The Very Lean Startup Method (Revised)

A Brief Introduction

The Very Lean Startup MethodTM or perhaps the Really Lean Startup MethodTM is but a natural extension of the Lean Startup Method. The latter approach to Entrepreneurship has been articulated exhaustively by Eric Reis in his book as well as by many others. In fact, there is now an industry around the methodology expressed in the Lean Startup book, and it has become a must read for any aspiring or practicing Entrepreneur.  One of the key teachings of The Lean Startup Method is the process of defining and creating the first functional product.

The Very Lean Startup Method focuses on identifying customers before an entrepreneur builds or perhaps even defines a product.

Why this is important

In reality, focusing on customers before a product idea is difficult, because most entrepreneurs and innovators work from passion first – they have an idea and they then try to make a business of it. In some cases they may not have an idea, but their experience, skills and interests determine what kind of products they are inclined to make. In fact, that last sentence carries the germ of success for the initial idea – experience and interest will often point an Entrepreneur to the problems that need to be solved in order to have a real business with real customers.

In fact, entrepreneurs often look for help when they have already built a product! They just want “Sales & Marketing Services” because they think their product or service is so great that all that is needed for a successful launch is to bring it in front of the customer. And very often, they will say in a self-deprecating manner “Oh, I am not a sales(wo)man, I am just an innovator…” Or worse “I am just an ideas person…” Those words and that attitude should be anathema to an entrepreneur.

Eric Reis has already talked in detail about the Lean Startup Method and how you create a Minimum Viable Product, so I won’t (re)address that concept here. However, the process he describes needs to dovetail into the process I am going to outline below.

The Very Lean Startup Method

Brainstorming and Informal “Research”

The rule is “Tell everybody about your idea”. This is a fail point and a possible innovation point. I say innovation is (only) “possible” because an idea may be so hare-brained as to defy possibility of any innovation to circumvent its fail point. Yet, the feedback received at this point is invaluable because it helps clarify the idea – sometimes the act of explaining alone can do that. It is important to understand that innovation, if possible starts as early as this point.

Identify possible customer demographics

The entrepreneur must identify several possible customer profiles for the product or service that s/he wants to create. This is fairly easy and at this stage since they can afford to be inclusive and broad. At this stage, because so little is known about the potential customer and product, the entrepreneur should not attempt to narrow the range of potential customer segments. In fact it is very likely that by narrowing at this stage, innovative business models will be overlooked. The exception is when an entrepreneur has significant previous experience of that specific market, and even then it is worthwhile at this time to be broad. This advice contradicts most advice to startups and perhaps may even seem counter-intuitive. However, keep in mind that the method being described here actually precedes the stages where typical management advice is offered. The goal is to test various customer demographics and find a “product-market fit”, and therefore no demographic should be abandoned before rational testing (described below) provides a clear negation.

Make Collateral

The next step is to create a brochure or website to engage the various segments identified. Depending on whether customers are mostly online or mostly offline a website or a brochure or both are appropriate. The collateral must provide details of the features you plan to provide but it is even more important to sell the benefits. Much has been written about this, so I am not going to go into too much depth on this. Suffice it to say that entrepreneurs (especially technologists!) tend to focus on features, whereas their customer will only buy when convinced of the benefits

Send out the Collateral

This has to be a broad effort. And here entrepreneurs shouldn’t get into the trap of asking friends or their mothers! They may not tell you the truth – only what you want to hear. Entrepreneurs must talk to strangers, both online and offline. They also shouldn’t hesitate to talk to potential customers in real life, even if the product is online.

It is important to be systematic at this point. There are hopefully a large number of segments that need to be analyzed now, and marketing programs should not overlap or taint each other. If that happens, you may end up choosing an incorrect customer segment and that could happen when it is too late, or at least too expensive to change your startup’s direction.

Send out variations with different pricing or offers

For each customer segment, the entrepreneur will have to experiment with various offering and price points – the equivalent of A/B testing. Sending out emails or other communication directing potential customers to a website is the quickest way to get results. The website can, for example, have landing pages that lead to different pricing for different segments. In fact, there can be multiple price points for a single segment; this is an opportunity to use that greatest of free market metrics – price discovery! Important: No public page on the website should link to these pricing pages. If that happens, potential customers will soon discover that different pricing schemes exist! That will obviously not have a very pleasant fallout.

An entrepreneur came to me for advice on starting a 3D Printing Service. I advised him to follow the Very Lean Startup Method. I asked him to begin asking companies, especially startups and incubators who could not afford their own machines if they would be interested in this service. We sat together and made a rough business plan focusing especially on what pricing would be needed to make it a sustainable business. However, when he went out and contacted people, he did not even discuss price – he simply presented the idea of using his machine for 3D Printing and ancillary services. To his surprise (and dismay) he found that no one responded to his queries. This was a fail point. Now he is rethinking the business model and meanwhile has also joined an accelerator. The latter gives him the opportunity to study startups close-up and determine their real needs.

