The Lean Startup by Eric Ries can help to create breakthrough new products (‘disruptive innovation’) that can create new sustainable sources of growth (p.31). Product Management enacts many of the principles outlined in the Lean Startup and is a useful touch-point for product managers. The pivot is at the heart of the Lean Startup: pivots represent the option to bulid, test and learn or to fail quickly and cheaply.
This post is a largely paraphrased overview of the Lean Startup (with page references to help you locate the original text).
The Lean Startup Method (p.8-10):
- Working in areas of extreme uncertainty (entrepreneurship is everywhere)
- Bring management to extreme uncertainty (entrepreneurship is management)
- Validated learning (learn about your products and your business)
- Build-Measure-Learn (accelerated feedback loop)
- Accountability (Innovation accounting: measure, manage, prioritise).
[Lean Startup comes from] lean manufacturing, design thinking, customer development, and agile development (p.4).
Entrepreneurship is Management.
The concept of entrepreneurship includes anyone who works within my definition of a startup: a human institution designed to create new products and services under conditions of extreme uncertainty (p.8). Entrepreneurs who operate inside an established organisation sometimes are called “intrapreneurs” (p.26).
Entrepreneurship is a kind of management (p.3) and requires a managerial discipline (p.17).
[Lean Startup is] characterised by an extremely fast cycle time, a focus on what customers want (without asking them), and a scientific approach to making decisions (p.8).
It’s easy to kid yourself about what you think customers want and it’s easy to learn things that are completely irrelevant. Validated learning is demonstrated by positive improvements in the startup’s core metrics, backed up by empirical data collected from real customers (p.49).
Value VS. Waste
Learning is the essential unit of progress for startups. The effort that is not absolutely necessary for learning what customers want can be eliminated (p.49). Which of our efforts are value creating and which are wasteful? A common excuse for failure is that it was worthwhile because it enabled learning – was it the best way to learn that, or would talking to users have been more efficient? (p.47) Value in a startup is not the creation of ‘stuff’, but rather validated learning about how to build a sustainable business (p.182).
Get out of the building and speak to real people – behind all metrics & reports are real people. Run experiments to observe real customer behaviour (p.58) and avoid vanity metrics that give the illusion of success: focus on real progress. An experiment is more than just a theoretical inquiry, it is also a first product (p.63).
Example experiments (p.61):
- The value hypothesis tests whether a product or service really delivers value to customers once they are using it
- The growth hypothesis tests how new customers will discover a product or service.
- Build-Measure-Learn feedback loop
build-measure-learn feedback loop.
Strategy is based on assumptions [. . .] because the assumptions haven’t been proved to be true [. . .] the goal of a startup’s early efforts should be to test them as quickly as possible (p.81).
Too many [. . .] business plans look more like they are planning to launch a rocket ship than drive a car. They prescribe the steps to take and the results to expect in excruciating detail, and as in planning to launch a rocket, they are set up in such a way that even tiny errors in assumptions can lead to catastrophic outcomes (p.21). Instead of making complex plans that are based on a lot of assumptions, you can make constant adjustments with [. . .] the Build-Measure-Learn feedback loop. We can learn when and if it’s time to make a sharp turn called a pivot or whether we should persevere along our current path (p.22).
We need to focus our energies on minimising the total time through this feedback loop. The two most important assumptions are the value hypothesis and the growth hypothesis [. . .] once clear of these leap-of-faith assumptions, the first step is to enter the Build phase as quickly as possible with a minimum viable product (M.V.P) (p.76). The MVP is that version of the product that enables a full turn of the Build-Measure-Learn loop with a minimum amount of effort and the least amount of development time (p.77).
The goal of such early contact with customers is not to gain definitive answers. Instead, it is to clarify at a basic, coarse level that we understand our potential customer and what problems they have. With that understanding we can craft a customer archetype, a brief document that seeks to humanise the proposed target customer (p.89).
A new breed of designers is developing brand-new techniques under the banner of Lean User Experience (Lean UX). They recognise that the customer archetype is a hypothesis, not a fact. The customer profile should be considered provisional until the strategy has shown via validated learning that we can serve this type of customer in a sustainable way (p.90).
Down the road – after many iterations – you may learn that some element of your product or strategy is flawed and decide it is time to make a change, which I call a pivot, to a different method for achieving your vision (p.113). ‘Innovation accounting’ leads to faster pivots (p.150) and entrepreneurs should pivot as soon as they can: failure to pivot is costly (p.169).
