Lean startup methodology explained

Ewa Rutczyńska-Jamróz
02 September 2022
9 min read

A lean startup is a specific approach to creating a new company or introducing a product or service on behalf of the existing company. It focuses on experimenting, testing, and iterating. 

It also involves customers in the development process to make sure that once a new product or service is introduced to the market, the demand for it already exists there. 

So, what is this lean startup methodology? What does the lean startup cycle look like? How does the lean startup change everything?

Lean startup approach in a nutshell

What is lean startup?

The father of lean startup methodology is Eric Ries. This is how he defines this approach: "The Lean Startup method teaches you how to drive a startup-how to steer, when to turn, and when to persevere and grow a business with maximum acceleration." (theleanstartup.com)

The genesis of the lean startup approach is the result of observing companies which spend great resources (time and money) on developing a perfect product. Typically, they will focus on their own perspectives without paying any attention to customer feedback. After months or even years of development, disappointment inevitably ensues: they've launched a product on the market that nobody wants.

Ries claims that it can be avoided by encouraging customers to take an active part in the process. There are two main advantages of such an approach. First, once the product is launched, the market already exists. Second, the product meets the real customers' needs and is not just based on the ideas of the founders of what these needs may be.

Lean startup methodology principles

Eric Ries defines 5 key principles for the lean start up:

  1. Entrepreneurs are everywhere - lean startup methodology can be for each startup, no matter what size.

  2. Entrepreneurship is management - a startup cannot be associated only with a product, so it still needs to set management rules in place. However, this is not traditional management - it is adjusted to the specific nature of the startup and encourages its team to experiment.

  3. Validated learning - the goal of the startup is to build a sustainable business. It can be achieved by running tests and learning based on their results.

  4. Innovation accounting - to survive accounting is necessary. But again, not the traditional one that is focused on the balance sheet. It's rather about setting up KPIs, measuring progress, and customer-centric metrics (e.g. customer churn rate, lifetime customer value).

  5. Build, measure, learn - the lean startup provides customers with a product for testing, measures how they respond, learns based on the feedback, and decides whether to persevere with the same idea, pivot or abandon the project.

Lean startup methodology vs the traditional approach

Having in mind the above, we can notice that the foundations of the lean startup methodology are against the traditional approach.

As standard practice, companies begin work on a new product with a solid business plan and have a typical time horizon of 5 years. Such a business plan is the basis for product development, negotiations with financial institutions, and acquiring an investor. This traditional approach has a rigid structure and is generally not subject to any adjustments.

The traditional model includes the participation of many internal employees. However, no one thinks about asking for the customers' opinions. The company claims to know best what the market needs are. 

As a result, a new product or service is being developed with the utmost secrecy. And just as this approach can still be successful in the case of corporations, it completely fails in the case of startups. 

Corporations have their reputation, track records, and access to much bigger resources, so the market has grounds to trust them. Startups must build everything from the scratch.

By contrast, lean startups do not accept a rigid business plan. This doesn't mean that they do not have a vision or a strategy. They do. However, they are not attached to a primary idea or a strict plan. They act based on the market analysis and the customers' reaction to the product. They simply follow the steps indicated by Eric Ries: "build measure learn".

Lean startup model: build measure learn

The lean startup methodology is described in a book by Eric Ries: "The Lean Startup. How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses". He emphasizes 3 main components in the lean startup plan.

No 1: Build Minimum viable product

Eris Ries suggests starting a product development process by building a minimum viable product (MVP). MVP stands for "a version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort".

In practice, it is an initial version of a product or service that has enough features to start testing it with the target audience. The clue is that the company doesn't wait until the product or service is final and perfect. According to the lean startup process, only sharing the initial version with customers is a way to market success. Of course, there are some requirements for an MVP. Nor can it be released too soon, so as not to discourage the customers.

So before an MVP is released for testing, the following conditions should be verified.

  1. First, an MVP shouldn't have too many functionalities. It should be limited only to the crucial ones which will facilitate a learning curve of user experience.

