One of the main obstacles in launching a project is the fear associated with the risk associated with any entrepreneurial adventure. According to PACE (Association pour la Création d’Entreprise) figures, one in two companies no longer exists 5 years after its creation. This indeed represents a significant risk. Based on the observation that many start-ups failed because they had spent 2, 3 or even 4 years raising funds and developing an innovative product that ultimately did not meet the needs of the market, the American Eric Ries inspired by the precepts of lean management to develop a method for continuously adapting its offer to the market from the design phase to the production and marketing phase: Lean Startup…
What is the principle of Lean startup?
The philosophy of this method is to think big, but to start small and make your project grow by confronting as soon as possible and as frequently as possible with market demand. Therefore, you limit the risks associated with your project:
- By starting with a small perimeter, you limit your financial needs;
- By quickly confronting the market, you avoid wasting time and secure the bases of your project;
- By regularly testing your market, you ensure that its development will take into account market developments. This allows you to keep good timing and not to launch your product too early or too late. This will also allow you to modify the characteristics of your project if necessary, what Ries calls “the pivot”.
How to apply it effectively?
The heart of the lean startup approach is to set up a learning loop: build-measure-learn which will allow you to continuously improve your product or service by successive iterations.
Here are the key points that you need to understand in order to be able to implement an innovation strategy based on lean startup:
1. Ddefine your value hypothesis
You must carefully formulate a hypothesis that defines what will be the value that your product or service will bring to the customer. It is this hypothesis that you will then seek to validate with your customers as part of your experiments.
2. Define your growth hypothesis
You must also define your growth hypothesis. That is to say the way in which your offer will grow your business and your business. To do this, you need to identify what will drive the growth of your business. In its approach, Ries distinguished three different types of growth engines:
- The growth engine based on loyalty:
This growth engine is associated with products that have a high retention rate. In other words, once a customer has subscribed to a product of this type, he is unlikely to change supplier because the cost of change will be high. This is the case for example of bank accounts which are very engaging products. For this type of product, growth will be possible if the customer acquisition rate is higher than the termination rate. Companies with such a growth engine therefore have every interest in closely monitoring these two indicators.
- The viral growth engine:
As its name suggests, this type of engine means that the use of the product will be transmitted “naturally” like a virus, from one user to another without any particular action. This is the type of growth used by social networks like Facebook or LinkedIn whose business model is linked to the large number of users they can acquire.The speed of growth is determined by the viral coefficient. For example, a viral coefficient of 0.5 means that out of ten customers, five of them will pass the product on to someone they know. A viral coefficient of less than 1 does not ensure viable growth. If we take the example of a product which has a viral coefficient equal to 0.5 and that 4 customers have subscribed to the product, that means these 4 customers will transmit the product to 2 people who themselves will transmit it to one person and it will be over. On the other hand, if the viral coefficient is greater than 1, then the number of people who use it will increase mechanically. If, for example, this viral coefficient is equal to 3, this means that each user will transmit the product to 3 people on average. So the first 4 users will pass the product on to 12 people who will then pass it on to 36 people. Companies that use this type of growth can only use free type economic models (financed by advertising) or freemium because models paying would significantly reduce the viral coefficient of the product.
- The growth engine based on the paid acquisition:
These are companies that must invest a certain amount (in advertising, communication, etc.) to acquire customers. In this case, the main growth indicator is the cost of acquiring a new customer. For example, if a company spends 60 euros to acquire a client and that client pays a total of 80 euros to the company, then the company has 20 euros of margin that it can reinvest. This represents 25% of the company’s revenues.
3. Design your PMV (Minimum Viable Product)
The minimum viable product is the first version of your product or service that you can offer to your potential customers. It is not necessarily a prototype or a beta version but really a first draft solution which aims to have a first feedback from your customers. These returns are valuable data because they should help you know whether you are going in the right direction or not. In other words, this data should allow you to confirm (or not) your value and growth assumptions as you progress in the development of your project.
To better understand this notion, take the example that is regularly cited by Eric Ries: Drop Box. In fact, Drew Houston, the founder of Dropbox decided to make a video explaining the service like PMV: a simple solution for putting your documents online and being able to access them from your Smartphone, PC or tablet. The video was so successful that the waiting list for the service increased from 5,000 to 75,000 people in 24 hours. This first success confirmed Drew Houston in his approach and he began to gradually implement the main functionalities of his product.
4. Define and measure your Decision Indicators
It is important to define indicators that will allow you to really test your value and growth assumptions.
Many companies define fairly generic indicators such as the total number of customers or the activation rate of the service. However, if we take the example of a company that has a growth engine based on loyalty, indicators of this type are not very useful in assessing growth in activity. Rather, it will be in the best interest of this business to track its acquisition and termination rates. A company that has an acquisition rate of 35% and a termination rate of 25% will be able to deduce that it has a growth rate of 10%.
5. Choose to “Rotate” or not
Once you have tested your Minimum Viable Product and measured the returns from the market, it’s time to decide if you should persevere in the same way or change course. If your indicators confirm your initial assumptions, then you can accelerate the pace of development and improve the quality of your product by improving certain functionalities or by adding others which seem relevant to you.
On the other hand, if your indicators are bad, then you will have to analyze them to understand where the problem can come from. This analysis may lead to the decision to “pivot”, that is to say to change direction in the design of your product. There are several ways to rotate but to sum it up, this will bring you to either:
- To deeply change your product;
- To change your marketing target;
- To change the distribution channel;
- To change your economic model;
- To redefine your value and / or growth assumptions.
Here is a diagram that illustrates the overall iterative process:
Innovate and Develop your business
This method thus makes it possible to reduce the share of chance linked to the design, production and marketing of an innovative product by implementing a process of learning and continuous improvement.
Your initial project is purely theoretical, it is the fruit of your vision. Your goal will therefore be to quickly set up the experiments that will allow you to compare your vision with the reality of the market. In this case, Lean Startup is an approach that will allow you to check if your successive iterations bring you closer to your goal: to develop an economically viable business!
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