October 12, 2012 Editor 0
The Lean Startup is a business approach coined by Eric Ries that aims to change the way that companies are built and new products are launched. The Lean Startup relies on validated learning, scientific experimentation, and iterative product releases to shorten product development cycles, measure progress, and gain valuable customer feedback. In this way, companies, especially startups, can design their products or services to meet the demands of their customer base without requiring large amounts of initial funding or expensive product launches.
Originally developed with high-tech companies in mind, the lean startup philosophy has since been expanded to apply to any individual, team, or company looking to introduce new products or services into the market.Today, the lean startup’s popularity has grown outside of its Silicon Valley birthplace and has spread throughout the world, in large part due to the success of Ries’ bestselling book, The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses.
Ries developed the idea for the Lean Startup from his experiences as a startup advisor, employee, and founder. His first startup, Catalyst Recruiting, failed because they did not understand the wants of their target customers, and because they focused too much time and energy on the initial product launch. After Catalyst, Ries was a senior software engineer with There, Inc. Ries describes There Inc. as a classic example of a Silicon Valley startup with five years of stealth R&D, $40 million in financing, and nearly 200 employees at the time of product launch. In 2003, There, Inc. launched its product, There.com, but they were unable to garner popularity beyond the initial early adopters. Ries claims that despite the many proximate causes for failure, the most important mistake was that the company’s “vision was almost too concrete,” making it impossible to see that their product did not accurately represent consumer demand.
The lean startup philosophy is based on lean manufacturing, the streamlined production philosophy developed in the 1980s by Japanese auto manufacturers. The lean manufacturing system considers as waste the expenditure of resources for any goal other than the creation of value for the end customer, and thus a target for elimination.
Similar to the precepts of lean management, Ries’ lean startup philosophy seeks to eliminate wasteful practices and increase value producing practices during the product development phase so that startups can have better chances of success without requiring large amounts of outside funding, elaborate business plans, or the perfect product. Ries believes that customer feedback during product development is integral to the lean startup process, and ensures that the producer does not invest time designing features or services that consumers do not want. This is done primarily through two processes, using key performance indicators and a continuous deployment process. Because startups typically cannot afford to have their entire investment depend upon the success of one single product launch, Ries maintains that by releasing a minimum viable product that is not yet finalized, the company can then make use of customer feedback to help further tailor their product to the specific needs of its customers.
In his blog and book, Ries uses specific terminology relating to the core lean startup principles.
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 business hypotheses (or leap-of-faith assumptions) and to help entrepreneurs begin the learning process as quickly as possible.As an example, Ries notes that 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, and sold them directly to customers if they purchased the shoe through his website. 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 is a process “whereby all code that is written for an application is immediately deployed into production,” which results in a reduction of cycle times. Ries states that some of the companies he’s worked with deploy new code into production as often as 50 times a day.The phrase was coined by Timothy Fitz, one of Ries’s colleagues and an early engineer at IMVU.
A split test 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 changes in behavior between the two groups and to measure the impact of each version on an actionable metric.
A/B testing can also be performed 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 can be criticized in circumstances where external events may influence user behavior one time period but not the other. For example a split test of two ice cream flavors performed in serial during the summer and winter would see a marked decrease in demand during the winter where that decrease is mostly related to the weather and not to the flavor offer.
These are in contrast to ‘vanity metrics’ – measurements that give “the rosiest picture possible” but do not accurately reflect the key drivers of a business. Actionable metrics can lead to informed business decisions and subsequent action.
Vanity metrics for one company may be actionable metrics for another. For example, a company specializing in creating web based dashboards for financial markets might view the number of web page views per person as a vanity metric as their revenue is not based on number of page views. However, an online magazine with advertising would view web page views as a key metric as page views as directly correlated to revenue.
Typical examples of a vanity metric are 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.
A pivot is a “structured course correction designed to test a new fundamental hypothesis about the product, strategy, and engine of growth.” A notable example of a company employing the pivot is 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 would grow into a billion dollar business.
The lean startup philosophy pushes web based or tech related startups away from the ideology of their dot-com era predecessors in order to achieve cost-effective production by building a minimal product and gauging customer feedback. Ries asserts that the “lean has nothing to do with how much money a company raises,” rather it has everything to do with assessing the specific demands of consumers and how to meet that demand using the least amount of resources possible.
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