Value Assumed Before Deep Customer Interaction
Low total cost of ownerships (TCO)
Turnkey
Customer doesn’t need to touch system
Value Validated After Deep Customer Interaction
Zero capex (hardware rolled into subscription)
Software-as-a-service (SaaS) (no black box to maintain)
Customization by customer required
We recognize this is not a traditional way to conduct business. Although many successful entrepreneurs implicitly understand that many of their ideas about their businesses are guesses and go about their own way of testing these, the Myth of the Visionary is the predominant startup meme.
When businesses cost a lot of money to get started, investors from bank officers to venture capitalists want to know as precisely as possible what the return on their investment will be and when they will see it. The opportunity cost of the investment was high. The business plan was an assurance document, despite its fictional quality.
Big businesses look for the same assurance. Despite their best intentions of encouraging disruptive innovation, the very nature of asking, “What’s the ROI and when will I see it?” lures disruptive ideas toward sustained, modest innovation. To predict the market, you have to be in a known market. To disrupt, you must create new markets.
Reducing the cost of startup endeavors means a lower opportunity cost and the ability to fund experiments. It’s actually rather ironic that we are willing to fund scientists to conduct research in new technology, whether in robotics, chemicals, materials, and so on, but the moment we wish to commercialize said technology, we abandon the scientific method.
In other words, it’s perfectly okay to test, fail, iterate when developing a technology, but to test, fail, iterate to find a marketable application of the technology seems ridiculous to many.
Of course the technology is marketable; it’s groundbreaking!
The result of scientific research is tangible, or at least factual. You put in money, you eventually get out a result. This works or it doesn’t.
The entrepreneur who says, “Eh, this may work or maybe not,” is not giving a very compelling pitch. It’s not very comforting, but there’s truth therein. As a matter of fact, based on the numbers, the entrepreneur would be the most truthful if he said, “We’ll give it a go, but it most likely won’t work.”
If you were to look at the value stream of a lean manufacturer, you would, from a high level, understand the steps involved in producing and delivering value. If someone were to outline the plan from delivery of raw materials to its flow through the manufacturing process and on to the delivery of goods to a customer, you would likely be able to identify value-added activities and non-value-added activities without a lot of knowledge of the particular product.
But what about analyzing the value stream when value is not known? If our goal in a lean startup is to eliminate waste in the discovery of value, how do we know what’s wasteful? The fact is you can’t eliminate all waste if you don’t understand the value you’re creating. The process of discovery itself will include waste. If you build a prototype that flops, you arguably wasted your time building that particular prototype, but it’s at least less wasteful than building the entire product before it flops!
This is why Eric Ries incorporates a different measure for lean startup. In lean manufacturing, you’re wasting time, money, materials, and labor when creating unused excess or when performing non-value-added activities. In a lean startup, you’re wasting if you’re not learning. “The effort that is not absolutely necessary for learning what customers want can be eliminated.” Validated learning is demonstrated by positive improvements in the startup’s core metrics.1
Note that core metrics do not automatically mean revenue and, as a matter of fact, early on, they most assuredly don’t. Core metrics initially relate back to the phrase what customers want, which, by the way, doesn’t mean customers know what they want. We can hear you say that you can raise $10 million and build a product no one wants and learn a ton, too!
That’s true. Which is why lean takes no stance on how much money you should raise. Arguably, one could learn a lot quicker with more money. In practice, however, we often see that (1) more money leads to more waste simply from a lack of discipline; and (2) more money often motivates investors to want more sooner (What’s my ROI and when do I see it?) just as it does in a large organization. You’ve perhaps heard that nine moms can’t make a baby in a month.
Your objective is to learn, but not all learning is created equal; quality trumps quantity. Your objective is to learn what is fundamental to your business success with the minimal amount of effort. Learn as if you believe you will fail. A prototype that fails helps point you in a better direction. A $10 million investment in product development and launch is one big failed experiment that leaves no room to pivot or learning to pivot around.
It’s easy to understand big waste:
Spending a year building a product no one wants.
Spending six months looking for investors to fund a year’s worth of development on a product no one wants.
Writing a business plan for four months to convince an investor to fund a year’s worth of development on a product no one wants.
Small waste is much more insidious, flailing through business-model ideas without direction:
Opportunistic and shotgun sales.
Product feature mongering.
Great marketing for a crappy product.
So the question remains: How can you develop your lean startup value stream, which is measurable by validated learning?
In any successful business, a certain number of customers go through a series of steps to become aware of your product, experience it, become satisfied with it, and then finally feel a high level of loyalty to the experience. Through the process of customer acquisition and conversion, and then delivering on the product’s fundamental promise, the successful business learns what problem it should be solving and what products and services it must provide, plus particular activities in marketing, selling, product development, support services, and so on, it needs to employ, in order to let the user most efficiently flow through the experience from beginning to end.
The process can always be improved. The sales process might be made more efficient so that it maps closer to customer expectations. Marketing can be expanded to automate part of sales and be more inclusive to adjacent segments. Engineering might reduce non-value-added steps in the creation of features and reduce “feature inventory.” Manufacturers might adopt lean manufacturing! As long as value is maintained, these are lean practices, and continuous improvement is a core lean ethos.
Because we don’t know what the value stream is in a lean startup, however, we’re not so concerned with improvement but rather with learning and validating what the internal business processes are in the creation and delivery of value, such that the business is successful and growing.
