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Chapter 4
In the Lean Startup methodology, a startup's efforts are seen as a series of experiments designed to test its business strategy and hypotheses. These experiments are akin to scientific experiments and follow the scientific method. Each experiment begins with a clear hypothesis, making predictions about what is expected to happen when implementing a certain aspect of the business.
The startup then tests these predictions empirically, collecting real-world data and feedback from customers and the market. This data-driven approach helps the startup learn what works and what doesn't, guiding them toward building a sustainable business model around their vision.
By conducting these experiments and continuously iterating based on the results, the startup can make informed decisions, mitigate risks, and adapt to the changing market conditions.
The Zappos Story
he Zappos story is a perfect example of how the Lean Startup methodology can be applied to build a successful business. Instead of waiting to develop a complete vision and investing heavily in warehouses and distribution partners, Zappos founder Nick Swinmurn started with a small, simple experiment to test a key assumption: whether customers were ready to buy shoes online and if there was sufficient demand for a superior online shopping experience for shoes.
By asking local shoe stores for permission to take pictures of their inventory and posting them online, Zappos tested the hypothesis directly with real customers. If a customer bought it online, he would come back and buy the shoes at full price. This approach provided more accurate data about customer demand because it observed real customer behavior, rather than relying on hypothetical questions through market research or surveys. It also allowed Zappos to interact with customers, learn about their needs, and be open to surprises and unexpected customer behavior, such as returns.
Zappos' initial experiment had a clear, measurable outcome: either customers would buy the shoes or not. This data-driven approach combined quantitative testing with qualitative learning, which provided valuable insights into customer behavior and preferences.
Starting with a small-scale experiment didn't prevent Zappos from realizing its larger vision. As it continued to iterate and learn from its customers, the company eventually became the world's largest online shoe store, achieving annual gross sales in excess of $1 billion. Zappos' success was further validated when it was acquired by Amazon.com for a reported $1.2 billion in 2009.
Breaking it Down
The process of breaking down a grand vision into its component parts involves testing two crucial assumptions: the value hypothesis and the growth hypothesis. The value hypothesis examines whether a product or service delivers actual value to customers, which can be gauged more accurately through experiments rather than surveys. For the growth hypothesis, it tests how new customers will discover the product or service and can be analyzed through experiments that target early adopters. These experiments should focus on actual customer behavior rather than opinions.
A technique called the "concierge minimum viable product" is used to ensure that initial participants have a positive experience aligned with the vision. By conducting experiments and gathering early feedback, entrepreneurs can identify potential problems and make improvements to the program quickly. The advantage of experimentation over traditional market research is that it allows for immediate qualitative feedback from participants.
The entire experiment can be completed in weeks, much faster than the traditional strategic planning process. Even if experiments yield negative results, they provide valuable insights that can influence the overall strategy, and if necessary, lead to a pivot in the approach.
Products Are Experiments
Experiments serve as more than just theoretical inquiries; they act as the first version of a product. If successful, these experiments enable managers to begin their campaign by attracting early adopters, adding more participants in subsequent iterations, and eventually building the product. This approach contrasts with traditional strategic planning, as it relies on current feedback rather than anticipation of future success.
An example from Kodak Gallery illustrates this method in action. Instead of immediately building solutions, the team first asks crucial questions to validate the customers' problem and potential demand. Through iterative experimentation, they developed an online "event album" with privacy controls for photo sharing. The team created a simple prototype and allowed customers to use it, revealing usability issues and missing features. Despite initial challenges, the experiment confirmed customers' desire for event albums and provided valuable insights into feature importance.
The team continued learning and iterating through a beta launch, using tools like KISSinsights to gather customer feedback. They discovered a crucial feature customers wanted: the ability to arrange pictures before inviting others to contribute. By prioritizing learning and problem-solving over task completion, Kodak Gallery adopted a transformative approach to success.
A Lean Startup Government?
The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama in 2010, created the Consumer Federal Protection Bureau (CFPB) to protect citizens from predatory lending by financial services companies. To set up the CFPB efficiently and cost-effectively, Aneesh Chopra, the chief technology officer, sought ideas from entrepreneurs, including treating the agency as a startup and conducting experiments to identify assumptions and test them.
The primary assumption to test was whether Americans would call the CFPB for help with financial fraud and abuse. Instead of waiting until the official plan was in motion, a minimum viable product (MVP) approach was proposed. A simple hotline with voice prompts offering information about solving financial problems was created using a low-cost platform. The experiment was conducted in a limited geographic area with targeted advertising. The results provided valuable insights into customer behavior and needs, guiding the agency's continuous improvement.
The CFPB adopted an experimental approach by segmenting their first products by use case, starting with credit cards. They monitored customer feedback and complaints to influence future offerings. The book concludes by emphasizing the need to challenge prevailing management thinking and embrace experimentation for startup success in both public and private sectors.
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