the product for which customers are prepared to pay, and in the shortest possible time.
As an answer to complex and quick changes in the environment, the so-called new methodology of building a new company developed, called the lean startup.
The lean startup is a new look on the development of innovative products, emphasizing quick iterations of product development based on new insights into the customers’ wishes, and simultaneously including big visions and high ambitions of the business team.
In modern economy, the question “Can this be built?” isn’t important anymore, because nearly any product can be built, since enough means of production are available.
Significantly more important questions in the modern economy are whether a certain product should be built and whether it is possible to build a long-term sustainable business model around the product.
Manufacture capacities of developed countries are significantly bigger and more developed than the knowledge of what exactly the markets want. With manufacturing capacities reaching the point where we can manufacture nearly anything we can think of, the question of whether we can make a new product or service isn’t in the foreground anymore, but rather whether it makes sense to build it and if it is profitable.
For all lean startups, it is thus of necessary that they let go, as soon as possible, of the wrong assumption that they can exactly describe history, even more exactly predict or plan the future and thus co-create it.
What should come to the forefront is the realization that the assumptions of the entrepreneur or the business team about the market, customers and their problems are wrong at first, and only by trying, measuring and discovering patterns with a scientific method can they become true.
The history of successful startups in modern times teaches us that by far the most important factor for the business success of new as well as established companies is a desire for testing, verifying assumptions on the market, learning based on small failures, and looking for the right combination of a problem, solution and market, which brings the final big success.
Customers are what makes the product into a success story. Without customers who are prepared to buy the product, it isn’t important how innovative an idea is or how affordable a product is, because the company will fail.
In this, there is the important realization that bigger uncertainty doesn’t only bring disadvantages and challenges to long-term business planning. Bigger uncertainty is also an opportunity, because uncertainty and innovation go hand in hand.
Without the first, there is no opportunity for the second. Disruptive innovations can happen in an environment where the final product, value offer, marketing, sales channels and (most importantly) price are at most informed guesswork, but more likely a complete unknown.
1.4. Different types of startups and markets
Before we delve into the basic concepts of lean startups, we need to emphasize the fact that not all startups are the same, and neither are the markets that they address, which means that lean launch methods aren’t suitable for all newly created companies.
The type of market and startup changes the suitability of using different business tools and approaches for company launch, making it necessary for the business team to first exactly define which market type they are addressing and which company type they wish to build.
1.4.1. Five market types
Steve Blank divides markets, addressed by startups, into the following five types:
- New product for an existing market
- New product for a completely new market
- Resegmentation of the existing market with a low-price product
- Resegmentation of the existing market with a niche entrance
- Cloning a business model that is successful in another country
When a startup launches a product to an already known existing market, traditional planning methods and preparing a business plan work just fine. The problem appears when a startup targets a new or resegmented market, where customers, channels and markets aren’t well‑known yet or are an unknown.
And most startups with a potential for rapid growth address such a market. Addressing a new market means that a startup’s solution will enable the customers to do something that couldn’t be done by now, and that the startup wishes to create something completely new, yet unknown, meaning that there are that much more unknowns and risks, connected to launching a new solution.
Different types of markets and suitability of using the lean startup methodology
|Market type||Suitability lean startup|
|New product – existing market||No|
|New product – new market||Yes|
|Cloning a business model||No|
1.4.2. Six types of startups
Besides the five different market types, you also need to know six different types of startups, which are directly linked to the vision of the company and the type of market that the startup addresses.
We know the following six types of startups (segmentation suggested by Steve Blank):
- Startup with the goal of satisfying the lifestyle of the founders, who are living out their passion (for example teaching surfing).
- Micro and small newly created businesses, whose primary motive isn’t capital gain but rather decent income, with the purpose of putting food on the family table (for example a hairdressing salon, family specialized store etc.).
- Startups with the potential for rapid growth (for example mobile apps).
- Social companies, whose primary purpose is to create big social value and change the world to the better.
- Big companies and corporations, which need to follow the philosophy of “innovate or die”, so there are similar processes to startups inside corporations.
- Scalable startups, founded with the purpose of growing and becoming big companies. The founders’ motive isn’t income but rather lies in profit and in increasing the value of the ownership share. They usually address new and resegmented markets.
|Startup type||Suitability of lean startup|
|Micro and small businesses||Rarely|
|Potential for rapid growth||Depends on the market|
|Social companies||Depends on the market|
|Big companies and corporations||For launching new products|
Each of the five different types of markets and six different types of startups demands a different business team, different financing sources, and includes different growth and profitability goals.
The startup team should not only clearly define the type of the market and the company they wish to build, it is that much important for them to find answers to several key questions that help define the market, vision of the business team, and other key elements of the newly created company, such as:
- which problems does the product solve,
- are these problems really painful for the customer,
- who exactly is the customer,
- what will be the profitability of individual customer and similar.
First of all, there needs to be the awareness that startups aren’t only small versions of big companies, which is a common false belief. Established and big companies are meant to implement the known, while startups are looking for a suitable business model.
Second of all, the startup team is often convinced that they already know the information about the market and the customers (since everything is written in the business plan), but usually that is nothing but a bunch of untested assumptions that can turn out to be wrong.
Write a business plan, build a product, and customers will come on their own isn’t a strategy, but rather a naïve hope, especially in cases where the market and the customers aren’t known.
The first orientation within lean startup methodologies is thus for the business team to clearly define the type of company it wishes to build, and the type of market it’s addressing, on this, they can decide if lean methods are even suitable or not.
2. Basics of the lean startup concept
Lean startup (wiki) is a term introduced by Eric Ries and similarly to what the vehicle production system Toyota does, it connects customer development, methods of agile product development, and lean business practices.
In this, an important starting point is Ries' definition of a lean startup, which says that a lean startup is nothing other than an institution of people, organized with the purpose of making a new product or service in incredibly uncertain circumstances.
The definition clearly shows that the lean startup includes the launch of a new product in uncertain circumstances, which means that lean startup methodologies are suitable for newly created companies as well as for big companies, and we shouldn't forget about government institutions, non-profit organizations and other examples where new products or services are developed in such uncertain circumstances.
The lean startup methodology is based on the fact that a business plan is nothing but a collection of assumptions. The document includes only assumptions about the strategy that the company should probably follow to achieve its vision.
The main goal of the business team in lean startup is thus to first organize its activities in a way to check these assumptions without losing the company's vision with it.
Startups do not exist solely for the purpose of creating new products, becoming profitable and taking care of their customers, rather their mission is to learn how to build a long-term sustainable business around their idea.
Lean startup is a temporary form of an organization developed with the purpose of using suitable systematic learning about the market to find a repeatable and scalable business model with the potential for rapid growth.
Achieving a repeatable and scalable business model means that a startup has a developed sales team with a clearly defined price policy that regularly sells the solution to a known segment of customers.
A long-term sustainable model with the potential for rapid growth means that a startup can obtain a large number of customers, not only some, and that every additional customer increases the profitability of the company. The path to this point isn’t easy and simple, and it demands a lot of learning.
This means that the business model in the lean startup is still a complete unknown and it has to be “discovered”. We can consequently differentiate between two types of activities.
The first type of activities focuses on finding a suitable business model, which is the lean startup’s task, and the second type on implementing an already discovered business model, wherein traditional methods of business planning, organizing and leading the company are an option (for established companies).
In the early stages of company growth, focusing on implementation based on wrong assumptions is what usually leads to a quick collapse of a newly created company.
This is why it is necessary to focus on learning and discovering insights into customers and the market through a carefully designed process that clearly shows what exactly needs to be implemented for the company to become successful and profitable.
Difference between a lean startup and an established company
|Lean startup||Established company|
|Looking for a repeatable and scalable business model||Implementing a known working business model|
Looking for the right business model is divided into several stages of the process called customer development and includes:
- Customer discovery
- Customer validation
- Customer creation
- A transition from a lean startup to a mature company that focuses on growing and implementing an already discovered business model.
In the stage of searching, it is necessary to maintain complete flexibility and high tolerance for failure, in the foreground are mostly learning about the market and customers.
This also means that it doesn’t make sense to organize a lean startup in a traditional functional organizational structure, but rather the founders should be surrounded mostly by a team that’s carrying out the process of discovering and validating customers.
Besides a team that’s created to carry out the process of discovering and validating customers, the lean startup has to form another team, namely the team for rapidly developing the product’s functionalities.
Gaining insight into what the market and customers want doesn’t make sense if new iterations of the (minimum viable) product aren’t being developed in accordance with the feedback, enabling new and repeated tests.
This rapid development should mostly take place based on agile methodologies of management and new product development.