When one is choosing among the many assumptions in a business plan, it makes sense to test the riskiest assumptions first (p.119). Metrics should be (p.142-146):
- Actionable (clear relationship between cause and effect)
- Accessible (plain English, easily understood, reflecting that metrics are people, e.g. what is a website ‘hit’?)
- Auditable (data must be credible).
Innovation accounting – how it works in three milestones (p.117, 118, 120):
- Use an MVP (baseline) to establish real data on where your company is at (value hypothesis and growth hypothesis)
- Use iterative development to progress from this baseline to a more ideal state: have a hypothesis about what will improve
- Metrics and a set of experiments designed to test that hypothesis
- Pivot or persevere?
A pivot is a special kind of change designed to test a new fundamental hypothesis about the product, business model, and engine of growth (p.172). When a company pivots, it starts the process all over again, re-establishing a new baseline and then tuning the engine from there. The sign of a successful pivot is that these engine-tuning activities are more productive after the pivot than before (p.118).
A startup’s runway is the number of pivots it can still make [. . .] a startup with a $1 million in the bank that is spending $100,000 per month has a projected runway of ten months [. . .] the true measure of runway is how many pivots a startup has left: the number of opportunities it has to make a fundamental change to its business strategy (p.160). A pivot is better understood as a new strategic hypothesis that will require a new minimum viable product to test (p.177). It is a special kind of structured change designed to test a new fundamental hypothesis about the product, business model, and engine of growth. It is the heart of the Lean Startup method. (p178)
Types of pivot (p.173-176):
- Zoom-in pivot: something previously considered a single feature of a product becomes a whole product
- Zoom-out Pivot: it becomes clear that a single feature isn’t enough for a whole product
- Customer Segment Pivot: your product is targeted at the wrong type of customers
- Customer Need Pivot: it becomes clear that the problem you’re trying to solve is not important for your customers
- Platform Pivot: changing from an application to a platform (or vice versa)
- Business Architecture Pivot: change from high margin, low volume to low margin, high volume (or vice versa)
- Value Capture Pivot: Monetisation is an example of value capture
- Engine of Growth Pivot: viral, sticky, or paid growth
- Channel Pivot: change to the sales/distribution channel
- Technology Pivot: deliver the same solution with different technology.
Sustainable growth is characterised by one simple rule: New customers come from the actions of past customers (p.207). There are four primary ways past customers drive sustainable growth (p.207-208):
- Word of mouth (through satisfied customers)
- As a side effect of product usage (Facebook gets you to invite friends)
- Through funded advertising (for sustainable growth advertising should be paid for out of revenue, not one-time sources; cost of customer acquisition through advertising should be less than the revenue the customer creates)
- Through repeat purchase or use (e.g. subscription, like mobile phone, or repurchase, like light bulbs).
Engines of growth (p.209-218):
- The Sticky Engine of Growth: high retention rate – once you start using their product, you will continue to do so. Attrition (or churn) needs to be tracked closely – if the rate of new customer acquisition exceeds the churn rate, the product will grow.
- The Viral Engine of Growth: Products that exhibit viral growth depend on person-to-person transmission as a necessary consequence of normal product use – Viruses are not optional. The viral engine is powered by a feedback loop that can be quantified, called a viral loopand its speed is determined by a single mathematical term called theviral coefficient: the viral coefficient measures how many new customers will use a product as a consequence of each new customer who signs up. Put another way, how many friends will each customer bring with them? For a product with a viral coefficient of 0.1, one in every ten customers will recruit one of his or her friends.
- The Paid Engine of growth: work out how much you make on each customer and then subtract the amount it costs to acquire each customer. To increase the rate of growth you can increase the revenue from each customer or drive down the cost of acquiring a customer. The paid engine of growth is powered by a feedback loop called the lifetime value (LTV) – this is the amount of money a customer pays for the product over their lifetime minus variable costs. E.g. Advertisement costs $100 and causes fifty new customers to sign up. This ad has a cost per acquisition (CPA) of $2. If the margin between LTV and CPA is greater than $2, the product will grow.
Technically, more than one engine of growth can operate in a business at a time. (p.219). There are many value-destroying kinds of growth that should be avoided. An example would be a business that grows through continuous fund-raising from investors and lots of paid advertising but does not develop a value-creating product (p.85).