The Magic Bike Company

The Lean Startup

One of Taiich Ohno's Ten precepts to thinking and acting to win.

Do anything immediately. Starting something right now is the only way to win.
The Lean startup is a new way of looking at the development of innovative new products that emphasizes fast iteration and customer insight. I was having coffee with the CEO of a new startup, listening to her puzzle through how to communicate to potential customers. She was an academic on leave from Stanford now selling SAAS software to large companies, but was being inundated with marketing communications advice. “My engineers say our website is old school, and we need to be on Facebook, Twitter and Instagram, my VP of Sales says we’re wasting our marketing dollars not targeting the right people and my board keeps giving me their opinions of how we should describe our product and company. How do I sort out what to do?”

How about an experiment...

 

powered by Typeform
Customer analytics is a process by which data from customer behavior is used to help make key business decisions via market segmentation and predictive analytics. “If you are building the wrong thing, optimizing the product or its marketing will not yield significant results. A startup has to measure progress against a high bar: evidence that a sustainable business can be built around its products or service ” [1]
Key Performance Indicators need to be part of your gotomarket product development. KPIs are a measurable value that demonstrates how effectively a company is achieving key business objectives. Organizations use KPIs at multiple levels to evaluate their success at reaching targets.Qualitative research involves talking with customers to uncover their needs or jobs to be done so as to generate ideas to improve your product. This research can be surveys or customer observations in the development of a journey map. Formal analysis of the impact of product development can use cohort analysis as part of agile development. The importent metrics include the number of new customers and customer retention, market share and surveys showing the likelihood of recommending your product to a friend. For KPI examples visit Klipfolio.
For those companies focused on performance priority, or an operational excellence strategy, it includes implementing their blockbuster idea, using the appropriate metrics and keeping their costs down. We call that product-centricity. Because of current trends, the product-centric approach has lost some of its effectiveness. We will discuss some alternative approaches as there are some cracks in product-centricity strategies. Of course for some companies product-centricity is a viable option, but modern approaches that did not exist 15-20 years ago have surpassed the product-centric approach. Furthermore, in some respects, product-centricity is not as progressive as it once was.
Current emerging trends that effect longevity cause companies to weigh the benefits of product-centricity or explore alternative strategies. There are a few factors that take some of the edge off of the product-centricity strategy including, the idea of commoditization. Commoditization is defined as the process by which goods that have economic value and are distinguishable in terms of attributes (uniqueness or brand) end up becoming simple commodities in the eyes of the market or consumers. It is the movement of a market from differentiated to undifferentiated price competition and from monopolistic to perfect competition. The company is in a race to achieve the lowest price. A race that is very hard to win.
Manufacturing new products or delivering new services that are steps ahead of the competition can be challenging as time plays a critical role before competitors generate an equivalent idea. Today, as a result of technology, products commoditize faster and product life cycles have become shorter than ever. Companies recognize as soon as they launch something new, they must have the next new "thing" in progress. In the product-centric world, every company would like to count on some kind of natural monopoly as they strive to keep ahead of their competitors for a long period of time. This process also enables them to focus on creating the most efficient operation processes and methods. However, as those life cycles shorten and things commoditize, some of the natural monopoly power dissipates.
“The current business reality is stark, three out of four companies on the S&P 500 list today will disappear into obscurity by 2027. What was once a 61-year life span for the average firm on the S&P 500 in 1958 narrowed to 25 years in 1980 — to 18 years today. At the center of this trend are the side effects of the transformative effects of the exponential growth found in modern technology.” retrieved from Wired.com article - Business Success Is Happening Faster Than Ever, But So Is Failure. How to Adapt
“As happens in most industries, value creation is moving up the stack. That is, companies make money in new technology-driven arenas at first by differentiating on performance, engineering, cost, etc. As industries evolve, core infrastructure gets built and commoditized, and differentiation moves up the hierarchy of needs from basic functionality to non-basic functionality, to design, and even to fashion. For example, there was a time when chief buying concerns included how well a watch might tell time and how durable a pair of jeans was. There is still plenty of core technology to be built for the Internet, but the fact that you can now be a fairly sizable Internet company without ever needing to own (or even look at) your server hardware means a much bigger proportion of what companies do is add value on top of what’s here. And one of the most powerful ways to add value is through design. ” from: link –a medium.com article by Evan Williams
Today’s consumers are much more informed and aware, as opposed to their historically passive purchasing behavior. Customers of yesteryear welcomed whatever products or services they received with "oh, that's great, terrific, thank you very much, I'll figure out how to use it." Today's customers are more demanding and savvy. A primary reason for this shift is a direct result of the internet as customers have become fully aware of available options including future options not yet released. Smart customers put pressure on companies and make it harder for them to extract as much value out of the products and services that they deliver.
Technology also lessens the strength of product-centric companies by offering products instantaneously. Companies such as FedEx, DHL, or UPS also help to diminish some of the natural monopoly power that a company has by delivering products almost immediately. Prior to the advent of the internet companies relished the fact that no one else had a product like them and even if they did, customers were simply not aware of it. In the off chance that customers were aware of it, for the most part, they would not have access to it.