So the lean startup doesn’t form its organizational structure according to the traditional functional form (development, marketing, sales, finances etc.), instead two teams are formed around the founders of the company and they have an exactly set purpose and goal – develop the right product for the right market in close interaction with customers.
Tight collaboration between both teams is incredibly important: there shouldn’t be friction between them, as they should both constructively and transparently follow the common goal of developing a product that customers will actually be prepared to buy.
Organization of a lean startup compared to a traditional organizational structure
|Traditional functional organization||Lean startup organization|
|Department for …
In doing so, each newly formed business team has to realize that failure is part of looking for a working business model, which is why you should constantly do pivots and adapt business operations based on the feedback from the market and potential customers.
The fundamental concept of lean startups can thus be summarized in the statement: don't sell what you can make, make what you can sell.
2.1. Short history of the lean startup
The lean startup originated in the revolution of lean manufacturing and lean thinking, developed by Taiichi Ohno and Shigeo Shingo in Toyota.
The concept of lean manufacturing and lean thinking completely changed the method of manufacturing and delivery, with approaches such as encouraging the innovativeness of industrial workers, reducing the number of manufactured products in a series, meticulous control of supply, just-in-time manufacture, and accelerating manufacturing cycles.
Lean manufacturing and lean thinking are dedicated mostly to a strict distinction between value added and wasting company’s resources, and how to systematically ensure product quality. Lean manufacturing and lean thinking are today especially known under the name “The Toyota Way”. The book with the same title was the first book to introduce such lean thinking outside Japan.
The content of the book is focused on how companies can significantly improve their processes by eliminating the waste of resources, systematically taking care of product quality, as well as by searching for low-budget alternatives to expensive high technology, perfecting company processes, and building a learning organization that’s constantly improving.
Tools used by lean manufacturing or that stem from it are Kanban (work visualization), 5S methodology, Kaizen – continuous improvement, PDCA cycle, 5-Whys, Six Stigma, just-in-time manufacturing, and many other approaches. The lean startup transfers this philosophy from the field of manufacturing to the field of launching new companies.
The term lean is here often misunderstood as “cheap”. Lean means you eliminate the unnecessary and use resources effectively, so this explanation isn’t completely wrong by itself, because one of the resources is money. But with a lean startup, we further strive to optimize the use of the resource we have the least of – time.
If we are even more exact, the goal of the entrepreneur is to get to know as much as possible about the customers in a short amount of time. Thus with the lean startup, it’s very clearly defined what wasting resources means, that is directing resources into anything that doesn’t bring value to customers, and value is exclusively what customers are prepared to use and pay for.
Such a waste of resources can include writing a business plan.
3. Key techniques and tools of the lean startup
The lean startup is thus a temporary organization founded for quick, active learning about the market and customers. Important elements of a quickly learning organization is that it puts concrete data before rhetoric, testing before implementation, and its customers before a business plan.
A quickly learning organization constantly does experiments with the purpose of reducing risks, uses concrete data for solving internal conflicts, and is in constant interaction with existing customers and potential customers in order to understand them as well as possible.
The lean startup does all this before it even has a complete product. How?
3.1. Three stages of a lean startup
Every startup goes through three exactly defined stages, namely these are:
- stage of the problem/solution fit,
- stage of product/market fit, and
- growth stage.
The second stage, so the stage of the product/market fit, is the most important milestone for every startup. Reaching this milestone strongly affects the strategy and method of leading the company.
This is why it makes sense for the startup to divide building the company into a period “before product/market fit” and period “after product/market fit”.
In the stage before “product/market fit”, it’s important for a startup to focus its activities on learning and pivoting the business model canvas. After the completed “product/market fit” stage, it makes sense for the startup to start focusing mostly on growth of the company and optimization of business processes.
The following are the three stages of the startup, amongst which the second stage is the first important milestone:
- Problem/solution fit: The first stage of a startup is called the problem/solution fit. In this stage, the startup decides whether it is trying to solve a problem that’s even worth solving. By doing this, the startup avoids the trap of spending months or even years developing something that nobody wants. Even though business ideas are cheap and there are a lot of them, their implementation can be rather expensive. That’s why concrete facts need to be chosen, showing that the right problem is being solved and that the business idea is reasonable. In the problem/solution fit stage, the startup should have a clear answer to three questions, namely whether the solution is something that customers need and want, are they prepared to pay for the solution and, of course, is the problem technically solvable. In this stage, the startup makes the minimum viable product.
- Product/market fit: The second stage is called product/market fit, in which the startup tests the reliability of the product and the attractiveness of the product for sales. In this stage, the startup goes from testing different business models to a plan that works, meaning that the startup is regularly acquiring customers that make repeated purchases and are prepared to pay for the solution regularly. In this stage, the lean startup thoroughly knows the key functionalities of the product that the market is prepared to pay for and that solve key problems for customers.
- Growth: The third stage is the stage of increasing the scope of business operations or the so-called growth. In this stage, the startup focuses its attention on increasing the scope of the business model. The lean startup increases the scope of the business model by using suitable mechanisms of marketing, sales and sales channels, and by choosing a suitable engine of growth.
The end of the problem/solution fit can be called business idea confirmation, the end of the product/market fit can be called value hypothesis confirmation.
And for rapid growth, confirmation of marketing, sales and engines of growth are needed (growth hypothesis). In this, it is crucial that the lean startup systematically establishes the collection of feedback (metrics) from the market or customers in every stage.
Four stages of customer development
|1. Customer discovery||Problem/solution fit||Idea confirmation|
|2. Customer validation||Product/market fit||Product confirmation|
|3. Customer creation||Growth||Confirmation of engines of growth|
|4. Building a traditional functional business organization|
The stage of discovering and validating customers (1st and 2nd stage of customer development) includes defining the consecutive steps that the lean startup follows when looking for a working business model. Steve Blank defines the steps as:
- Phase 1: Write down the vision and hypotheses on a canvas
- Phase 2: Test the problem
- Phase 3: Test the product solution
- Phase 4: Confirm the assumptions or pivot
First, the lean startup team writes down its vision and hypotheses by using the lean or business model canvas. Then it tests the problem and solution by using the concept of the minimum viable product and out-of-the-building learning.
All this enables validated learning based on the build – measure – learn feedback loop. Validated learning means that the company decides to confirm or reject assumptions written in the canvas based on concrete innovation metrics, and then decides to either keep the business strategy or pivot.
In doing so, it is necessary for the business team of the lean startup to focus mostly on the problem (not the solution), namely on the smallest possible problem that it can solve and for which customers are prepared to pay.
A niche approach is crucial, and if the entrepreneur becomes the first in a niche, they then have the option of expanding with a leverage, because they know customers better than the competition. Besides focusing on the problem, the vision of the business team is definitely incredibly important, and flexibility in business strategy should be kept around it.
3.2. Vision of the lean startup
Even though the lean startup represents a new business methodology and approach, at the beginning the business team (or startup team) needs a big vision (as it is written in the business plan) that defines any type of a blooming business that entrepreneurs wish to build.
To achieve that vision, the startup team needs a starting vision that includes a business model (devised on a lean or business model canvas), plan of product development, strategic look into potential partners and competition, and a rough idea of who the potential customers could be.
Examples of questions that help to define company's vision:
- How will the company contribute to the industry?
- How will the company change people’ lives?
- How big could the company become?
- How big the team wants the company to become?
- How many products there will be?
- What will be the core competence of the company?
Building a product is the final result of the vision and strategy. But in doing this, the startup team constantly supplements, upgrades and changes the product through optimization.
The startup team changes the strategy with a pivot if that is needed based on the feedback by customers and market, but the vision of the team rarely changes significantly or only parts of it change.
The lean startup’s vision stays more or less the same final goal, but the path to it is flexible. In some way, the task of the startup team is to find synthesis between the business vision and what customers are prepared to buy.
So the goal of the lean startup is to use scientifically devised experiments to discover and learn how to build a long-term business around the vision of the business team. Considering that the vision of the lean startup is very viable, it is often called the minimum viable vision.
On the one hand, the business team must always have a pragmatic and practical approach rooted in the reality of metrics, but on the other hand it needs a vision that is exciting, daring, unshakable and attractive for founders.
The minimum viable vision is what provides an exciting explanation of why the lean startup will become the dominant and disruptive player on the market. It often includes a lot more than only empty illusions of the business team.
The minimum viable vision reflects concrete exciting facts, for example that a new business ecosystem is being built around the company or that there are several options for monetizing the idea, marginal costs that lean towards zero, trends support the vision, it isn’t hard to set a pricing strategy, and other concrete facts that show a business opportunity.
After defining the vision and consequently the type of company and the type of market, there is the step of writing down hypotheses (assumptions) in the lean canvas, followed by verifying hypotheses on the market with actual customers, first by focusing on the size of the problem and suitability of the solution.
