Lean Startup Zappos: the basics

The Lean Startup Methodology has caused quite a stir in the startup community. Here we give you an idea of what it’s all about to put you on the track to “thinking lean”.

Bullet Lean Startup: Apples iPod Hypothesis

Background

The company that put lean manufacturing on the map was Toyota. Following on from scientific management practices that had been developing since the industrial revolution, the “Toyota Production System” set a new standard in business precision. Startups can learn a lot from their example (such as the “5 Whys” and “Kaizen” methods)

An integral part of the Japanese company’s lean philosophy was a continuous effort to eliminate “waste” in product design, production and logistics. “Waste”, to Japanese management, was anything that the customer wasn’t willing to pay for. Overproduction, time and defects are all examples of types of waste:

Eric Ries’ book the “Lean Startup Methodology” sought to look at how these principles might be used by startups. Why would startups be any different?

“in general management, a failure to deliver results is due to either a failure to plan adequately or a failure to execute properly. Both are significant lapses, yet new product development in our modern economy routinely requires exactly this kind of failure on the way to greatness.”

Traditional companies operate in mature industries where demand and competition are relatively stable and predictable. Thinking lean for the traditional company involves looking at how current processes and activities can be improved. The hallmark of a startup’s environment, in contrast, is that of extreme uncertainty: the product, the competition and the demand are unknown. Thinking lean for the startup, therefore, involves ascertaining what processes and activities should be undertaken in the first place.

This high level of uncertainty means that startups need to make the best possible guesses as to what kind of product and market to target, thus minimising the chances of producing waste. Lean startups should think of these guesses as hypotheses; ideas about the outside world based on a set of assumptions that have been made.

A lean startup will approach these assumptions with two things in mind:
1. Make these assumptions testable and tangible, not abstract.
2. Know which of your assumptions are the most uncertain, and test these risky assumptions first.

In this way Ries likens the process of building a startup to the process of scientific enquiry. The riskiest assumptions should be tested as soon as possible. He echoes the renowned philosopher Karl Popper, who, in his famous paper “Science as Falsification” (1963) said:

“In so far as a scientific statement speaks about reality, it must be falsifiable; and in so far as it is not falsifiable, it does not speak about reality.”

                    – Karl Popper                     

The job of a startup is to learn how to grow a business, and a lean startup will go about this in a pragmatic and scientific way.

Here are some of the tools a lean startup will use:

MVP or Minimum Viable Product

Nightmare waste scenario: you had a great idea for a product and built it well, only to launch it to find out it no one will buy it. This happens more often than it should, and sometimes even great products flop because of bad timing or bad market fit. Lean solution: release a prototype as soon as possible, and use it to test assumptions.

Ries calls this the Build-Measure-Learn cycle, and the faster and more times you complete this cycle the sooner you’ll find out what the market wants most relevant example: Zappos shoes

Bullet Lean Startup: Zappos Hypothesis

Testing and Metrics

An important part of the lean startup methodology is the “Measure” step of the Build-Measure-Learn cycle.

In terms of product testing, Ries advocates “Split” or “A/B” testing as the leanest approach. This involves making multiple testable versions of a product so that any changes can be compared to a baseline.
In terms of metrics, Ries advocates avoiding “vanity metrics”. A lean startup will avoid gimmicky pat-on-the-back metrics that don’t tell you enough about how well your doing. Any metrics used must be “actionable, accessible and auditable”.The less, the better– irrelevant noise is waste!

Pivot

If your research suggests that your current idea isn’t going to work, it might be time to “pivot” your startup. This involves changing your business strategy to align with a new hypothesis of how to succeed. The vision remains the same, but the means to achieve it can change. There are many types of pivot: you could focus on a different customer need than before, you could zoom in on a current feature of your product that you’re underselling, you could change where you’re trying to sell your product… the choice is yours!

However, in keeping with the scientific approach of the lean startup methodology, these new hypotheses must be executed in a structured way. This video gives an example of how clever founders go about it:

Growth

The lean startup methodology gives some useful lessons in growth optimisation. Ries outlines the main options open to you, and suggests you focus on one. You could have viral growth, where one customer using your product draws in more users (think Facebook or PayPal). You could have a paid growth model, where revenue from one customer is reinvested into acquiring more (think Amazon or Netflix). You could also have a sticky growth model, where your customers love using your product and you have a very low churn rate. High customer retention means it doesn’t matter how you get your customers, as they are likely to stick with you (think eBay)

What does it all mean?

Eric Ries started a movement with his Lean Startup Methodology, and any business can learn from it. First think lean, and think how you can make your business leaner. Second, see if any of the many tools used in the lean process could be of use to you.

 

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