The Lean Startup

Written By Vignes Rajagopal

In this weeks newsletter, Dragon Argent explore the core principles of the Lean Startup - a methodology for developing businesses and products that aims to shorten product development cycles and rapidly discover if a proposed business model is viable.
 
It helps entrepreneurs answer two critical questions quickly.  Should we build this new product or service and how can we increase our chances of success if we do.  This helps to reduce failure rates, focus time, and save money and it can be used across all sorts of organisations and sectors.
 
The core principles of the Lean Startup are summarised below:
 
Minimum Viable Product
 
A minimum viable product (MVP) is the version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort.  The goal of an MVP is to test fundamental assumptions to help entrepreneurs begin the learning process as quickly as possible.
 
As an example, Zappos founder Nick Swinmurn wanted to test the hypothesis that customers were ready and willing to buy shoes online.  Instead of building a website and a large database of footwear, Swinmurn approached local shoe stores, took pictures of their inventory, posted the pictures online, bought the shoes from the stores at full price after he'd made a sale, and then shipped them directly to customers. Swinmurn deduced that customer demand was present, and Zappos would eventually grow into a billion-dollar business based on the model of selling shoes online.
 
Continuous Deployment (applied to software development only)
 
Continuous deployment is the process of deploying all code that is written for an application immediately into production.   This approach ensures software can be reliably released at any time, facilitates the building, testing, and releasing of software with greater speed and frequency therefore reducing cycle times.    
 
Split Testing
 
A split or A/B test is an experiment in which different versions of a product are offered to customers at the same time.  The goal of a split test is to observe differences in behaviour between the two groups and to measure the impact of each version on an actionable metric.
 
A common mistake when A/B testing is to perform it in serial fashion, where a group of users one week may see one version of the product while the next week users see another. This undermines the statistical validity of the results, since external events may influence user behaviour in one time period but not the other.
 
Actionable Metrics
 
Actionable metrics lead to informed business decisions and actions as appose to vanity metrics which lead to the best possible perspective but don’t accurately reflect the key drivers of a business.
 
A typical example of a vanity metric could be focusing on the number of new users gained per day. While a high number of users gained per day seems beneficial to any company, if the cost of acquiring each user through expensive advertising campaigns is significantly higher than the revenue gained per user, then gaining more users could quickly lead to bankruptcy.
 
Pivot
 
A pivot is a structured course correction designed to test a new fundamental hypothesis about the product, strategy, and engine of growth.   
 
A well know example of a pivot in action involves Groupon.  When the company first started, it was an online activism platform called The Point.  After receiving almost no traction, the founders opened a WordPress blog and launched their first coupon promotion for a pizzeria located in their building lobby. Although they only received 20 redemptions, the founders realized that their idea was significant, and had successfully empowered people to coordinate group action.  Three years later, Groupon had grown into a billion-dollar business.
 
Innovation Accounting
 
Innovation Accounting is a way of evaluating progress when all the metrics typically used in an established company (revenue, customers, ROI, market share) are effectively zero. It provides a framework of chained leading indicators, each of which predicts success.
 
It provides entrepreneurs with a way to maintain accountability and maximize outcomes by measuring progress, planning milestones, and prioritizing.  There are three levels of innovation accounting related to the types of assumptions being validated, which carry built-in dependencies in that the first measures user engagement, the second the market readiness of the product and the third measures financial/market performance.
 
Build-Measure-Learn
 
The Build–Measure–Learn loop emphasizes speed as a critical ingredient to customer development. A team or company's effectiveness is determined by its ability to ideate, quickly build a minimum viable product of that idea, measure its effectiveness in the market, and learn from that experiment.
 
In other words, it's a learning cycle of turning ideas into products, measuring customers' reactions and behaviours against built products, and then deciding whether to persevere or pivot the idea; this process repeats as many times as necessary. The phases of the loop are: Ideas → Build → Product → Measure → Data → Learn.
 
This rapid iteration allows teams to discover a feasible path towards product/market fit, and to continue optimizing and refining the business model after reaching product/market fit.

If you'd like to learn more about Lean Startup concepts or how they could be applied to your business, please get in touch. 

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