Lean Startup by Eric Ries – second part

The Lean Startup

The Lean Startup

The Lean Startup is a 2011 book by Eric Ries, where it is introduced a new and modern entrepreneurial approach, defined in the previous years by Ries himself, and very popular today expecially amongst the Silicon Valley’s Startups.

In his work, Ries tries to renovate the Startup, making it more agile and above all making easy to track the progresses: new concepts are introduced, new metrics to evaluate the company trends, and a new cyclic methodology of production.

In the previous article some amongst the most important concepts introduced by the Lean Startup methodology were exposed, while in this article we will conclude our overview on the methodology and the innovations brought by this approach. If you want to learn more about the Lean Startup, you can buy the book from Amazon:

Pivot

The pivot is a key moment during the life cycle of a Lean Startup: things are not going as we hoped, we need to do something or we will be forced to shut down the company. It is time to pivot.

But what does “to pivot” mean? To pivot means to execute some structured correction on our strategy, basically we are going to test a new hypothesis on our product, strategy or growth engine. There are several different types of pivot:

  • Zoom In: one feature becomes the whole product
  • Zoom Out: one product becomes a feature of another bigger product
  • Customer Segment: the product is working, but in a different segment from the one it was designed for, with the pivot the unexpected segment becomes the main target for the product
  • Customer Need Pivot: the product is almost fine, the starting hypothesis was partially true, but the customers theirself are telling me that their needs are slighly different
  • Platform Pivot: transform the product from an application to a platform or viceversa
  • Business Architecture Pivot: moving from an high-margin and low-volume structure (B2C) to a low-margin and high-volume one (B2B), or viceversa
  • Value Capture Pivot: change the revenue model
  • Engine of growth pivot: change the growth engine (see below)
  • Channel pivot: change the sales channel
  • Technology Pivot: change the technology but not the business model

Work in batches

The batch is the number of pieces involved in one single process. Eric Ries states that a Lean Startup should work with batches of small size.

With bigger batch the “Assembly Line” effect can be obtained, with an increase in productivity, but should be considered also another factor, that in modern markets and startup environment has a bigger influence than the productivity alone.

The book’s author uses an example: having 100 letters, 100 envelopes and 100 stamps, by enveloping all the 100 letters and putting the stamps at the end, we are using a batch of dimension one hundred. Otherwise, taking one letter at a time, enveloping it, putting the stamp and then passing to the next letter, we are adopting a batch of size one, or single-piece flow. The single-piece flow has the advantage of letting us identify issues on the envelope or stamp at the beginning, on the first pieces, meanwhile with a bigger batch we would eventually work with the stamp and notice something was wrong only after we had enveloped a hundred letters.

Cohort analysis

Is a type of analysis where we identify and separate the users inside the total population by their behaviour:

  • the 50% of the users completed the registration process
  • the 30% of the users has come back after the fist visit
  • the 5% of the users has bought something

Making a graph of the temporal trend of those percentages at different times, especially before and after a pivot, it is possible to observe quantitatively the effect of the pivot (for example, how much the percentage of buying user has changed after the pivot?).

Growth engine

Is a term already used before, without explaining what it is about. Now I’m going to unfold it: it means what’s the path our company is going to take in order to grow over time, there are several different models.

We can separate two type of models:

  • Engine jump-start, related to one-time actions, for example a single tv spot to increase our brand awareness
  • Sustainable Engine, that acts continuosly, making new users come to my site because of my post actions or because of the precedent users’ past actions. There are three categories of sustainable engines:
    • Sticky: the customers does not leave us after the first purchase (for example subscriptions or reapeat purchases)
    • Viral: the users spoke or show the product to other users, and the product itself infect other people (for example the white headphones of the first ipods). Mathematically it is possible to definy a viral coefficient, the number of the new users produced by an old user. If this coefficient is for example 0.1 the viral effect will not last long: a hundred users will bring 10 new users, those 10 new users will bring another one and then the effect is run out. On the contrary, if the coefficient is close to 1 the effect will last much more, and if it is bigger than 1 we will encounter an exponential growth.
    • Paid growth: we bring in new customers by paying for them: this kind of engine is sustainable only as long as the cost for acquiring a new customer is lower than the lifetime customer value (different from the amount of the first purchase, it includes anything that the user will buy at my site). This difference (marginal profit) can be reinvested in advertising, creating a virtuos circle. This type of engine is suitable for non-viral products.

It is possible to use more than one growth engine at the same time, but usually it is recommended to focus on one growth engine, keeping in mind that an engine is going to “run out of fuel” after a while, and at that time it will be necessary a renovation or perhaps a pivot.

Problem Solving in the Lean Startup

Every problem, from marketing to product development ones, can be risolved by asking for five times in a row “Why”, as children do, looking for upstream causes.
For each “Why” level a solution related to that level is identified, be aware that the most general the problem (the why) is, harder and more expensive will be to solve it.

It is important during this problem to not blame anyone, and if someone has made a mistake, make sure to change the process in order to make impossible for someone to repeat the same mistake in the future.

The company grows

If the company is doing good, its dimension will eventually grow, and new issues will surface at the horizon, in particular it will be necessary to find a balance between:

  • the need to satisfy the current customers
  • the search for new customers
  • making adjustments to the current business model
  • the exploration of new business models

The key ingredients to obtain a good balance between those activities, in Eric Ries opinion is:

  • assign few but stable resources to innovation (too much can mislead, but at the same time it is important that the budget will not be cut in the future)
  • give a strong autonomy to R&D teams
  • spur the employees by giving them stock options or bonus

It is also important to point out that, if the company is not anymore a Startup but is an established company, it will be impossible to keep experiment on the main site, or we could put at risk the current established business. In these cases is reccomended to build an indipendent platform, a sandbox, where it will be possible to do all the required experiments.

This is the end of the summary of the most important concepts you will find in the “The Lean Startup” book by Eric Ries. If you want to learn more, I remind you once again that you can buy the book from Amazon in both paper and Kindle format:

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