Lean startup methodology

Updated: Thu, 28 May 2015 by Rad

Lean Startup. Method teaches how to drive a startup - how to steer and grow a business with maximum acceleration. Lean startup is an approach to business development that is based on the principles of lean production, a manufacturing methodology that values a business' ability to change quickly.

Lean Startup is a rigorous process for iterating from Plan A to a plan that works.

Lean production

Lean production is an assembly-line methodology developed originally for Toyota and the manufacturing of automobiles. Lean manufacturing (production) is a systematic method for the elimination of waste within a manufacturing process. Essentially, lean is centered on making obvious what adds value by reducing everything else.

Also known as the flexible mass production, the Toyota Production System has two pillar concepts: Just-in-time (JIT) or "flow", and "autonomation" (smart automation). Toyota system relied on Kanban cards - used to signal only when the necessary inputs to production are needed, and in so doing, reduce assembly waste (Inventory) and increase productivity

Lean implementation is therefore focused on getting the right things to the right place at the right time in the right quantity to achieve perfect work flow, while minimizing waste and being flexible and able to change.

Five principles of Lean Startup

Eric Ries coined the term Lean Startup around 2009. Ries, a serial entrepreneur, co-founded IMVU, an online social network that made the Inc. 500. Through trial and error at IMVU, Ries developed a methodical approach to launching companies that goes beyond bootstrapping.

  • Entrepreneurs are everywhere - not only in a garage.
  • Entrepreneurship is management. A startup is an institution, not just a product, and so it requires a new kind of management specifically geared to its context of extreme uncertainty.
  • Validated learning. Startups exist not just to make stuff, make money, or even serve customers.
  • Build-Measure-Learn. The fundamental activity of a startup is to turn ideas into products, measure how customers respond, and then learn whether to pivot or persevere.
  • Innovation accounting. To improve entrepreneurial outcomes and hold innovators accountable, we need to focus on the boring stuff: how to measure progress, how to set up milestones, and how to prioritize work.

Similar to the precepts of lean management, Lean Startup philosophy seeks to eliminate wasteful practices and increase value producing practices during the product development phase so that startups can have a better chance of success without requiring large amounts of outside funding, elaborate business plans, or the perfect product.

Customer feedback during product development is integral to the lean startup process, and ensures that the producer does not invest time designing features or services that consumers do not want. This is done primarily through two processes, using key performance indicators and a continuous deployment process.

Key Performance Indicators (KPI) in Start Ups

Defining the array of KPIs that a company uses is a process. The process starts by defining the company's goals and identifying which are the most important indicators to observe from a business perspective.

Some examples of KPI:

  • Conversion rate - the probability that a visitor will end up purchasing something on the site
  • New account sign-ups - number of new customers that create a new account
  • The number of new visitors versus existing customers
  • Stickiness - What proportion of users continue to use the service once they have subscribed
  • Acquisition Cost – The amount that it costs to acquire a new customer
  • Customer Lifetime Value – The amount of revenue that a customer generates over their lifetime

Minimum Viable Product - test hypotheses

A minimum viable product has just those core features that allow the product to be deployed, and no more.

The term was coined and defined by Frank Robinson and adopted and popularized by Eric Ries for web application development.

"The minimum viable product is that version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort."

Eric Ries, Startup Lessons Learned

Important idea of efficiency in Lean Startup is and Learn as Fast as You Can. If learning is the essential unit of progress for start-ups, any effort that is not absolutely necessary for learning what customers want should be eliminated. This is done by building a minimum viable product — or MVP. Its goal is to test fundamental business hypotheses.

Split testing

Split-testing is a core lean startup discipline. General experience suggests that the majority of changes we made to products have no effect at all on customer behavior. Split-testing is the recommended way to get that immidiate customer feedback and enable in long run to focus on development of features users really like and want.

The goal is to have split-testing be a continuous part of our development process, so much so that it is considered a completely routine part of developing a new feature.

It is comparing two versions of a web page (product, app) to see which one performs better. You compare two web pages by showing the two variants (let's call them A and B) to similar visitors at the same time. The one that gives a better conversion rate, wins!

While the cost of acquiring paid traffic can be huge, the cost of increasing your conversions is minimal. It is important to run tests as long as necessary. The amount of time required for a reliable test will vary depending on factors like your conversion rates, and how much traffic your website gets; a good testing tool should tell you when you've gathered enough data to draw a reliable conclusion.

A number of tools are available for A/B testing. SOme of them are free some enterprise versions require monthly payment.

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