3.2.1. Start with why
The big vision must also include a clear answer to why the vision is important to founders. According to Simon Sinek, every great company must start with why.
The general idea is that a startup team to find powerful why that gives their work a deeper meaning and makes everything else secondary. A powerful why gets team motivated and enthusiastic, and an enthusiastic team is always personally invested and stays like that much longer.
The more clearly an organization describes and communicates their why, the more people will like it, and that goes for all stakeholders, especially customers. The truth is that people don’t buy what people make, they buy things for why people make them.
The founders should have a clear answer on the questions like:
- Why are we making this?
- Why doesn’t this exist already?
- Why us?
- Why now?
- Why do people need this product?
- Why will people want this product?
- Why will people pay for this?
- Why will this make people do/feel/be, what they want to do/feel/be?
- Why would people buy from our competitors?
- Why will people cross the street to buy from us?
- Why does this idea matter?
3.3. Lean canvas and business model canvas
An alternative method of business planning inside the concept of the lean startup, enabling the team to regularly verify assumptions and quickly adapt the business idea to the market, is called using a business model or lean canvas.
Because the business model needs to be turned on its head several times, it makes a lot more sense to use the lean canvas or business model canvas instead of traditional business planning. The use of the lean canvas is what enables the transition from a static business plan into dynamic adjustment of the business model.
The main idea behind using a canvas instead of a business plan is the option of displaying the business model in a portable single-page schematic. Two main canvases are most in use, namely the business model canvas, designed by Alexander Osterwalder in the book Business Model Generation, and the lean canvas, which Ash Maurya derived from the business model canvas.
By using the canvas, the startup team can very quickly and efficiently find potential business models, set priorities, and follow continuous learning based on the build – measure – learn feedback cycle.
The business model canvas allows the business team to avoid many weaknesses of business planning, such as time-consuming long texts, unclearly written assumptions, long‑term planning etc.
The key advantages of using the canvas instead of the business plan are mostly the following:
- Speed – Compared to the business plan, which the startup team can spend several months writing, it is possible to sketch several business models on the canvas in a single afternoon.
- Succinctness – The way that the canvas is designed allows the startup team to focus on the key elements of business operations and extract the essence of its product. Succinctness is achieved with clear visualization of the business model by using a frame (in lean manufacturing, this visualization is known as the Kanban philosophy).
- Portability – The business model that’s presented on one page in the scope of the canvas is a lot easier to share with other stakeholders of the lean startup. That means that more people read it and that the frame is easier to update than a business plan.
The lean or business model canvas don’t only represent a record of the currently planned business model of the company in a certain moment. Using them also enables the team to monitor the progress in finding a working business model, and to keep an eye on the state of confirmation or rejection of assumptions.
This is why it’s incredibly important that the team of the lean startup refreshes the lean or business model canvas at least weekly. It is necessary to regularly write down assumptions, confirm or reject them, write down new assumptions, and clearly show the adaptation of the strategy.
3.3.1. Business model canvas
The business model canvas was devised by Alexander Osterwalder. Using the frame allows you to present how the company will generate money with a diagram structure and clear visualization.
The diagram structure, which can be used by all types of organizations for writing down key hypotheses and rapidly designing business models, including lean startups, encompasses nine frames:
- Value proposition – Value proposition defines the way in which the organization solves the problem and satisfies customers' needs. Value proposition is what defines the reason why customers decide to buy from a specific company.
- Customer segments – The organization offers its products or services to one or more customer segments. In this segment, there is the important decision to be made about which segments take priority and which are not important.
- Sales channel – Customers access the value proposition through communication, distribution and sales channels. This part of the business model includes all activities, from increasing the awareness about the product on the market to planned use of different distribution channels.
- Customer relationships – An organization has to implement certain activities with which it establishes and maintains customer relationships. This includes activities like retaining customers, after-sales activities, additional sales, and other activities for building a strong customer relationship.
- Revenue streams – Successful value proposition for potential customers through sales channels is seen in successfully created revenue streams. Revenue streams can be one‑time, in case there is a single purchase, or repeatable, if the customer makes a purchase with the provider several times.
- Key resources – The part of canvas that includes key resources deals with assumptions about which resources are vital for serving customers and other business activities. Key resources can be physical resources (such as machines, facilities), they can be intellectual property (such as patents, brands etc.), and amongst them are also human resources and the need for capital resources.
- Key activities – The organization achieves all desired goals through implementing a certain number of key activities that lead to the goal step-by-step. Key activities have to be defined mostly on the basis of all other parts of the business model.
- Key partners – Some of the activities are carried out by other partners or the organization leases certain resources and services on the market, meaning it needs reliable key partners. Key partners mostly include strategic partners, subcontractors, suppliers and joint investments.
- Cost structure – Business operations of an organization create costs that need to be thoroughly defined and compared to the revenue streams. With costs, it is important to define fixed and variable costs as well as the potential positive impact of the economies of scale.
3.3.2. Lean canvas
Ash Maurya derived the lean canvas from the business model canvas by Alexander Osterwalder, as described in his book Business Model Generation. The lean canvas differs from the business model canvas mostly in that it is meant exclusively for startups.
The business model canvas includes a large part of planned infrastructure (partners, activities, resources, customer relationships), while the lean canvas focuses exclusively on areas that are most important for startups. Thus key partners are substituted by the problem, key activities with the solution, resources with metrics, and customer relationships with unfair advantage.
The purpose of the lean frame is that it helps the startup dissect the business model to nine components that can be systematically tested, starting with the most and ending with the least risky one. An important fact is that not only is the startup’s product a “product for the market”, but rather the entire business model is a “product for the market”.
The nine components of the lean canvas are:
- Problem – The startup team lists the three biggest problems that customers face and that need to be solved for the chosen customer segment. The problems can be imagined as the tasks and effort that the customer should make or does have to make without the solution. It’s also important that under problems, the startup team writes how the customers are currently solving them.
- Solution – In the solution segment of the canvas, the startup team writes every thought on what is the easiest way to start solving every problem written down.
- Unique value proposition – The field of unique value proposition defines how the startup’s solution is different from the competition and why it is worth the attention. In the starting stages of building the company, grabbing the attention of the customer is highlighted more than sales. By defining the unique value proposition, the startup extracts the essence of the product and has to describe it in a few words that clearly show how it will attract customers. A well-defined unfair advantage answers two key questions, namely what the startup’s product is and who the product customer is.
- Unfair advantage – An unfair advantage is defined as something that can't easily be copied by the competition. Unfair advantages can include everything from internal information and personal authority to the community and existing customers. Usually certain unfair advantages start as the basic values of the company and become the company's differentiators, so what the customers use to differ the company from the competition.
- Channels – Channels are paths to customers. In the learning stage, it makes sense for the startup to use all channels to potential customers and find those that lead to a sufficient number of customers as soon as possible. In this, the startup needs to realize that free channels don't exist. Even those that seem free (social media, search engines etc.), have costs in the form of human capital. It is also sensible for the startup to give priority to inbound channels, namely those where customers find you on their own (the so-called pull messaging), rather than outbound channels. Examples of inbound channels are blogs, e-books etc. It is also advisable that at the beginning, the startup focuses on channels that are as direct as possible, because that enables maximum learning.
- Segments – In the field of segments, the startup recognizes all potential users and puts them into segments (groups that are as homogenous as possible). Inside every segment, it is crucial that a startup creates a picture of a ideal customer (personas), whereby it makes sense to follow the goal of finding the early adopters, not aiming at all customers and the mainstream market from the very beginning.
- Key metrics – In the canvas, the startup defines its key metrics. These include certain key numbers based on which the startup can measure progress and how well it is doing. In this, the recommended model is to use Dave McClure's pirate metrics, which include the whole picture from raising awareness of the brand and creating demand to recommendations.
- Revenue streams – Revenue streams, together with the cost structure, help the startup evaluate the lucrativeness of the idea. In this, it is important that the startup doesn't think about long-term three- to five-year predictions, but more about the short term. It is also incredibly important that the startup thinks about potential streams from the beginning, because the way of pricing is an important part of the product. There is a rule (with certain exceptions) that if the entrepreneur is intending to charge for the product, they should do so from the first day. Beside this, the price determines which customer segment the company is in, and payment is the first form of validating the business idea. Revenue streams, pricing strategy, and earliest possible charging are thus important aspects of the business model.
- Cost structure – With costs, it's important that the startup knows the necessary amount of capital needed to launch the minimum viable product. Afterwards, it constantly renews and supplements this amount based on the feedback from the market. At the beginning, this amount of capital includes covering the costs for doing 30 – 50 interviews with customers, and for creating and launching the minimum viable product. The startup simply lists all operative costs that will grow until product launch.
