Name an entrepreneur who doesn’t want to breathe life into a startup that becomes the next Airbnb-level unicorn. Unfortunately for many startup creators, they can’t follow the same path of an accidental discovery. There’s no universal management paradigm for freshly minted companies. When big investments, precious time, and passion are at stake, the pain of failure is real. So how can entrepreneurs sleep soundly knowing they’re building the right thing that won’t wind up on the shelf?
As a startup, you have a vague idea of what your market wants. Operating under extreme uncertainty, you can’t stick to the traditional management methods. It will take a while and won’t necessarily pay off. Your path is much bumpier than that.
Let us introduce you to another way of doing things - the Lean Startup. Although it won’t remove all the hurdles that might cause your business to stumble, Lean Startup will set a development rhythm and define a sequence of actions. Designed roughly 10 years ago, it’s still relevant for managing any type of innovation. And if you’re an established business, don’t reach for your remote. We’ll explain how you can make use of Lean Startup too.
Lean Startup: how to create continuous innovation
First, what is “lean”? Meaning sparse or slender, the word itself hints that we strip the project of all waste without sacrificing productivity. In Agile software development, the lean framework helps businesses be just that - effective and straight to the point. It centers around the following principles:
Fast delivery: short development cycles provide educating, instant feedback.
Software development is an ongoing learning process.
Waste cutback: Under time constraints demanded by fast delivery, there’s only room for the critical features that will be further tested for demand. As a result, you avoid wasting time and money on a perfect product that eventually won’t find a market.
Delayed decisions: Put it off until you have enough data to draw an informed conclusion.
Coherent perception: Assure that your product stays consistent in terms of its architecture, usability, and adequacy of purpose.
Having lots of similarities with the startup culture, lean has been transfigured for startups specifically via the Lean Startup. What is it exactly? Someone speaks of it as a mindset, another refers to it as a movement, a third one may call it a methodology. From our side, we choose to define the Lean Startup as an approach to setting up an efficient environment for a new business.
Speaking of Lean Startup, we can’t fail to mention its father - Eric Ries. After going through a failed project and lots of trials and errors, Eric arrived at this startup management methodology as we have it today. You can read his full path towards the LS in his same-titled bestseller.
Thumbnail sketching the theory, Eric urges entrepreneurs to keep an eye on the startup management. There’s often a tendency to perceive startups as something creative and chaotic that can’t be subject to any precise regulations and measurements. Without a second thought, some adopt a “Just Do It” approach. It’s true that carved-in-stone strategy and to-pieces analysis can’t be applied to a startup, but it also doesn’t mean that you just go with the flow.
Under the umbrella term Lean Startup, Eric provides the following principles and techniques to guide your venture:
Validated learning: Learning and make discoveries on the go.
Innovation accounting: Define and keep in mind the metrics specific to your business model.
This basically means that in development you have to follow a simple cycle: build, measure, learn. This is called a Feedback loop.
Feedback loop: learn through iteration
It’s easy to fall victim to your own biases when you’re passionate about your idea. But if your startup is based only on your own untested assumptions, it’s doomed to failure. Iterating the following steps, you’ll sync up your product with the audience’s demand. The result will be a sought-after product.
The build-measure-learn cycle of the Lean Startup, Source: Running Lean
A feedback loop comprises three recurrent steps: build, measure, and learn.
Build activities:
1.Shape the key assumptions about your product.
2. Figure out how to test them the cheapest and fastest way.
3. Build your minimum viable product - a basic version of the future solution. It might be flawed but what’s important is it must have the features that embody your hypotheses.
4. Make your draft version available for real customers.
Measure activities:
1. Come up with a baseline of metrics. Interpret success and failure for your product, so that later you can quickly scope out where you’re at.
2. Collect the feedback.
3. Evaluate customers’ reactions against your KPIs. For example, if you’re measuring conversions or sign-ups, you can set a threshold as a move-forward sign.
Learn activities:
1. Draw conclusions from your measurement results to determine whether your ideas proved valid.
2. Decide your next move:
a) If ideas worked - keep it going: Refine your product.
b) If at least one of your key assumptions didn’t work, you’d better change your direction.
3. Start the cycle all over again. It takes a lot of experimenting until you achieve product-market fit with a demonstrated demand for your product.
You can go to correcting your idea, modifying your product or the market you’re targeting, etc. It might be hard to wrap your head around it, but failure at this stage doesn’t mean you failed at all. As long as you’re monitoring your state of things and taking rapid actions to improve it, your brainchild should be all right.
