Eric Ries, an entrepreneur and business blogger enlightens entrepreneurs looking for an edge in their business, by revealing his method for creating a business that will stand the test of time. His method, of staying small enables businesses to be more agile, ultimately making them more adaptable to change. He reveals how startups can make products sell faster and better than their competitors.
Key Takeaways from “The Lean Startup" by Eric Ries
Takeaway #1 Finding a Sustainable Business Model
No matter how good your plans or how much free marketing you get, without a profitable and sustainable business model, your start-up won't succeed.
Answer these questions by doing real research (talking with people!) rather than a mix of guessing/hoping.
Does anyone want what I can provide?
Can I make money from it?
Is it sustainable – Will it work in the future as well?
Everything that your business does, including day-to-day operations, should be focused on your sustainable business model; finding the right products for the right people with a way to sell it to them because the faster you do this, the more likely your business is to succeed.
Takeaway #2 Bridging The Leap Of Faith
There will always be a moment when you have to do the leap of faith to see if what you envision can work as a viable business but you can bridge that gap by testing 2 fundamental assumptions early on.
The value hypothesis assumes that early adopters will embrace the item and that they will find value in the product. The growth hypothesis presumes that the product will only appeal to a certain type and number of people to start with, but that over time, a larger market will open up – If you need an example, just look at Facebook.
If these 2 points cannot be validated you should walk away and come up with another business idea but presuming you've passed the test, you can move on to testing.
You can test your product by creating a minimal version of it whilst getting real customer feedback. Leave off the bells and whistles, your MVP (minimal viable product) should have just enough to give customers a realistic idea of what they can expect. A dummy website that has the information, images, and price even though there's not an actual product to be shipped out but that has people signing up for a waiting list can also work if you're not creating a physical product – This is exactly what Dropbox did.
From here you can enter the build, measure, learn phase in which you take on board all of the customer feedback, measure interest in the product, and talk to the people who tried the product/website so that you can then develop an even better product – Repeat the MVP and feedback loop until you have found your sustainable business model.
At this point you can start split-testing to work out which features are of most value to your customers, you should only include the most valuable ones as these will bring you money, ditch any 'extras' that you 'thought' would work but actually don't! This applies for the product itself as well as website features.
Keep asking how your product can be improved to help it find its market – What you think the public need and what the public actually need can be two entirely different things, don't get stuck in thinking your way is the right way and remember that pivoting is normal, the faster you resist the change the faster you succeed!
Takeaway #3 The Growth Period
To make sure your business doesn't become stagnant, it should have 3 different kinds of growth engines; a sticky engine, a viral engine, and a paid engine, these can run all at once but it's best to focus on one at a time.
The sticky engine works to retain existing customers, this can be done by providing great service and/or updating with new features so that they want to use your product more. The viral engine gets your existing customers to market your product for you, you make it easy for them to tell friends and family about your service/product, last but not least the paid engine is your paid marketing which is only possible if you have enough existing customers bringing in the revenue to ensure your costs per acquisition are less than your user lifetime value.
Takeaway #4 Stop and Reflect
As you develop, test, and grow your business you need to pause and see how much progress you've made towards your long-term goals. Don't caught up in the vanity of receiving a ton of social media followers if they haven't resulted in paying customers!
Define the correct metrics for your business and evaluate them often – When the metrics improve, you know you're proceeding towards your goal but if the numbers stay the same you know you need to try a new way.
Lesson #1. The Sustainable Business Model
Your goal as a business owner is to find a sustainable and profitable business model as fast as possible as the faster you find your sustainable and profitable business model, the more likely your startup is to succeed.
You need to find a way to successfully obtain customers, serve them in some way, and earn money for the foreseeable future. Essentially, you have to sell something that people are willing to buy and that’s not as straightforward as you might initially think, requiring a lot of trial and error.
Lesson #2. Using Validated Learning
List your theories of what your customers want, how you can sell what they want, and how you can make a profit. For example, if you’re a clothing startup when coming up with theories about how your selected product/s will be sold you might say that “Customers in the U.S.A and Europe are willing to purchase clothes online.”
Through validated learning you then put your theories to the test as however sure you feel that you’re ‘onto a winner’, you can’t know for sure until you’ve placed your product in front of the customer.