3.3.3. Recommended steps in making a lean or business model canvas
It is recommendable that the startup (entrepreneur) starts thinking about who the potential customers for their product could be, and make a list. In this, they must strictly distinguish between customers (those who pay) and product users.
In the next step, it’s advisable that they divide wide segments of users into smaller ones, because in entrepreneurship there is the general rule that it isn’t possible to create, design and position a product for everyone. When the startup is preparing a list of potential customers, it has to keep very specific customers in mind.
In the next step, the startup starts preparing the lean (or business model) canvas. It is recommendable to start with one canvas, with two to three customer segments that are most promising, and using different colours and labels for different segments in the same canvas.
During preparation, it is important that the startup sketches the canvas in one go (in less than 15 minutes), because the point of the first sketch is for the startup to write a short summary of its current thoughts and assumptions.
There’s nothing wrong with a few fields staying empty, it’s more important that the startup is succinct with the first sketch, thinks about the present, focuses on the customers, then goes out of the building as soon as possible to test its model with other stakeholders.
When the startup team goes out of the building and starts doing interviews, it upgrades the lean canvas based on the feedback.
3.4. Setting and verifying hypotheses
The basis of the lean startup methodology is that the entrepreneur changes their business thoughts, ideas, assumptions and strategies into falsifiable assumptions or hypotheses. The point of such an approach is better risk management.
A falsifiable hypothesis is nothing other than a statement that can easily be proven wrong. The statement we are testing as a hypothesis has to have a specific and measurable outcome, and be based on a specific and repeatable action.
The prediction already enables you to more easily verify the actual state and a better judgement, even though mistakes are possible in evaluating the expected outcome.
Verifying assumptions always takes place in collaboration with (potential) customers. The most typical mistake made by startups is to develop a product in absence of customers.
It is simply impossible to learn about the market and the customers if there is no interaction with the customers and if at a certain point, customers don’t start using the minimum viable product and that is then the source of real feedback.
Ash Maurya defines the falsifiable hypothesis as:
Falsifiable hypothesis = [specific repeatable action] will [expected measurable outcome]
The key purpose of testing assumptions is that instead of having blind faith in its assumptions, the startup team purposefully tests and tries to prove that their assumptions about the business and customers are wrong. By verifying assumptions, the team or entrepreneur-individual try to find shortcomings in their business idea on purpose.
Setting hypotheses is confirmed qualitatively, and checked quantitatively. The sequence of using methods is that qualitative verification takes precedence over the quantitative. By testing, the startup follows goals to receive a strong positive or negative reaction from the market.
Not a big sample of potential customers is needed to achieve that. By verifying hypotheses, the startup wishes to better manage mostly three key risks:
- Product risk – Product risk is connected to how to correctly make a product, namely which functionalities to develop so that the customers will be willing to pay for it. When using the lean startup methodology, it is recommended that the entrepreneur first makes sure that they have a problem that needs to be solved; if they have one, they can then determine the specifications of the minimum viable product and make it; when it is made, the startup validates the minimum viable product on a small scale and in the last step on a big scale.
- Customer risk – Customer risk is connected mostly to how to find the path to customers. The process of lowering risks with the lean startup method recommends that the entrepreneur should first focus on who even has a problem, then focus on the earlyadopters that want to have the product immediately.
- Market risk – Market risk deals with the question of how to create a profitable business. Systematically managing risk according to the lean startup methodology includes recognizing the competition and its alternative existing solutions, setting the product price, and testing the price based on first spoken and written reactions of customers and their behaviour. In the last step, the startup optimizes costs by arriving at a suitable business model.
All three risks can be summarized in two key assumptions that the lean startup must confirm, namely the value hypothesis and the growth hypothesis.
When the business team sets a vision, the next step inside the lean startup methodology is that they break it apart into smaller pieces inside the business model or lean canvas. The most important components are exactly these two hypotheses.
The startup uses the value hypothesis to check whether the product based on a vision really brings value to the customers (they’re prepared to pay for it), and uses the scientifically-set growth hypothesis to check how new customers will discover the profitable product or service.
A condition for learning is failure, which shows through rejected hypotheses. If you don’t experience failure, you can’t learn, which leads us to validated learning.
Two basic hypothesis of the lean startup
|Value hypothesis||Idea confirmation|
|Growth hypothesis||Confirmation of engines of growth|
3.5. Validated learning
When customers use a product, they create feedback and with it important information. Feedback can be qualitative as well as quantitative.
Information from the first customers is significantly more important for a startup than an investment, victories at various competitions or media releases, because they are the input element for further development of product functionalities and ranking the importance of business ideas.
When we speak of entrepreneurial learning, high caution is necessary. Learning is one of the most frequent excuses for failure. We can often hear the excuse we didn't succeed, but at least we learned a lot.
Entrepreneurs as well as managers quickly find excuses in saying what important lessons and new knowledge the failure brought. It can be very cold comfort, mostly to investors in the company who lost the invested resources, and entrepreneurs who lost the invested resources as well as their time and precious energy.
Learning is important, but it shouldn’t only serve as a cheap excuse, but rather needs a different name and a more detailed definition. We are talking about validated learning.
Learning about the market and customers is the key task of startups, because it’s the only way to build a real product. In doing so, actual learning isn’t the one that serves only as an excuse, but rather the one that tells which elements of the strategy work and which ones don’t.
Real learning says exactly what customers want and what they don’t. Not even what they say they want or what they think they want, but what they actually want. Real learning gives feedback about the behaviour of potential customers. It’s called validated learning and it’s a key concept of the lean startup.
Validated learning is a process that can empirically prove that the business team has discovered an insight into the market and customers, current and future ones. In validated learning, the information is more concrete, exact and faster compared to traditional marketing research and business planning.
Validated learning helps the business team to learn and systematically eliminate everything that is a waste of resources, which includes all that the customers aren’t prepared to pay for. It should be stressed once again that validated learning is always supported with empirical data that are gathered from real (potential) customers.
Thus the key goal of discovering and developing customers, and validated learning, is that the lean startup team understands which functionalities in the product aren’t needed. At the end, validated learning must show in improvements of key and lean startup metrics.
In the beginning stages of business operations, these metrics are rarely the revenue, they are always connected to what the customers want. The customers might not know what they want, so it’s crucial to systematically verify assumptions with help of the minimum viable product.
By validating or disproving hypotheses, the startup learns about the market and customers. A validated hypothesis thus means nothing other than that the business team is, based on data, confident enough to continue investing time, money and effort into a certain direction.
In this, a healthy measure of scepticism is always necessary, the customer’s behaviour is more important than their words. This leads us to the fact that in a lean startup, learning first takes place outside the conference room (amongst the customers).
3.6. Learning outside the conference room
As we have seen, the main function of a lean startup as a temporary organization for validating the business model is customer discovery and development.
In the stage of discovering and developing customers, the vision of the founders is transformed into a set of assumptions on the lean or business model canvas that need to be tested on the market.
Discovering customers always takes place “out of the building”, and the key purpose of the process is mostly detailed understanding of the customer’s problem and the greatness of need for making the solution for the problem.
First, let’s say a word about where the concept of learning outside the conference room comes from. In Toyota methodology of lean production, an important concept is “genchi gembutsu”, the translation of which is “go and see for yourself”.
The wisdom of this concept is that you get direct knowledge about something through your own experience. The same concept is also used in lean startup, called “get out of the building” because early contact with the customer is what reveals the riskiest and most critical assumptions of the business.
No matter how many intermediaries are between the company and customers, at the end customers are living and thinking individuals who behave according to certain patterns that are measurable and can be influenced. This is why intense contact between the lean startup and customers is necessary for developing the right product.
The startup learns fastest in conversation with customers. When it comes to learning, talking to people is more important than collecting analytical data. Because customer discovery is about discovering the unknown, surveys and focus groups aren’t the best option.
With a survey, the startup assumes that they already know the right questions (and sometimes answers), and this prevents additional explanations and the analysis of other unexpected areas. Focus groups often develop into group thinking, which prevents the collection of real concrete data.
Customer discovery thus takes place mostly with interviews. For effectively doing interviews, mostly the following instructions are recommended:
- The startup should focus on learning, not on selling their idea. It is crucial that in the interview, you only set the context, then let the customer speak most of the time. Every communication with a potential customer has to be a learning opportunity for the startup.
- In interviews, potential customers often aren’t completely honest, either from politeness, a lack of interest or any other reason. That’s why it’s important that the startup observes the customers’ behaviour and measures what they are doing or how they are reacting. An example of getting a reaction is a call-to-action, such as getting a verbal commitment for buying the product with advance payment.