The most important benefit of using the Very Lean Startup Method was that he didn’t invest any money, only some of his time, to find that there was no viable business. Other entrepreneurs would possibly have leased space and bought at least one 3D Printer before starting to offer their service. We put the marketing ahead of the product development and were able to save a lot of time, money and effort.

Identify the customers that respond and why

If an entrepreneur is lucky, some targets will respond. If not, it’s back to the drawing board – more on that later. It is imperative to find out why! Easy to say, harder to do! In short, it’s great that you got a few responses, but you need to know why you got those responses so that you can get more of them. Even at the expense of losing a few of them.

However, it is very likely that you won’t lose them. By engaging potential customers, you are more likely to create an unshakeable bond, because people like to connect to real people especially when they are spending their hard earned money. And it is surprising how many people respond if they are asked the right questions.

Find out why the non-responses didn’t respond

In business it’s perhaps more important to find critics than friends. The critics keep one grounded.  There may be many reasons or even a single small reason that some of the target audience didn’t respond. Maybe the message was not appropriate for that target demographic, maybe the timing was off, maybe the price was wrong and so on. But it could be that there is a very small piece of the puzzle that is missing and adding that could turn the tables, so to speak. This little piece may be easy for you to implement and may not even be a feature – it could, for example be financing, an external option.

Note that in any campaign to acquire customers, there are always many times more people who don’t respond than those that do, including those who want the product, but didn’t or couldn’t at that time. So, if one doesn’t go after this “silent majority”, one is missing out on getting some very valuable feedback.

 

Around 2009 Intuit introduced a product that allowed tax filers to photograph their W-2 forms (an earnings statement like the Form 16 in India required to be submitted with their tax filing) using their cell phones. The users could then transmit this to Inuit, who automatically associated this with their online tax filing application. The result? A big yawn from the marketplace. However, the team did not give up on the product. Instead (as quoted in the HBR Case Study “The Innovation Catalysts”),

[a] five-person team went “out in the wild,” [Carol Howe, a project manager and innovation catalyst] says, to observe dozens of smartphone users. It quickly narrowed in on millennials, whose income range made them likely candidates for the simplest tax experience.

They were told during casual conversations that users resented having to go back online to file, and these users wanted to be able to complete their tax forms on the smartphone itself (as long it was the simple 1040EZ). And thus was born the most successful product in Intuit’s stable in almost a decade!

Ask the responding customers to pay

This is perhaps the most important step in the entire process – this is where one gets to see whether an idea for a product or service can actually be a viable business.

Take this common life example as a parallel to what happens when people have to actually commit to some time or expense.

Let’s say you are putting together a trip to a holiday location with your friends or relatives. You are sitting talking about it and you all agree that it would be fun to go to the Bahamas or the Grand Canyon for a holiday. It’s not very expensive, but the cost is not trivial. Everybody is excited and they agree to go. Now you ask them to decide on a date and also ask them to fork out the money, so you can book the tickets and the hotels. Suddenly everybody finds an excuse, or they find another topic of discussion.

This is also true when people buy products or services. When someone presents an offering to people, they most likely are supportive and will agree that it makes sense to adopt or buy it. How many times do we hear, “Sure, I’ll buy that for $X!”. However, when asked to pull out their wallets and actually buy it, they have various excuses – “Let me think about it some more” or “Hmm, I’m a little short of cash right now, but maybe in a couple of months…”. Alternately, if the seller is lucky, they will start asking questions, for example about warranties, about specific features they want (and probably don’t exist in the current offering).

In fact, their objections, if real, are a great form of feedback that could significantly improve a product/service. Listening at this stage and asking more questions is a goldmine of market research information.

Do the math on cost of customer acquisition & pricing

Okay, so let us say people are willing to pay for the offered product or service. But wait! The next important question is this – is it priced right? Enough to make a profit? It’s easy to get customers if the pricing is artificially low. But that price may not be enough to make a profit. If there exists a business plan with some pricing (and cost) assumptions, it’s now time to revisit that. Is the promised service level doable in the cost structure previously assumed?

At this stage you also have some idea of how many customers you can acquire and at what cost. The current marketing campaign’s budget should be divided by the number of customers you actually acquired.

This is a crucial fail point and an innovation point.

Adjust the cost of feature development in the business model

This step makes use of the information in the previous step and rejiggers the business plan to take into account the additional costs of the features that customers want (or say they want). This is an important step and not to be glossed over – business models invariably need to be tweaked as new costs are recognized based on new features or changes to the business model.

Modify offering – product/price/placement/target customer

Now it is time to take a look at the big picture again and check if the business is still viable with the new costs. If not, the product and/or the target customer needs to be rethought. If, on the other hand, the business still makes sense, it is time to take the next step and actually build the product.

Repeat

…till you have a viable business model

Conclusion

Much of this paper is theoretical in the sense that the process has not gone through robust testing against facts. However, it should be treated as a set of hypotheses that need to be proven experimentally. Of course the hypotheses are derived from my extensive experience in starting and running my own companies as well as entrepreneurs I have advised and mentored. That several entrepreneurs have benefited from this approach is sufficient proof that there is some merit here. However, like the process itself, I am testing these hypotheses by approaching potential consumers of the concept!

 

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