You might be tempted to create a questionnaire for your target audience to fill in or to create fictional customers but this can lead to false positives. Instead, get feedback from real customers by offering the product for purchase and see how they respond.
The shoe company Zappos started in this way - They had the theory that people would be willing to buy shoes online. So they tested the idea by taking photos of shoes that were for sale in retail stores and displaying them on a mock website. When people tried to purchase the shoes from their fake site they knew they were onto a winning business model.
Lesson #3. Taking The Leap Of Faith
Moving from theories to product development requires a leap of faith however, you don’t need to leap blindly without knowing where or how you’re going to land - bridge the gap by preparing and testing two primary beliefs, the value hypothesis and the growth hypothesis, as soon as possible.
The value hypothesis presumes that your product or service will provide value to your initial customers aka the early adopters.
The growth hypothesis meanwhile, presumes that the product will find a bigger market later on. If both hypotheses can be verified it is reasonably safe to continue investing your time, money, and energy on launching your startup.
Facebook managed to validate the value hypotheses and the growth hypothesis when they had only a few registered users. This was due to the registered users being very active with more than 50% logging in once per day or more which answered the value hypothesis. Next, it ticked off the growth hypothesis with its amazing user-activation rates - In the colleges where Facebook was initially introduced three quarters of the entire student population signed up within a month, this all without a cent being spent on marketing the platform.
Lesson #4. Developing a Product To Test The Waters
All too often founders will create their product in isolation, spending hour upon hour creating a product that a customer won’t actually buy. This is why you have to find out as fast as possible if there’s a demand for your product. How? Develop an MVP - a minimal version of the product.
The MVP should be as simple as possible, a bare bones product that allows the user to experience the product and give feedback but without all the bells and whistles being ready. Alternatively, you can do what Zappos did and create a ‘smoke test’ by pretending to sell a product that doesn’t yet exist.
When Dropbox was just an idea, the founders knew that developing the idea into a usable product would take a lot of time so they tested their hypothesis by creating a video to show what Dropbox would do. Within 1 night 75,000 people had signed up to the waiting list proving that the growth hypothesis was practical. They then proceeded to develop the actual product.
Lesson #5. Learn Fast and Often
Create BML loops that allow you to move through the build-measure-learn process with grace.
Using your MVP or smoke screen product to gain valuable customer feedback on what the customer did or didn’t like about your product you’ll also need to measure quantitative data such as how many people tried to purchase the product. What you learn from this feedback session can then be used to create a new optimized product (one that your customers have said they want) which you then show them again gathering more feedback. Rinse and repeat the build-measure-learn process as fast as you can until you’ve hit the nail on the head in terms of what customers want and what you can make a profit from - with each full loop you go through you’ll be getting ever nearer to reaching your sustainable business model.
When moving through the BML loops founders need to identify which features are valuable to their customers (the features which will either increase revenue or help attract more customers) and those which aren’t. Even if a developer thinks a feature is fantastic and that people just don’t realize it yet, unless it increases revenue or is a talking point that will bring in more customers it’s a waste and should be removed.
To determine the valuable features from the wasteful ones you have to do split testing. This means creating 2 versions of the same product, 1 version has the feature, the other doesn’t.
Split testing was first used by mail order businesses. They would have 2 versions of the same catalog printed and sent out to customers to determine which would get more sales - One version would have the original layout and be sent out to half the customer base, the remaining 50% would be sent the new layout. When orders were sent back in by post, the company could determine which catalog performed better.
Every change you’re thinking about making should be split tested to determine if it’s really better or not whether that’s a product feature, packaging, website design, or advert.
Lesson #6. Be Prepared to Pivot
Many startups mistakenly believe that if they persevere enough, throwing more time, energy, and money at any setback they come across, that the business will eventually take off and become successful. This ‘zombie attitude’ should be avoided at all costs. Instead, keep asking how and where you need to change to have your product find its market.
It’s likely that you’ll need to make a substantial change (pivot) along the way due to realizing that one of the core assumptions have changed. You might find you need to redefine your core value or product, change the sales channel, or target a different customer segment and therefore need to test the new hypotheses.
Groupon did a pivot and look where they are now, known for being one of the top daily deal platforms today, yet they initially started out as an activism and fundraising platform!
Due to the perceived loss of time, energy, and money when facing a pivot decision, many founders will avoid or postpone making the call to change direction but remember, pivots are often necessary to finding your sustainable and profitable business model. Schedule monthly meetings to reflect on the data you have so far to make sure you’re not burying your head in the sand about a necessary change of direction.