Because distribution technology delivers everything everywhere overnight, companies today find it laborious as they try to compete with products and services that are available from other regions. This is just one example of how technology diminishes the strength of product-centricity. Not limited solely to technology, part of the decline of product-centricity is attributed to a mindset. More than ever, customers are thinking globally as they seek products and services from other regions.Industry deregulation has also played a part in the weakening of product-centricity. Regulation gave companies monopoly power. Here, they were the only game in town and customers had no choice. But as one industry after another has deregulated, companies are forced into competition with each other. As a result, it is difficult for companies to stay a step ahead. In some cases, it's not deregulation, but it's re-regulation. Clearly regulations are driving markets into competition. This is yet another example why product-centricity isn't what it used to be.
An important reason attributed to the decline of product-centricity is the customer. As previously mentioned, customers are far more demanding than ever before. In times past, as customers acquired products and services, it was incumbent upon them to put them to use to help them solve the problems that they had. This common practice was perfectly acceptable to both the buyer and the seller. Today's customer is much more resourceful as they no longer seek just one product or service but insist companies offer bundled products or services that they can choose from.
Sometimes companies include products and services that they may not make money on. It is essential that companies be seen as trusted advisors and provide full–fledged solutions to the customer rather than piece meal products and services together. IBM is a classic example of a company that was solely a product-centric firm which transformed into a customer centric solution provider. In the early days, IBM surpassed their competitors as they developed certain kinds of products including business machines and computers better than anybody else. By the mid 1990s, they had a revelation they could actually make more money serving as a trusted advisor. When computers and other information technology equipment commoditized, IBM expanded their business by counseling customers on what set of machines and services to buy. IBM profits today from serving as a customer centric solution provider. They equip customers with knowledge so that they can make informed decisions when purchasing products and services. That kind of expertise doesn't commoditize nearly as much as any one product might. The idea of moving away from selling products to serving as a full scale solution provider is a major change that has occurred in the last 15 to 20 years.
Today's technology enables us to collect, manage and use data about customers in a way that we could have never imagined before. Henry Ford was one of the real originators of product-centric thinking. He had no idea how many customers he had. He wasn't clear whether he was selling one car to each of ten million different people, or whether he was selling ten million cars to one person. Quite frankly, he didn't know and he didn't care. Because he was product-centric in his thinking, for him, it was a matter of pushing products out the door while keeping volumes up and costs down.
But by focusing on competition, scholars, companies, and consultants have ignored two important—and, far more lucrative— strategies: One is to find and develop markets where there is little or no competition—blue oceans—and the other is to exploit and protect blue oceans. “Perhaps the most important feature of blue ocean strategy is that it rejects the fundamental tenet of conventional strategy: that a trade-off exists between value and cost. According to this thesis, companies can either create greater value for customers at a higher cost or create reasonable value at a lower cost. In other words, strategy is essentially a choice between differentiation and low cost. But when it comes to creating blue oceans, the evidence shows that successful companies pursue differentiation and low cost simultaneously.” reference: Blue Ocean Strategy-HBR at link
Given today's flaws with product-centricity, it is imperative that companies review data regarding their customers. Doing so enables them to understand who is buying what, and for how long. Studying data also helps companies to recognize just what other products customers are buying. Current information systems provide the possibility of developing business models that were once unimaginable and could potentially outperform those of the product-centric approach.
This guide from the smarta website introduces you to various techniques and guidelines for collecting data on your customers: Guide
A classic example of a MVP is what was done by Zappos Founder Nick Swinmurn: “My Dad told me, you know I think the one you should focus on is the shoe thing. That’s a real business that makes sense. So I said okay, focused on the shoe thing, went to a couple of stores, took some pictures of the shoes, made a website, put them up and told the shoe store, if I sell anything, I’ll come here and pay full price. They said okay, knock yourself out. So I did that, made a couple of sales.” If you can validate your thesis without paying to create lots of code that approach is like found gold. As another example, the MVP for AngelList mostly took the form of making introductions by email. The Virgin Airlines MVP was just a single plane flying back and forth between two cities. The less money spent on proving the hypothesis, the more money that is left to pivot or execute on the idea.
[1]The Lean Startup pg 126.
LTV is lifetime value. What you’re describing there is the incremental profit contribution for a user over the projected life of that user. It’s the value of each customer to the bottom line, and then you compare that to the CAC or “cost of acquired customer” to understand the leverage you have between what I need to spend to acquire a customer and how much they’re worth. If your CAC is higher than your LTV you’re sunk. Because it’s costing you more to acquire a user than the value you extract from that customer and there’s the dynamics on how does it scale over time, CAC tends to go up, LTV tends to go down. Because you’re, on the CAC side, you’re acquiring the less interested users over time. So they cost more to acquire and they’re worth less, and so that the LTV to CAC ratio, in our experience, almost always degrades as over time with scale. What entrepreneurs should think about is what is the unique organic new thing that’s gonna get it in front of people, without spending a bunch of money. Lime's scooters are bright green and they glow. So when someone sees one in the wild, someone bolts by them in a glowing green electric scooter and you’re thinking, “Okay…what is that?” And Lime hasn’t spent a penny on consumer acquisition.
Lime logo Lime scooters
scource: Lime Blog
Several years age you could have been the only person competing online selling matteress's. The new breed of mattress companies needed to buy users and early on. Flash-forward a year or two, they’re like six new age mattress manufacturers with virtually identical products competing for the same consumer. Some are Casper, Lull, Wayfair,Tuff & Needle, tulo. The economics did not persist over time. One of the key questions in businesses driven by heavy user acquisition is how does the play end? You know, it usually looks pretty good at the beginning of the play but in the middle it’s starts getting a little complex and there’s tragedies at the ends. Review one of the tragedies that resulted in a dicey lawsuit.