Now that we know how to manage a startup company using the Lean Startup, let’s shed some light on how a conventional business can optimize its processes using the same approach.
Applying Lean Startup to established businesses: culture change
Your company has been running for decades and you feel like it’s been stuck in a rut? You can use Lean Startup to introduce innovation to your business. Such giants as General Electric and financial software company Intuit have already reimagined their performance management systems. How can you follow in their footsteps?
Spot innovation blockers. The most challenging for a large company is to get Lean Startup concepts across to all the employees. It requires creating a culture that can support a new way of working, notes Janice Semper, a co-founder of GE’s FastWorks - a customer-focused methodology for lean products and services. It mainly involves a lot of teaching and training. You’ll need to walk every employee through making sure they understand the why behind the adoption of the new management approach and are able to apply Lean startup principles to their daily work.
Adjust Lean Startup to your company’s needs. There are no strict rules. You can and should modify Lean Startup to the needs of your company. For example, GE created its four essential concepts: discover, develop, learn, and act.
Rethink how you measure impact. Inspire employee’s behavioral change by engaging them more into their customers. What Intuit did was the “Follow-me-home” technique: You get out of the building and observe your customers where they are. Also, Intuit introduced a customer benefit metric measuring how your product is improving your customer’s life.
Moving from theory to practice, we'll describe a tool for developing and documenting a business model that rests on Lean Startup principles.
Lean Startup Canvas: a complete business model in a one-page diagram
Lean Startup is a meta-process from which more specific processes and practices can be formulated. As the Lean Startup movement gained popularity, its adapters kept coming up with new tools for effective strategic management. One of them was the Lean Canvas created by Ash Maurya and described in detail in his book Running Lean.
Adapted from the Business Model Canvas (BMC), Lean Canvas is usually created at the first stage build - when the team is figuring out what product to create - and then regularly revised. Filling out the nine boxes of a Lean Canvas, startup founders are able to comprehend the assumptions they make about the business. As a result, you get your business model on a single page forming a blueprint to navigate your startup. Lean Canvas can be a complementary tool for scrum teams as their workflow aligns with its iterative and constant learning approach. A good practice is to create separate canvases for different customer segments.
Modifying BMC, Ash Maurya aimed at making it more actionable and customer-centric. Here’s the result.
Business Model Canvas evolving into Lean Canvas, Source: Ash Maurya
Lean Startup principles have greatly influenced the design of the Lean Canvas. It addresses uncertainty by capturing the riskiest segments: problem, solution, key metrics, and unfair advantage.
Before you get down to articulating your business model, you should study the industry, market, customers, and financial side of the business. Another point, don’t be too meticulous filling out the canvas because it all can prove wrong once you validate it. But don’t worry, that’s how it’s supposed to be.
Use our Lean Canvas tool to create your own startup outline. Fill the segments in, download the canvas, and share it with your team.
Now, let’s practice sketching Lean Canvas on the example of a startup unicorn ClassPass. One of the largest health club aggregators, it was ranked among the top fastest-growing North American tech companies in 2017. ClassPass for fitness studios is what Booking.com is for hotels - a search engine and a reservation system.
1. Problems. Here, you determine industry limitations that fail to be solved by existing solutions. So, it’s also worth noting what alternatives are currently out there in the market. Problems and customer segments are the main ideation drivers of the Lean Canvas.
The idea for creating ClassPass was born after its founder, Payal Kadakia, wasted an hour surfing the web for an open ballet class in New York. So, we can say that in her case, the problem was tiresome googling and manual comparison to find the right place for working out.
Other problems became evident too, like committing to a single studio, and for studios - the lack of a platform for creating awareness and managing bookings.
2. Customer segment. Once you've collected background information, you can define your target customers. Be objective and don’t think that everybody in the world can use your product. Try to narrow down the candidate pool to the early adopters. You can always reach new audiences later on when your undertaking gets on its feet.
For example, ClassPass targets people aged 20 to 35, who are eager to stay in shape and explore various activities for it. They live in urban areas (since the service wasn't intended to reach rural communities from the start), use technology a lot, and are early adopters for many rising startups. At the same time, ClassPass provides clientele for fitness clubs and studios, so they can also be considered another customer segment.
3. Unique value proposition (UVP). Taking a central part of the Lean Canvas, this box answers the question of how we are different from the existing alternatives. Cooking up your UVP, ground it on the benefit your customers get with your product. Formulate UVP so that it clearly conveys your idea. Picking a few keywords or even a high concept pitch should help with that.