Lesson #7. Stick To 1 Engine Burning At A Time
You know the saying, don’t run before you can walk! Well, it applies to startups too.
There are 3 types of growth engines that are key for a successful business model and whilst you can have all 3 engines at once, it’s advisable to focus on one at a time so that you can see which engine works most effectively for you.
The ‘sticky engine’ retains existing customers who already generate a steady stream of income by getting them to use the product more, this can be done by introducing new features whilst providing great service.
The ‘viral engine’ uses its existing customers to promote the company or product through word of mouth and other easy to implement measures. This means the startup doesn’t have to spend a ton of money on marketing. Hotmail did this by adding the signature “P.S Get your free email account at Hotmail” automatically to all emails that.
The “paid engine” invests in marketing whether through TV or radio ads or online adverts. This engine is only sustainable if there’s an existing customer base that generates enough money to ensure the costs per user acquisition is lower than the user lifetime value.
Lesson #8. Don’t Let Vanity Get The Better Of Your Business
Have you ever heard of vanity metrics? These are the flattering yet useless metrics that make you and your startup look good but don’t actually help you to achieve real goals and certainly don’t help pay the bills. Social media metrics are a good example - It’s easy to start believing that when you get x amount of Instagram followers your business will take off, or mistakenly think that because you’ve already reached 100,000 fans you’re a success.
Unless followers are buying from you, or at least clicking on your website link, social media stats are worthless. Other misleading vanity metrics can include the number of hours you’ve worked, or the number of items you’ve ticked off your to-do list.
Don’t fall into the trap of running on a hamster wheel and getting nowhere!
Lesson #9. Analyze Your Core Metrics
Identifying, tracking, and evaluating your core metrics such as number of products sold, number of customers, and average website session length per customer (presuming you’re selling online) is essential as when you see the metrics improve, you know you’re on track for reaching your sustainable business model.
The cohort analysis, where you compare new customer’s behavior against old customer’s behavior can be useful in steering the startup in the right direction. For example, if you’re tracking your average website session you can compare how long customers spent on your website per session 6 months ago, 4 months ago, and last month. Ideally, you want to see that customers from the previous month spent longer on your site than those customers 6 months ago. If the metric is improving you’re progressing but if the metric is the same, you’re stagnating and need to find a way to increase numbers next month.
The Lean Startup Chapters
Chapter One - Start
Chapter Two - Define
Chapter Three - Learn
Chapter Four - Experiment
Chapter Five - Leap
Chapter Six - Test
Chapter Seven - Measure
Chapter Eight - Pivot (or Persevere)
Chapter Nine - Batch
Chapter Ten - Grow
Chapter Eleven - Adapt
Chapter Twelve - Innovate
Chapter Thirteen - Epilogue: Waste Not
Chapter Fourteen - Join the Movement
Best Quotes from The Lean Startup
“The only way to win is to learn faster than anyone else.”
“We must learn what customers really want, not what they say they want or what we think they should want.”
“Reading is good, action is better.”
“As you consider building your own minimum viable product, let this simple rule suffice: remove any feature, process, or effort that does not contribute directly to the learning you seek.”
“if you cannot fail, you cannot learn.”
“A startup is a human institution designed to create a new product or service under conditions of extreme uncertainty.”
“The big question of our time is not Can it be built? but Should it be built? This places us in an unusual historical moment: our future prosperity depends on the quality of our collective imaginations.”
“When in doubt, simplify.”
“Success is not delivering a feature; success is learning how to solve the customer’s problem.”
“Innovation is a bottoms-up, decentralized, and unpredictable thing, but that doesn’t mean it cannot be managed.”
“The lesson of the MVP is that any additional work beyond what was required to start learning is waste, no matter how important it might have seemed at the time.”
“Customers don’t care how much time something takes to build. They care only if it serves their needs.”
― Eric Ries - The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses
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Tal Gur is a location independent entrepreneur, author, and impact investor. After trading his daily grind for a life of his own daring design, he spent a decade pursuing 100 major life goals around the globe. His most recent book and bestseller, The Art of Fully Living - 1 Man, 10 Years, 100 Life Goals Around the World, has set the stage for his new mission: elevating society to its abundance potential.