- It’s important that the interviews follow a certain scenario, meaning that the startup is able to ensure the consistency and repeatability of interviews. The best way to achieve that is by using fixed scenarios.
- A startup can start with a wider range of starting potential customers when doing the interviews, and set the exact target group later, once it starts a new round of detailed interviews.
- It is recommended that at least two people are present at the interview, so that mistakes resulting from forgetfulness are prevented and more facts are detected.
- Different financial incentives or rewards for participating in the interview aren’t desired. After all, the startup wants the potential customer to buy the product, not for the startup to pay the potential customer for participating in the interview.
- Interviews should take place live, if at all possible, it’s best to start with personal contacts, choose a neutral location, and ensure enough time. It’s recommended that you avoid recording the interviews, because interviewees behave differently. The results should always be noted directly after the interview, while the thoughts are still fresh.
3.6.1. The customer discovery interview – problem
The startup guarantees the consistency and repeatability of interviews by preparing a suitable scenario. In general, there are two types of interviews, namely the interview for learning about the problem and the interview for testing the solution.
The goal of the first is to gain information from potential customers about whether they actually face a certain problem, while the second interview type is dedicated to obtaining feedback about the startup’s solution and inbound data for creating the minimum viable product.
The scenario of doing the interview for learning about the problem (not testing the solution) includes several stages, suggested by Ash Maurya:
- Welcome (2 min),
- Collecting general and important demographic information (2 min)
- Presenting the problem together with the context and ranking problems that the customer supposedly faces (6 min)
- Discovering the customer’s view on the world and posing sub-questions (15 min)
- Conclusion (2 min)
- Writing down results (5 min)
In the stage of conclusion, it is important that the startup does two more things: Explains its solution on a conceptual level and gains the permission to further inform about the product.
An individual interview should consequently take about 30 minutes. Before an entrepreneur decides to make the final product following the lean startup methodology, they should test the solution with a minimum viable product, about which more below.
The biggest challenge in doing interviews for learning about the problem of the lean startup is usually that the lean startup finds it difficult to resist the desire to present its solution and business idea. But that leads the conversation away from the key goal, which is deeply and thoroughly understanding the customer’s problems.
Within the interview about the problem, it is incredibly important to realize that the purpose isn’t for the team to gather information about what specifications the customer would want. The team’s task is to find early users that need a solution consistent with the company’s vision.
The most important things that a startup should learn when talking to potential customers about the problem are:
- One to three main problems that potential customers face, including the suitable context of the startup’s business idea
- How potential customers are currently solving this problem
- How big or painful is this problem
- What are the costs of this problem and existing solutions, are there any obstacles preventing the potential customer from starting to use a new better solution
- In what way could the customers most easily get the information about a new better solution the the startup has to offer
For quality insight into understanding the problem, the startup should carry out between 30 and 60 interviews in the period of four to six weeks. The best measurement for stopping interviews is when they don’t give any new more knowledge to the startup.
There are many opportunities for obtaining potential interviewees:
- the startup can start with personal contacts,
- by collecting contacts through a website,
- collecting contacts through social networks,
- and with cold calls and e-mails.
3.6.2. The customer discovery interview – solution
Only talking to customers about problems isn’t enough, because most potential customers know how to clearly express problems that they’re facing, but they often have problems with visualizing solutions.
That’s why it’s important to do the second type of interviews (in approximately the same scope), where the startup is focused on the solution.
The scenario of leading the solution interview also consists of:
- A welcome (2 min),
- Collecting demographic information (2 min) and presenting the problem with the context (2 min)
- Presentation of the product, with which you test the solution (15 min)
- Test of the price (3 min)
- A conclusion, including writing down the results (2 min).
In the end, the startup asks for permission to send further notifications and asks for recommendations if the potential customer knows any other potential customers for doing additional interviews.
For leading a solution interview, the startup needs at least a demo product, if not already a minimum viable product that replaces the actual solution. Feedback based on a demo product can be excellent inbound information for making a minimum viable product.
Demo products can be sketches, models, prototypes, clay products or products made with a 3D printer, demo presentations etc.
When making a demo product it’s important that the startup makes it in such a way that it is feasible in practice, it has to look like the real thing, it has to enable quick iterations for additions and upgrades, and it mustn’t be financially wasteful.
At the interview about the potential solution, the lean startup needs to get information about whether its solution is a sustainable or disruptive innovation – whether the solution can be directly compared to an existing solution.
This gives the right context of whether you are addressing a new market or not, whether customers have a suitable business environment and the necessary conditions to start using the new solution immediately, whether they see an opportunity and reality of using the new solution in everyday working process and of course, are they prepared to pay for the new solution.
An important part of the solution interview with potential customers is testing the price. In doing so, you have to stick to the principle that you shouldn’t ask a potential customer how much they are prepared to pay, because this often leads to embarrassment and there is also no reason why the potential customer wouldn’t give an unreasonably low price.
It’s also important that in the stage of verifying the price, the startup doesn’t decrease the purchase friction (lower price, free use with the purpose of obtaining the first satisfied customers etc.) but increases it instead, because otherwise postponed validation can occur – the customer confirms that they will buy something for a fair price, but we actually don’t know this or they wouldn’t do it.
The difference between a pitch and a solution interview is that a pitch is an “all-or-nothing” type of an offer. In a solution interview, learning is still in the forefront and the startup leads every step with a clear hypothesis and evaluates the customer’s reaction.
The stage of customer discovery and validation is concluded when the team, based on tests and iterations of the minimum viable product, proves that the chosen business model can achieve the volume of sales that are needed for the desired profitability of the company.
The startup team also needs to have concrete metrics and proofs that they can reach a bigger number of customers and consequently rapid growth. At the end of the stage of customer discovery and validation, the business team already has an exact sales plan. In the stage of customer discovery, it’s important that the business team obtains enough information for building the minimum viable product.
3.6.3. Earlyevangelists – Excited early users
In his book Crossing the Chasm, Geoffrey Moore popularized the concept of how new technologies are adopted by the market (based on Everett Rogers' Diffusion of innovations), whereby the use of technology spreads through five different stages or user groups:
- Innovators – Aggressively adopt new technologies, exclusively for technological interests. They are mostly the people working with technology, innovators, scholars and other technology enthusiasts. Their main characteristic is that they don’t have a problem spending hours upon hours with a certain technical product until it starts working properly.
- Early adopters – Adopt and use new technologies because of the actual benefits that they bring. Early adopters are usually visionaries outside and inside organizations, who are the first buyers of new technological products and as such finance their further development. They are prepared to accept bigger risks and convince others in their environment to do the same. Their characteristic is that it is easy to sell something to them but it’s difficult to satisfy their needs, because they are, after all, a type of visionaries.
- Early majority – They adopt and use new technologies, but only after the technology is developed well enough that there aren’t too many errors and un-working aspects. It’s a pragmatic segment that’s more difficult to profile, because they don’t accept overly large risks like visionaries do.
- Late majority – They aren’t interested in technology, but they buy a solution when it becomes the market standard. We can call them conservatives. They are against technological changes and are often somewhat afraid of new technologies. They are stubborn towards changes and when they start using new technologies, that doesn’t mean that they like it.
- Laggards – They don’t want to use new technologies or they adopt them extremely late. They often block the buying of new technologies in environments they work in, which is why it’s incredibly important that technological companies neutralize them.
Successful lean startups in the first stages don’t develop a product for the mass market, because they usually lack the resources to do so. Instead, it makes sense for them to focus on identifying small groups of people with a big problem or pain that the startup solves with its product.
Above all, members of this group have to strongly believe the startup’s vision. This group of customers are called earlyevangelists and they are a special segment of early adopters. So the goal of the startup isn’t to find the average customer through the customer discovery process, but to find the enthusiastic earlyevangelist.
Earlyevangelists are the people who feel that they need the product right away, are prepared to participate in the development stage with feedback, and they allow development mistakes as the first users of the product.
Steve Blank states the characteristics of earlyvangelists in five key elements:
- Have a problem and a need.
- Realize that they have a problem.
- Were actively looking for a solution in the past and have to solve the problem as soon as possible.
- Somehow manage to solve the problem temporarily in an ineffective way using several different parts and activities.
- Have a budget for buying a better solution.
The key participation of earlyevangelists in the process is mostly that these users have no problem giving feedback and including their idea of which functionalities the product needs and they would be prepared to pay for.
The incredible importance of enthusiastic earlyevangelists lies mostly in the fact that they are already looking for solutions for the problems they have.
Thus their purpose isn’t only a desire to use new technology, like it is with innovators. What’s even more important is that they disregard others when making buying decisions and they are prepared to help with feedback.
Through the customer discovery process, the lean startup must thus find the so-called earlyevangelists who are prepared to actively participate in further development of the solution and buy it, and thus co-finance its development in a way.