  2. Second, it should be remembered that an MVP is not a lesser-quality product. To obtain high-calibre feedback, it should be satisfying to customers and meet their needs.

  3. Third, an MVP shouldn't be shared with too large a group, but limited to a small subset of carefully selected target customers.

Learn more about the MVP from our previous blog post: What is a minimum viable product and how is it built?

No 2: Measure

In the next component of the lean startup methodology, the company should focus on measuring the results of testing an MVP while developing the final version of the product. The clue is to determine the right tools of measurement to obtain both quality and quantity feedback.

The choice is huge: AB testing, focus groups, surveys. It is crucial to choose the one that is the most suitable to the specific nature of business, product, and customers.

Because the numbers alone can be hard to interpret, in-depth user interviews can be taken into consideration. As an example of qualitative data collection methods, they are aimed at exploring the opinions and feelings of the target customers. 

Therefore, they are a valuable source of information that can influence the characteristics of the final product.

Learn more about the advantages of in-depth user interviews from our previous blog post. 

No 3: Learn

Measuring in itself will be of no avail if no conclusions follow. Therefore, the third component of the lean startup methodology is to learn from customer feedback.

The opinions shared by the customers can be invaluable in terms of improving the product. However, it may occur that a new product is not gaining any traction. In that case, the founders must be prepared to abandon the initial idea without losing too many resources (i.e. time and money).

If only the results of MVP testing are used effectively, a new product has a genuine chance of meeting customers' needs and of being successful in the market.

Why is it worth being a lean startup?

According to "106 Must-Know Startup Statistics for 2022", 90% of startups fail. However, the one that applies the lean startup method has a greatly improved chance of defying this negative trend.

Lean startups do not stick to a rigid business plan but actively search for a scalable business model. Iterating with product development and giving a voice to customers reduces the chances that a startup will end with a product nobody wants.

Lean startups engage not only with clients but also with distributors and other business partners. Using the feedback gained, they shape the product's features whilst attending to other important issues of the business model such as distribution channels and pricing.

The lean startup methodology shortens the time to market. It is faster and cheaper to start testing an MVP and effectively use the results rather than wait until the final product is ready. As a result, the usage of the resources is limited to the minimum necessary.

Here is a set of reasons why is lean startup methodology worth considering:

  • higher chances for market success;

  • reduction of failure risk;

  • higher efficiency and productivity;

  • optimization of resources;

  • targeting the real needs of customers;

  • faster time to market;

  • better team morale;

  • invaluable lessons learned for future ventures;

  •  potential to build a scalable and sustainable business.

The lean startup summary

This is how Steve Blank, a professor at Stanford University, summarizes the lean model in his article "Why the Lean Start-Up Changes Everything": "...it favors experimentation over elaborate planning, customer feedback over intuition, and iterative design over traditional “big design up front” development".

He highlights the fundamental differences between lean startups and the traditional approach, including the following areas:

  • strategy: business model vs business plan;

  • new-product process: customer development vs product development;

  • organization: customer and agile development teams vs departments by function;

  • financial reporting: metrics that matter vs accounting;

  • failure: expected vs exception;

  • speed: rapid vs measured.

As one of the architects of the lean startup movement, Blank has seen this approach help numerous businesses grow and perceives it as a way to reduce the incidence of start-up failure.

At Startup Development House, we have our own methodology for turning ideas into real-life products. We call it the Product Discovery Process. It is a process that relies heavily on the assumptions and resources found in the lean startup methodology. 

Why do we use it? Simply because we cannot imagine any product development without flexibility, nor without having representatives of the target audience on board. We follow the "build, measure, learn" approach and actively listen to customer feedback to either build a sustainable business or abandon the business idea before resources are exhausted.

Do you have an idea for an application or other digital product? Do you feel that the lean startup methodology is closer to you than the traditional approach? Do you want to reduce the failure risk by confronting your business idea with potential customers? Contact us and let's check if the startup methodology suits your needs.

 

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