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A lean startup is a customer-centric methodology that may help you launch your business or product more quickly and with lower costs. It’s based on answering an existing need and pivoting product design quickly based on customer feedback. Find out what a lean startup is and determine if this business model is the best option for your new company.
What is a lean startup?
The concept of the lean startup is often attributed to entrepreneur Eric Ries, whose book of the same name was published in 2011. A lean startup is a new business that aims to create a product or service where there’s already demand for a product. The lean startup process assumes that change is inevitable, which is why it doesn’t rely on a traditional business plan. Instead, the business is ready to constantly pivot as its product needs tweaking. Slack is a great example of the lean startup definition.
The intra-office chat platform actually started as a gaming company. The chat feature was used to connect offices. While the gaming subscription business didn’t get off the ground, the company started testing the chat feature with external groups. As the developers received feedback, they incorporated that input into the program and then released the chat program to an even larger group, continually improving and growing over time. In December of 2020, SalesForce acquired Slack for $27.7 billion. Dropbox is another company that has reportedly used this model.
Related: Learning to pay yourself first
How a lean startup works
The lean startup model is designed to reduce waste and streamline processes so that the business can become successful more quickly. A lean startup is also a way for startups to bootstrap early on rather than taking on expensive startup funding options. Not only can it be difficult to find small business loans for new businesses, but it’s also risky. According to the U.S. Bureau of Labor Statistics, small businesses opened in 2019 had a one-year survival rate or 78.1%—meaning that more than 20% failed in the first year.
A lean startup plan could increase a business’s chances for survival. Start with your initial product, but don’t expect that it’s the final model. As you get feedback from customers or test groups, you can make changes to improve the product. That way you know early on what customers like and don’t like without investing a huge amount of capital into inventory that may not end up being the final product you want. Once you land on a product and your company starts growing, you can begin exploring small business loans for startups if it makes sense for your company. Alternatively, well-paced growth could allow a business to remain self-funded without taking on debt or investors.
Lean startup vs. Traditional business model
There are a number of differences you’ll find when you’re comparing a lean startup with a traditional business model.
- Plans. The first is the type of planning that’s involved. A traditional business typically creates a multi-year business plan and tries to stick to it. A lean startup plan is much more flexible.
- Employee Skills. Additionally, a traditional business may focus on hiring employees with specific expertise to help execute the goals of its business plan. Lean startups, on the other hand, try to attract employees who can easily adapt to changing circumstances.
- Metrics. The two types of businesses may also use different metrics. A traditional business may focus on financials from the beginning, whereas a lean startup is likely to focus on measuring customer-based metrics like customer acquisition cost, customer churn rate, and lifetime customer value.
Phases of a lean startup
Most lean startups operate on three distinct phases. Each stage leads to the next to ideally reduce costs and effort.
Business model canvas
This is the lean startup’s version of a business plan. Instead of focusing on industry, market share, marketing strategy, and projected financials, this business model canvas creates a hypothesis based on the product. What does that look like? In a single chart, you sketch out the problem you’re trying to solve, the solution, and your company’s unique value proposition. You briefly define your customer segments, cost structure, and revenue stream. The idea is to create a roadmap with the understanding that change is bound to happen.
Once you have your base model or minimum viable product (MVP), the next lean startup stage is acquiring feedback from customers. This feedback may include (but is not limited to) the MVP itself. Other areas to ask about include pricing and distribution. After all, a business needs to operate well in all areas, not just production. Changes should be made after each round of feedback. The change may be something small, which is called an iteration. Or it could be a major change, in which case it’s considered a pivot.
Agile development is the phase when the changes are actually made. The focus should be on incremental changes so that significant amounts of time and money aren’t wasted on marketing a product that isn’t quite right. It’s also supposed to make it easier to scale. You only expand as improvements are made, not with a warehouse of inventory that doesn’t meet your customers’ needs.
Pros and cons of a lean startup
Like any business model, a lean startup has its particular benefits and drawbacks.
Pros of a lean startup
A lean startup has several benefits when you’re trying to create a new product.
- Enables you to quickly identify and create the best product for your customer
- Can save money and time compared to a more traditional business model
- Builds in customer feedback from the beginning
Cons of a lean startup
Lean startups are not without their potential negatives.
- Early feedback sessions may lead you to actually abandon an idea that could have been successful given more time
- Could delay your ability to earn revenue depending on how you approach those early feedback sessions (through either paid or complimentary products)
- May make it more difficult to get small business loans early in the process than it would be with a more traditional business model
Is a lean startup model right for my small business?
Some businesses are better suited for a lean startup methodology than others. Software and tech companies are often associated with this type of business model. After all, Slack and Dropbox are two of its most successful examples. Software companies can use customer feedback to constantly create updates and improve the user experience.
Companies producing physical products may be able to use the lean startup model as well. Several automakers such as Toyota have started employing this approach.
Before you start your company, you may want to think about how comfortable you might be with this model, whether your staff will be able to respond nimbly to changes in direction, and how and where you’d get the feedback this approach requires.
Lean startups provide a way to create a business or product that’s responsive to the wishes of your target audience from the get-go. They require your company to be nimble and responsive, but may enable you to create a successful product quickly. Whether you opt for a lean startup approach or a traditional one, it’s always smart to understand how to get a business loan.
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