The majority of learning takes place in interaction with these users, and the minimum viable product is indispensable for learning.
3.7. Minimum viable product
Developing the entire solution or product is time-consuming and wasteful, especially if it turns out that the startup is developing the wrong solution or developing unnecessary properties. The goal of the lean startup methodology is also to increase the speed of learning.
The problem is that in the stage of collecting demands, developing the product, and ensuring quality, you get very little information about the market and the customer, so there is almost no learning. The lion’s share of learning happens after launching the product.
The solution for this problem in the lean startup methodology is the concept of a minimum viable product. With it, the startup learns about the market and customers more quickly, without already finalizing product development based on assumptions that can be wrong.
In traditional methods of product development, which usually includes long development stages up until perfecting the product and until it is ready for the market, learning typically starts only in the end, when the product is already complete and on the market.
The goal of the minimum viable product is that learning starts immediately. Unlike the prototype or pilot concept, the purpose of the minimum viable product isn’t to answer the technical and designer questions of the product, but to enable the testing of key business assumptions.
The minimum viable product is completely different from the final, shiny and incredible product made by perfectionistic values, and it isn’t the product that you gladly show to your parents and that gets awards at different fairs. A minimum viable product often seems like an unacceptable compromise, an unfinished product full of mistakes.
MVP enables the maximal amount of learning about the customers and the market with the minimum amount of effort.
This is why when making the minimum viable product, good judgement is important and so is simplification, if the business team doesn’t know whether to add a functionality or not. The minimum viable product needs to include the smallest possible scope of functionalities that solve the central problem for customers.
The minimum viable product often isn’t a lot more than an advert. Examples of a minimum viable product are:
- video presentation,
- manually doing the service instead of building the product,
- landing pages,
- testing the idea through crowdfunding,
- quickly prototyping with 3D printers,
- and other approaches that give a simulation of the actual product and the potential customer’s purchasing decision.
The minimum viable product needs to be constantly upgraded based on feedback from customers. Upgrading and iterating the minimum viable product and later the final product in companies following the lean startup methodology often takes place following the methodology of continuous deployment.
If we summarize what the minimum viable product is, it’s the version of the product that enables the maximal amount of learning about the customers and the market with the minimum amount of effort. It encompasses the smallest possible extent of functionalities that customers are prepared to pay for.
In this, the rule is that if you aren’t at least a bit embarrassed when you show the minimum viable product to customers, you don’t have a real minimum viable product.
3.7.1. The customer discovery interview – MVP
After making an MVP, it’s recommendable that a startup does the third interview, namely the interview about the minimum viable product. The purpose of this is still learning and convincing users to sign up to use the service and in doing so, test the messaging, prices and activation stream.
The scenario of such an interview includes a welcome (2 min), displaying introductory materials or website (2 min), showing and explaining the price (3 min), acquiring the customer (15 min) and conclusion (2 min), together with writing down the results (5 min).
The goal is thus to gain additional feedback about the minimum viable product and marketing material, and to get the first paying customers.
3.8. Build – measure – learn loop for validated learning
The method of the lean startup is based on a scientific approach, which means that performing experiments is of key importance.
An experiment in the lean startup methodology means implementing the cycle that includes the entire validated learning process. This is the build – measure – learn loop whose essence is to get feedback from customers.
Based on this loop, the basic activity of the startup is to build individual functionalities of the product (which are part of the minimum viable product), and measure how potential customers react (product use metrics). Afterwards, based on the metrics of use and validated learning, entrepreneurs make a decision about whether to keep the functionality or pivot.
The learning cycle has three stages.
- The first stage is the stage of creating, called build, in which the startup makes the minimum viable product based on the assumptions written on the canvas.
- Then in the next stage, the startup shows the minimum viable product to customers and, with a combination of qualitative and quantitative data, checks the reaction of customers and thus validates or rejects its assumptions. The stage is thus called measure because the startup measures the reactions of potential customers.
- All this leads to the last stage, namely the stage of learning. The findings are what help the startup decide whether a pivot is necessary or not.
The main point of the build – measure – learn loop, is mostly in reaching a high speed of learning about the market and customers. The goal of the startup is to find a working plan before it runs out of resources, and it finds a working plan based on learning (validating hypotheses) about the market and customers.
The startup’s goal should be to increase the amount of learning about the biggest risks of the business model in a time unit.
The faster that the lean startup follows the build – measure – learn loop, the bigger the possibility that the startup finds a working business model on time. If the startup is too slow in following this cycle, it usually fails because the money for financing launch runs out.
Meanwhile in speed and validated learning, the biggest problem is psychological (ego), because you have to admit small defeats and face unverified assumptions. You must have no problem with being wrong, knowing that you are always wrong before you are right.
3.9. Startup's engines of growth
Once the startup confirms the plan and validates hypotheses on the market, it passes to the stage of rapid growth. In this, the revenue is the first and customer retention the best form of confirming the hypotheses and the right business model.
Company growth based on the lean startup methodology can originate from three foundations, called the engines of growth.
An engine of growth is a mechanism and way that startups use to achieve sustainable growth of the company. Company growth primarily depends on three things:
- Profitability of individual customers
- Costs for acquiring a new customer (CAC)
- The speed of repeated purchases by existing customers.
These are the basic elements of growth of a lean startup, and the bigger that these values are, the faster the company will grow and the more profitable it will be.
In doing this, engines of growth are a mechanism that the startup uses to reach the desired constant growth. The startup can achieve constant growth only on the basis of:
- activities of its existing customers, for example through word-of-mouth publicity,
- repeated purchases,
- reinvesting the revenue from existing customers into advertising, or
- consequence of using the product, for example an invitation of friends into online social networks.
These sources of growth compose the three basic engines of growth. The name “engines of growth” comes from the fact that this is a strong feedback loop where more existing and new customers bring even more new customers to the company.
In the lean startup theory, we know three basic engines of growth that the company can focus on:
- The sticky engine of growth: The sticky engine of growth mostly relies on the fact that once customers start using the product, it’s difficult for them to switch to a new product or to stop using it, and so they make repeated purchases. An example of such a product are databases. Growth in this case is determined mostly with the factor of how quickly the startup acquires new customers compared to the churn of existing customers. The sticky engine of growth is based on retaining a large number of customers as compared to the churn rate of existing customers. Growth in this engine is measured and achieved by keeping the customer acquisition rate higher than the churn rate. Churn includes all those customers who leave or don’t want to use the product anymore.
- The viral engine of growth: Viral growth happens automatically, when existing customers bring in new customers by using the product. The speed of growth in this case depends on the viral coefficient, which measures how many new customers the startup obtains based on one existing customer (and how quickly that happens). For exponential growth, the coefficient has to be at least 1.0, meaning that every existing customer gains at least one new customer. Examples of companies that use such an engine are online social networks. In this, we know three types of virality: such that is inherently a part of the product and happens through product use; such that is artificial and achieved through a reward system; and word-of-mouth virality that happens based on customer satisfaction.
- The paid engine of growth: The paid engine of growth means that the company reinvests the revenue of existing customers into paid advertisement for obtaining new ones. The speed of growth in this case depends on two factors – how much revenue from an individual the company can reinvest into paid advertising, and how much it costs to acquire one new customer. In this, there is the rule that the cost for customer acquisition is higher for more expensive products, but the profitability of such a customer has to be bigger. The paid engine of growth is based on a high margin. If a startup really achieves very high margin, then it can reinvest part of customer revenue into acquiring new customers. Growth based on the paid engine is measured based on the customer lifetime value and customer acquisition cost. The golden rule is that the customer lifetime value is even three times higher than the cost of their acquisition.
It’s important for the startup to focus on one model of growth, which usually isn’t obvious at the beginning, but can change throughout the curve of the company’s lifecycle. Choosing the engine of growth strongly defines the choice of metrics that show the progress and development of the company.
In this stage, not only searching for the suitable engine of growth is important. This stage comes after confirming the problem, solution and customers, and Steve Blank calls it customer creation.
Customer creation includes finally launching the product after confirming all hypotheses in the customer discovery stage, marketing positioning of the product and company on the market, official launch to the market, and constantly creating new demand with different methods of sales and market communication.
3.10. Innovation accounting and metrics
The instinct of the business team gives ideas for experiments, while concrete data and metrics are proof of the accuracy of this instinct. Customer development gives the startup the first feedback about which minimum viable product to build, then validation with concrete metrics is necessary.
The purpose of innovation accounting and metrics of the lean startup is to ensure a method for measuring progress in extreme uncertainty, where traditional financial planning isn’t useful.
