How to Raise a Lean Startup – IV
October 9, 2013 2 Comments
The first three parts spoke about starting up your startup. This part talks about how to sustain the momentum, or better still, increase it.
Lean thinking advocates small batches of production, if possible, batches of one. This is based on the principle of keeping the feedback loop short. A short loop allows production / quality problems to surface sooner. This is why Sprints in Scrum based software development are kept as small as possible. This is why user stories in Scrum are also kept small in size. Small sizes allow incremental and iterative development while large sizes tend to list towards all-at-once delivery.
Continuous Integration, a key practice of any Agile software development organisation is also based on the above theory. Toyota’s production systems encouraged a culture wherein any person part of the production system could stop the production instantly on spotting a quality issue. Both Continuous Integration and Toyota’ production system recommend the following steps:
- The change that introduced the defect to be removed immediately
- Everyone on the production team to be notified of the defect
- The production to be stopped immediately to prevent introduction of further changes
- The root cause to be identified and fixed immediately
Having a smooth production system isn’t enough. It also needs to grow, and sustainably so. Ries defines sustainable growth as one where new customers come from the actions of past customers. This can happen in one or more of the following ways:
- Word of mouth: existing customers talk to other people who buy the product on hearing positive opinion.
- As a side effect of product usage: other people feel compelled to buy the product on seeing existing customers use the product or engaging with existing customers while the former are using the product.
- Through funded advertising: advertising is paid out of the revenue that existing customers generated and this creates a positive feedback flow in terms of revenue where the cost of advertising is less than the revenue generated by a new customer.
- Through repeat purchase or use: some products are inherently designed to encourage repeat purchase, for example, subscription, or consumables.
Now startups can leverage the above to form a growth strategy which Ries terms as engine of growth. Startups can employ one (or more) of the following engines of growth:
- The Sticky Engine of Growth: this encourages long term retention of customers (makes them stick to the product). The net growth rate is calculated as the natural growth rate minus churn rate.
- The Viral Engine of a Growth: this depends on person to person spread of influence (deliberately or involuntarily) like the spread of a virus. Growth is measured by a viral coefficient: the number of new customers each new customer brings.
- The Paid Engine of Growth: this encourages maximising the returns on each new customer by either reducing the cost of acquisition or increasing the revenue.