 American online shoe and clothing retailer. Their hypothesis, back in 1999, was that people were ready to buy shoes online. Nick Swinmurn, the founder, took pictures of the inventory in local shoe stores and posted the pictures online on Shoesite.com. If a customer wanted a shoe, he bought it from store and sent it to the customer. In this way, he validated his hypothesis, then built the business. Zappos was acquired Amazon in 2009 for $1.2bn.
Dropbox allows you to synchronize your files between PCs, laptops, mobile phones etc. Drew Houston thought it would be too hard and time consuming to build a prototype in order to convince potential investors, so he and his co-founder made a 3 minute video.
Steve Blank’s Customer Development Process
The next thing that lean startup practitioners do is what Steve Blank calls, in this Harvard Business Review article, “Get out of the Building” or what Toyota call “genchi gembutsu” – “go and see for yourself”. Steve had documented what he called a Customer Development Process, embodying Lean Startup principles:
- Customer Discovery – translate ideas into business model hypotheses, test assumptions, create a Minimum Viable Product
- Customer Validation – continue to test all other hypotheses and try to validate customer interest through early orders or product usage; if no interest, startup can “pivot” by changing one or more hypotheses
- Customer Creation – product has been iterated enough so that it is refined enough to sell; ramp up marketing and sales
- Company Building – transition from startup mode into an established company
The third enabler of the Lean Startup model is agile development, which has its origins in agile software development. This is a group of software development methods in which requirements and solutions evolve through collaboration between self-organizing, cross-functional teams, and has become the predominant way of developing software. Agile promotes adaptive planning, evolutionary development in small increments, early delivery, continuous improvement, and encourages rapid and flexible response to change.
Agile development doesn’t apply only to software. In his book, Eric Ries gives the example of SGW Designworks. Their specialty is rapid production techniques for physical products. They were engaged by a client who had been asked to build a ruggedised portable complex x-ray machine to detect explosives etc. at border crossings and in war zones. SGW designed prototypes with CAD (Computer Aided Design). Three days after the design was agreed by the client, they delivered physical prototypes. The parts were machined in aluminum directly from CAD using computer numerical control and hand assembled by the SWG team. A second iteration was done in 5 days.
Another important aspect of lean innovation championed by Ries is the focus on Actionable Metrics. These are metrics that can lead you to informed business decisions and subsequent action, and are in contrast to ‘vanity metrics’ – measurements that give “the rosiest picture possible” but do not accurately reflect the key drivers of a business.
However, 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 – 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 since page views are directly correlated to revenue.
A typical example of a vanity metric is ‘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. Be honest and realistic about your metrics!
Validated learning, mentioned earlier, is a term coined in the lean startup scene, but it can be applied universally. Validated learning is defined as a proc