Traditional accounting and controlling (balance and income statements together with the financial plan) don’t give such good insight into the success of business operations with startups as they do in already established companies, mostly due to a lack of information about stable past business, and an uncertain future.
This is why a different metric frame for measuring progress of disruptive startups is needed – the so-called innovation accounting. In lean startup, the purpose of analytics and metrics is thus that they show the business team the path to the right product and market before money in the account runs out.
Innovation accounting is based on three key steps.
- The first step is that based on the minimum viable product, the startup starts obtaining concrete information about where the company currently is. Without a factual picture of the current situation, it is impossible to measure progress.
- In the second step, the startup must use different tests to try to improve the metrics of growth and progress.
- The last step covers the metrics-based decision of whether the company should continue with the strategy or decide to pivot. The startup decides to pivot when every next experiment doesn’t improve business metrics. This means that something is wrong with the strategy and it has to be changed. In case the strategy is changed, the startup returns to step two and once again works in the direction of improving metrics for the ideally planned picture.
With metrics, making decisions stops being about what customers said in interviews and starts being about strictly measuring what customers are really doing and what their behaviour is. However, it is still necessary for the startup to see actual people or customers behind the numbers of metrics.
An important problem solved by the minimum viable product and the set metrics is that the more disruptive the innovation, the less the customer is aware of what exactly they need and whether they would use and buy a certain product.
In sustainable innovations, it’s usually clear what exactly the customer needs (a better and cheaper product), while in disruptive innovations it usually isn’t, because the potential customer hasn’t even had an experience with such a product yet.
With disruptive innovation, the customer doesn’t know exactly what they want, simply because they aren’t aware of what’s possible outside their current experience and knowledge. This is why it’s necessary to measure the reaction of customers based on the minimum viable product based on metrics, and not only do interviews.
3.10.1. Vanity metrics
Vanity metrics are those metrics that note only the current state of the product, but don’t give an insight into how the startup arrived to a certain result and even less how to continue and which strategy to choose.
Vanity metrics give the team good feelings, you can brag with them or even collect money from inexperienced venture capital investors, but they can absolutely have fatal consequences if the team makes business decisions based on them.
So every metric or information that doesn’t influence the behavior of the business team and the strategy is a vanity metric. Based on a metric, there should always be an answer to the question of what the business team will do differently.
3.10.2. Measuring actionable metrics
The opposite of vanity metrics are actionable metrics. An actionable metric is defined as a metric that can connect specific and repeatable actions to a measurable result. Actionable metrics are actionable, accessible and auditable, which is known as meeting the 3-A criteria.
Additionally, it’s important that metrics are comparative in different time periods, understandable to the business team and stakeholders, a good metric is also usually a ratio, but above all it strongly influences the behaviour of the business team, answering the question of what the team will be doing differently.
That’s why it’s necessary that metrics are closely connected to clearly set goals of the lean startup.
Metrics are often introduced based on funnel reports and cohort analyses. Funnel reports are designed in a way that you choose a certain period of reporting, in which certain key events inside the sales funnel are considered and shown.
The key events inside a sales funnel are, for example, acquisition, activation and sales. For a more advanced analysis, funnel reports have to be connected to cohorts.
The cohort can be designed based on any characteristic that we wish to assign to users, but the most usual characteristics when preparing cohort analyses are the starting date of product use, gender, operating system and similar.
We can compare cohorts with one another and then observe differences inside the sales funnel – for example how many potential customers activated and bought a product in this week compared to the week before or any other time period that we wish to monitor.
Cohorts are important because with rapid development of new product iterations, those users who start using the product in the first week don’t have the same experience as those who start using the product a week later. Designing cohorts enables you to monitor various metrics in detail, including revenue, churn rate, virality and other important metrics.
When measuring metrics, it’s important that startups consider all the key rules of statistical data management, namely keeping the data clean and normalized, and correctly considering bigger deviancies, seasonal components and other possible irregularities.
In doing so, it’s important to know that a startup drowning in data that it doesn’t know how to interpret is no better than a startup that collects no data.
That’s why when it comes to measuring actionable metrics, it’s incredibly important that in each growth stage, the startup chooses the one most important metric. This helps keeps focus and discipline in the company. Focus is one of the most important factors of every startup’s success. The one metric that matters is what completely focuses the workings of a lean startup in a certain stage.
The one metric that matters in a given stage should inspire a culture of experimentation, focus the entire company, answer the most important and critical questions of the business model, be closely connected to the goals, and show the startup’s progress or, in other words, define success.
The formula for correctly focusing the company is that a startup team should have 1 to 2 specific business goals, one key metric, a list of activities that lead to business goals (whereby we always have to stay flexible about what these activities are based on market feedback), and lastly a real timeframe is necessary.
In this, it is necessary to realize that it’s better to have 1 to 2 key goals than 3, 5 or even more goals.
3.10.3. Pirate metrics
For defining business metrics, Dave McClure’s pirate metrics are the most used model. It was designed mostly for companies making software, but it can also be used in other industries.
The model encompasses five different stages – the so called AARRR funnel, inside which different metrics types are measured. The five stages inside the model are:
- Acquisition – Acquisition happens when a random visitor transforms into an interested potential customer. It happens based on marketing, which can be advertising, using social networks, recommendations, or through any other channel that triggers interest with potential customers.
- Activation – Activation is when a customer has their first user experience with the use of the product. Activation means that the user buys or uses the service at least once, registers for product testing, or establishes active interest for buying the product in some other way.
- Retention – Retention is defined as repeated use of the product and the level to which the product attracts the customer. Because the customers are happy with the product’s functionalities, they use it again and regularly. Examples of metrics in this stage are the time from last use of the product, the frequency of product use, customer churn rate etc. Customer retention is the best indicator of the success and suitability of the product.
- Revenue – Revenue metrics measure when and why customers pay. Examples of metrics that a startup can monitor in this stage are customer lifetime value, purchase conversions, size of purchase chart and similar.
- Referral – Referral metrics measure how many of the existing customers bring new customers into the conversion funnel. Referrals are a more advanced form of customer acquisition, where satisfied customers bring in new customers. The existing customers are so excited about the product that they use word-of-mouth marketing or even bragging to bring new customers to the top of the funnel. Examples of metrics in this stage are the number of sent recommendations, the viral coefficient, and the speed of the virality cycle.
3.10.4. Four stages of a lean startup
Based on different stages of building a lean startup (customer discovery, customer validation, customer creation, building a company) and the frame of innovation metrics based on which the lean startup monitors its progress (funnel, cohort analysis, pirate metrics),…
…we can define four stages that describe the set of metrics that the lean startup should most focus on.
These four stages are:
- Emphatic stage – In this stage, all metrics are focused on understanding the market and customers, what’s happening in the customer’s mind, and whether the problem being solved is truly one for which customers are prepared to pay for. Metrics are connected mostly to interviews, surveys and research.
- Sticky stage – In this stage, metrics are mostly connected to whether the right solution is being built for the problem that customers have. If customers don’t use the product regularly, this is a clear indicator that their problem isn’t big enough or that the solution isn’t suitable.
- Viral stage – When the company successfully completes the emphatic and sticky stage, it transitions into the viral stage, where all the important metrics are focused into how many new customers are brought in by existing customers, either through excitement about the product or in any other way.
- Revenue stage – When the company confirms the value hypothesis based on empathy, regular product use and viral acquisition of new customers, it focuses on maximizing and optimizing revenue. It transitions more and more from innovation metrics to traditional monitoring of the company’s financial status.
- Rapid growth stage – The last stage focuses metrics on expanding business operations to new geographic markets, new verticals and secondary segments. The company invests additional resources into new distribution channels and rapid growth. For a successfully completed stage of rapid growth, the company must know the company’s key engines of growth.
It’s incredibly important for the business team to know which stage it’s in, and to focus its actions and the metrics it’s monitoring.
Of course it’s possible for the lean startup to be somewhere in between the stages or in several stages at once, but it’s still important that it’s clearly defined where exactly the startup is, and that the metrics it monitors are suitably adjusted.
We know two basic strategic activities of business operations. The first one is optimization and the second one is pivot. When the startup is in the stage of pivot, it’s looking for a real plan that works.
Within the stage of finding and developing customers, the startup is trying to validate individual parts of business model canvas assumptions. Based on validating individual parts of the assumptions, the startup decides to adjust the direction or pivot, if needed.
A pivot is nothing other than a fundamental change in strategy, while the startup keeps the vision. A pivot can be expertly defined as a structural course correction with the purpose of testing a new central assumption about the product, strategy or engine of growth.
A successfully executed pivot in business demands that the startup considers everything it learned about the market and product up until the pivoting point, and decides to pivot with the purpose of additionally accelerating validated learning. The more money, time and creative energy that were invested in the initial idea, the more difficult it is to pivot.