Traditionally, the 50,000-foot view of a startup value stream might look like this:
Business Planning ⇒ Investment ⇒ Product Development ⇒ Marketing ⇒ Sales ⇒ Feedback
As we’ve seen, however, this has also resulted in a lot of failed startups and a lot of waste.
As the costs of building products has plummeted such that most entrepreneurs require little to no capital to get started, the value stream has not been rethought, but rather been shortened.
Product Development ⇒ Marketing ⇒ Sales ⇒ Feedback ⇒ Investment to Grow
In terms of sheer volume, it’s not surprising that the number of startups failing has increased. It wouldn’t surprise us if with a lack of real planning, the rate of failure had also increased.
Whether the product should be built is not seen as a question even worth asking. If it is asked, it is answered through persuasion born of charm and personality rather than through any factual element.
Can lean help us?
Through its evolution, lean has remained primarily an engineering endeavor. Design is sometimes included and internal representatives of the customer, such as product managers, are often added to the process, but in practice, direct customer interaction is poorly represented in the lean process. Data collected by the business is often tied back to efficiencies of business units, quality of code delivered by IT, customer satisfaction as measured by marketing, but there’s little to connect product and product developers to customer satisfaction and product loyalty.
The Toyota Production System includes stories about engineers and design leads interacting with customers firsthand, in order to learn what to build. We know that Toyota salespeople sold cars door-to-door and considered this part of being lean. One hears of efforts to develop lean sales and lean marketing processes, but few lean organizations are truly completing the lifecycle of a customer’s relationship with a business in one lean flow.
As long as everyone is being lean inside vertical silos, rather than as a horizontal team creating value, startups will fail and big companies will only be capable of sustaining innovation.
Unlike many engineering- or design-led lean processes, we include marketing and sales in the value stream. Many feel that marketing and sales are inherently evil and are non-value-added activities. In a perfect world, one would not need them.
Such people tend to believe that if you build the best product, the market will eventually find you. It’s often referred to as the build-it-and-they-will-come philosophy.
We empathize. Your product is your best marketing. All marketing depends on word-of-mouth, so if people have good things to say about your product, you are a step ahead.
An inverted corollary is “Nothing kills a bad product quicker than good marketing.” The bottom line is that if people have no path to your product or service, then you will not be able to provide value to these people. They won’t become your customer. Assuming that you truly wish to provide value, the importance of letting potential customers become aware of the value shouldn’t be diminished. The process of converting customers should be built around what the buyer wants the process to be. This is critical to delivering value and creating passion in the product.
The fundamental difference between marketing and selling products that deliver value and marketing and selling products to make a dollar is that the former is part of creating a lasting business based on repeat customers, long-term retention, and referrals. The latter (generally) is about maximizing revenue through as many one-off transactions as possible. The ambition isn’t to maximize customer satisfaction that generates word-of-mouth marketing, but rather to simply maximize money coming in, while minimizing money going out. When the product has run its course, those businesses launch another product under a different brand.
“Now the only way to grow is to stand out, to create something worth talking about, to treat people with respect and to have them spread the word.”2
—Seth Godin
What we are talking about is building businesses based on providing such extraordinary value that customers are willing to pay something valuable to them: money, time, a significant amount of attention. As Seth Godin points out, this isn’t accomplished by a race to the bottom, but rather a race to the top. In other words, doing what others are doing at a lower cost isn’t where the value play is. You must provide something meaningful, something more.
This isn’t always true, however. A “value surplus” can be created where increased competition lowers cost without destroying value. Customers that couldn’t afford the value before, now can. This is clearly good for the consumer. It mustn’t mean lower quality or lower value, but rather getting more for less. This is the natural result of true free market capitalism (the Adam Smith version, not the libertarian version).
New product ⇒ Company strives for monopoly ⇒ Competition enters market ⇒ Customer gets more for less
Businesses naturally strive to achieve or maintain a monopoly. In free markets, this is accomplished by relentlessly adding value. More value comes in many different flavors—higher quality, more features, support for social causes, environmental initiatives, better packaging, and so on. What Steven Spear calls the “high velocity” company is one that maintains its market lead by relentlessly leveraging some core competency. We call this the “shadow force,” because this capability isn’t necessarily visible to outsiders.
Eventually, you want to discover your value stream that encompasses everything from when someone first discovers your product through the end of the customer lifecycle. So what marks the end of the lifecycle? Many might say, “Duh, when the customer pays you.” Not so fast! The customer lifecycle is a loop. It isn’t complete until they contribute to the top of your acquisition funnel. They do this in two ways and both are important.
First, they continue as loyal customers:
Resubscribe.
Become regulars.
Sign long-term contracts.
Buy other products and upgrades from you.
“People’s desires always have a way of emerging after their needs are satisfied. When a person needs something, she will do what is needed to get it, but when she desires something, she is loyal to it. She knows that it is a discretionary purchase, and she will buy what makes her happy and will not necessarily judge rationally. When a consumer desires a product or a brand, his loyalty is one of the strongest forces in business.”3
—Alan Cooper
Second, they become product champions:
Invite friends.
Agree to a press release or case study.
Provide a testimonial.
Agree to act as a personal reference.
Show off product to others.
There’s a point we want to capture that goes beyond when a customer feels satisfied simply because your product delivered on its promise.
So what might a value stream look like that maps activities to learning, includes marketing and sales, as well as answers the question, “Should we build the product at all?”