We can assume that ClassPass meant to stand out thanks to its personalized approach: Customers are able to mix and match classes and studios. Offering better deals than traditional studios, ClassPass has the added advantage of being equipped with booking capabilities.
4. Solution. In this box, we identify the features that tackle the outlined problems. Start with the most primitive thing you can build to address them. In the next iteration, you'll most likely resketch it based on customer interviews.
ClassPass was aimed to create a marketplace for fitness providers and an easy-to-use search engine for customers to discover and attend fitness classes for one flat rate.
5. Communication channels. Decide how you'll promote your product. Experiment with channels but be reasonable about promotional investments. Calculate their ROI, as some channels may turn out inapplicable to your startup, while others may be more viable during earlier or, vice versa, later stages. You can hardly establish strategic partnerships until your product is proven. As word of mouth remains effective in spreading the news about your product and inspiring trust in it, building a referral program is a good way of attaining it.
Speaking of ClassPass, they raise awareness via social media, their fitness-themed blog, influencers, and targeted advertising.
6. Revenue stream. List the ways your product will make money from customers. You may have to change your revenue stream with time if it fails to generate profit. That’s what happened with the ClassPass subscription model. Initially, they set off with an unlimited version, but their consumers turned out to be more committed than they expected - they attended more classes and as a result, ClassPass owed more money to fitness clubs than they were earning. So, they created a money-replacing system of credits users can exchange for a certain number of classes and it costs them a fixed fee.
7. Cost structure. Determine your fixed and variable cost drivers within a particular time frame. Be it a product release or a reach of a minimum number of customers. This can be office rent, hardware, recruitment, market research, etc. If you balance the cost structure with the revenue streams, you can figure what revenue it will take to pay off the investments.
ClassPass’s operational expenses include labor costs to develop and maintain the aggregating platform and marketing costs to set distribution channels, to say the least.
8. Key metrics. Now, to progress evaluation. Initially, KPIs ground on vanity metrics like conversion rates and app downloads. But they alone don’t necessarily mean that you’re making progress. Look in the direction of actionable metrics - conduct cohort analysis and move away from cause-and-effect relationships towards A/B testing.
As for ClassPass, their KPIs as a subscription service might include, number of users, number of credits, and margin after paying partnering studios their share.
9. Unfair advantage. Be prepared that after initial success, you’ll have to secure your product from various copycats who’ll try to imitate your idea. You should have some unique features that are hard to duplicate. For ClassPass it’s their exclusive deals with the most popular studios. Their coverage spreads across 25 countries and includes over 27,300 health clubs. So wannabes aren’t able to beat off their offer.
Lean Canvas of the ClassPass startup, we use color indicators to distinguish between the two customer segments: blue for studios and yellow for fitness-oriented people; created in Canvanizer
How we apply Lean Canvas at AltexSoft
At AltexSoft, we use Lean Canvas at the elaboration phase for a rapid catch-up with our clients. Filling up the canvas together, we’re able to quickly tune in with the specifics of their business and align the vision with the client. We regularly revise the canvas making necessary changes. Further, we use Lean Canvas as a ground for other important artifacts as a customer journey map, revenue plan, creating wireframes, marketing plan, high-level architecture, etc.
Lean Canvas is typically created at a workshop with a standard set of participants including an architect, a business analyst, a product manager, a UX specialist, a project manager, and a domain expert in case it’s a new field for the team. Read our article to know what to take into account while holding a product development workshop.
Saving critique for last
After Lean Startup hit the entrepreneurs world, it went through a thorough outside investigation. Indeed, academics concluded that the sequence of generating and testing hypotheses is productive for startups. However, there also have been some negative impact discovered. Here are some of them.
Extreme reliance on customer feedback. This may deprive a startup of a truly innovative idea as it keeps favoring immediate validation instead of looking into the future. Customers tend to be hostile to anything alien. So if you empower them to be in charge of your decision, you may never make a breakthrough.
Too much focus on the canvas structure. As a deliverable, canvas has many pros. It’s easy to compose and gives a short and to-the-point overview of the business model. But don’t focus too much on the special arrangement of the boxes. Canvas is a flexible template you can adjust your own way, according to Jurgen Appelo, the creator of Business Quilt - a remix of the Business Model Canvas and the Lean Canvas. Using the metaphor of a quilt, Jurgen suggests making your own canvas: Start with a few boxes and gradually add more depending on your business specifics.