Examples of the most frequent pivots in business are:
- Zoom-in pivot: An individual functionality of the product or service becomes the one and only functionality, others are abandoned.
- Zoom-out pivot: The product or service becomes only one of the functionalities of a bigger and more expansive product or service.
- Customer segment pivot: The startup realizes that it actually solves a problem on the market, but for a different target group than expected, so it decides to pivot to the new customer segment.
- Customer need pivot: In the stage of customer discovery, the startup realizes that customers have bigger challenges with a different problem type, so it decides to build a solution for a different problem than initially intended.
- Platform pivot: The startup decides to rearrange the application into a platform or vice-versa. It’s mostly applicable to IT companies.
- Business architecture pivot: The startup decides for a different business architecture, for example going from a boutique market to the mass market or changing the basic business architecture in another way.
- Value capture pivot: The startup decides for a different pricing strategy, different way of charging (for example from one-time payment into a subscription model) or decides for a different change that influences the way of charging and the pricing policy.
- Engine of growth pivot: Based on several types of engines of growth, the startup decides to go from one model of growth to another with the purpose of achieving bigger profitability and quicker growth.
- Chanel pivot: The startup decides for other main distribution channels and a way to market, sell and distribute its products and services to its customers.
- Technology pivot: New technologies can often allow a startup to achieve a better price, quicker development, and ensure bigger quality. In such cases, the startup can decide to pivot in its use of the basic technologies with which the product or service is made.
If the startup team doesn’t decide for a pivot, optimization follows. Optimization is an acceleration of a working plan.
Within the scope of optimization, the startup stops validating individual parts of the business plan, and starts to work on the hypotheses with the purpose of achieving the highest possible effectiveness and growth of the company.
3.12. Team formation
As already mentioned, in line with a completely different approach to building a company, the lean company methodology recommends a different organizational structure.
Instead of the standard functional organization structure and the traditionally named departments, such as engineering, marketing, quality control etc., it’s recommended that a startup forms two working groups:
- The team for the problem (or customer discovery)
- The team for the solution (or making the solution with quick iterations)
The purpose of such an organizational structure is mostly that there is no friction between the departments, and employees are focused on real priorities.
The problem team in a lean startup mostly does activities out of the building, including doing interviews and talking with customers, executing different use tests.
Meanwhile the other team (called the solution team) mostly does activities inside the office, including product development, doing tests and similar. It’s recommended that both teams share certain tasks, such as customer communication, for example.
Both teams or all founders of the lean startup need to have a strong passion towards the vision and what they do. Successful lean startups are different from the majority of people, they are only a small part of the entire population. Most people are extremely good in doing tasks.
But successful lean startups have characteristics that enable them to work incredibly well in turbulent conditions, uncertainty and rapid learning. And even more, they are irrationally and completely focused on customers’ needs and giving the customers incredible products.
An important part of the lean startup’s culture, which concerns all team members, is sharing all information and realizations in the learning stage. In the most successful startups, there is always the rule of information transparency.
For such sharing, it makes sense and it’s necessary that besides regular weekly meetings, the team uses different technical tools, such as blogs, tools for product development and customer management, and similar.
4. Transition from the startup into a mature company
After validating the value hypothesis, the engines of growth, and the entire business model, the company transitions from the startup stage of “searching” into the stage of rapid growth and designing a professional executive organization.
In order to transition from the startup stage, it is necessary that the company reaches the mass market with its product, clearly designs the management strategy and the mission of the company, designs the traditional functional organization structure, and consequently forms quick-to-react departments that are responsible for individual functions in the company.
The company can only transition from the startup stage into the growth stage after the product/market fit. For achieving that, the following conditions need to be fulfilled:
- Customers are prepared to pay for the product
- The customer acquisition cost is significantly smaller than the customer lifetime value
- There is enough firm proof that the market is big enough for the company to grow quickly and reach a big enough segment of customers.
Entrepreneurs usually know very well when they reach product/market fit (they don’t ask themselves about it anymore), and another good indicator is if more than 40 % of existing customers claim that they’d be very disappointed if the product weren’t on the market anymore.
In the experience of Sean Ellis, 40 % or more of customers who would be miserable without the product is a good indicator of the product/market fit. A common way of measuring customer satisfaction is also net promoter score.
In this, he recommends that if the company has not yet found its product/market fit, it should lower the monthly costs of business operations as much as possible and direct all resources into increasing the percentage of customers that would be very disappointed.
Besides failing to find a business model, the majority of companies fail because of too mature scaling. In such a scenario, there is usually too little concrete proof that the mass market for the product exists, but the team still decides for rapid growth.
The reason lies in the chasm between the innovators, earlyadopters, and the mass market. This is known as the chasm in the Bell curve.
For crossing the chasm, it is necessary for the startup to properly confirm the assumptions of the primary engine of growth and the size of the market, and mostly to carry out a suitable transition from a “garage” company organization to a professional one.
5. Problems and limitations of lean techniques
The first important fact is that lean startup methodologies aren’t suitable for all newly created companies but mostly for those that are doing business based on disruptive, not sustainable innovations.
Disruptive innovations are those where the problem still isn’t well-understood, a completely new unknown market is addressed (the so-called blue ocean), the innovation dramatically changes the patterns of operation, the segment of customers isn’t yet clearly defined, and the market is completely unpredictable.
With sustainable innovations, where the problem is completely understood, the market already exists, the customer segment is well‑plotted, the market is predictable, and the innovation only improves the functionalities, lowers the price, or logically linearly improves the product or service in some other way, traditional methods of planning completely suffice.
The biggest and most frequent obstacles to using the methodologies of the lean startup, minimum viable product and other approaches, are:
- Legal questions connected to the protection of intellectual property
- Fear of the competition’s superiority, because having only a MVP
- Risks connected to the strength of the brand
- A negative influence on the business team’s morale, because of all the small failures (learning)
- Entrepreneurs are also usually extremely sceptical and afraid of using a minimum viable product, because they fear that an unfinished product would harm the company, customers would stop using the unfinished product or even that their idea would get stolen.
We can find several wrong interpretations of lean methods, for example that this means building a company cheaply (speed is essential), that it’s easy to follow these methodologies (it's not and the problem for that is mostly the entrepreneurs’ ego) and similar.
But it is definitely the case that the tools and approaches aren’t perfected yet and have as many proponents as opponents.
6. Resources and additional reading
Here you can find the collection of resources used for this article and as suggestions for additional reading.
- Alvarez, Cindy – Lean Customer Development
- Blank, Steven, Bob Dorf – The Startup Owner's Manual
- Blank, Steven – The Four Steps to the Epiphany
- Cooper & Vlaskovits – The Entreprenur's Guide to Customer Development
- Cooper & Vlaskovits – The Lean Entrepreneur
- Croll, Alistair in Benjamin Yoskovitz – Lean Analytics
- Ellis, Sean – Lean Marketing for Startups
- Fitzpatric, Robert – The mom test
- Florida, Richard – The Rise of the Creative Class
- Liker, Jeffrey – The Toyota Way: 14 Management Principles from Toyota
- Maurya, Ash – Running lean
- Moore, Geoffrey A. – Crossing the Chasm
- Osterwalder, Alexander, Yves Pigneur – Business Model Generation
- Ridderstråle, Jonas, Kjell Nordström – Funky Business Forever
- Ries, Eric – The Lean Startup
- O'Reilly – The Lean Series
6.2. Blogs and articles
- Blank, Steven – Why The Lean Startup Changes Everything, HBR
- Blanks' blog – Entrepreneurship & Innovation (with a massive list of resources)
- Startup Lessons Learned by Eric Ries
- 500 Hats by Dave McClure
- Love the problem by Ash Maurya
- Startup Marketing by Sean Ellis
- Lean Analytics Blog
- Y Combinator's Startup Playbook written by Sam Altman
- Lean Startup Co. Blog
- Lean Startup Circle Wiki
- Lean Startups Quora Page
- #leanstartup on Twitter
6.3. Videos and courses
- Udacity: How to Build a Startup by Steve Blank
- Steve Blank's Youtube Channel
- Lean Startup Conference Youtube Channel
- General Assembly Youtube Channel
6.4. Agile & Lean YOU – apply the lean startup techniques to increase personal productivity
As we have seen, one of the toughest career challenges you can set for yourself in life is starting, growing and managing a new business. Living a start-up life is no piece of cake.
The challenge of the same difficulty or even much harder is living a happy and productive life. We all have to deal with disappointments, obstacles, fears and life tests.
But there are many parallels and similarities between managing a startup and personal life. And that is the main idea of this blog – how to apply agile and lean techniques in your personal life to achieve a completely new level of personal performance. Read more about it: