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Startup Strategy StuffDraft 0.3 – 24.11.2012

Jan-Hendrik AdolphsT @twabou

Overview

• This presentation is about frameworks, ideas and ideologies about startup and ideation strategies.

• It gives a short introduction to:– Lean Startup– Business Modelling– Customer Development– Service Design

What is a startup?

• A startup is a human institution that desires to create value for customers in an environment of high uncertainty and risk.

• Therefore:– Test, iterate, try someting

Problem

YourVision

CustomerNeeds

• Who are your customers and what prouct do they need/want?

• P/M vs. P/S fit

So why try it then? And how?

• Because its fun, creative, challenging and fulfilling! => And it‘s YOU!

• There are strategies and frameworks that can lower the chance of failing and wasting your time … but it‘s a lot of work …

Big Picture

• Business Model Canvas* (Alexander Osterwalder)– Visual presentation of end-to-end business model– Focuses on the internal of a business model (no PESTIELD**!)– Separated in creation and consumption side– Excelent for group discussion and brainstorming– Don‘t get to excited about massive planning, focus on few

details and keep it high-level!

Þ A good foundation for business model discussion and enhancement with additional models / frameworks / tools

* Business Model Generation (Osterwalder, A.; 2010) / http://www.businessmodelgeneration.com** External factors = political, economic, social, tax, international, ecological, legal, demographic (can be mission critical)

Other Frameworks• Strategy Diamond• Porters 5 Forces• Porters Generic Strategies• PESTIELD• Bowman’s Strategy Clock• SWOT/TOWS

• These and more can be found at http://www.mindtools.com/pages/main/newMN_STR.htm

(check back-up slides for few examples)

• Remember: Its mostly business internal stuff. Also consider external factors• Work with it from right to left and keep it simple• Start with customer segment and value proposition (or CPS)• Leave costs and revenues for the end

Focus

• CPS Hypothesis– Who? Is there a customer & scalable market?– Why? Is there a problem/need/desire that can be

solved?– How will we solve this? With what?

• What you want is a product/service that serves a customer as a solution to a problem/need that is perceived as a desirable value-creation.

„Create something people love!“*

• Compelling product that people love to use more than once and recommend to othersÞ make it contagious and sticky!Þ activation / retention / referral

• Product / market fitÞ Right set of features (not more than necessary)Þ for identified customer segment

• Customer Value Canvas (Link)– Pain => Gain

* Service design and entrepreneurial mantra

Economic Logic

• A happy user..– Is willing to pay for your product (revenue)

– Talks good about your product (referral)

– Sticks with your product (customer lifetime value up)

Source:http://www.businessmodelalchemist.com/2012/01/the-customer-value-canvas-v-0-8.html

Service Design Thinking

• A multidisciplinary approach to design better user-centered services/products

• Service-dominant logic (Stephen Vargo and Robert Lusch)*=> There is no sole product or service, always look at product & service as one for better user experience! (gives you higher retention and refferal)

Source:http://courses.ischool.berkeley.edu/i210/f07/readings/VargoLusch.pdf

Service Design Tools*

• Always ask for the ultimate solution for a customer – not the product (there is a difference!) Explore it!– 5 Why‘s Root Cause Analysis– User Journey / User Day Walkthrough– Stakeholder Maps / Decision Maker Analysis– Customer Lifecylce Map– Design Scenarios ...

Source:This is Service Design Thinking: Basics, Tools, Cases (Schneider, D.; Stickdorn, M.; 2011)

How (not) to waste time…

• You don’t want to build a product for a market that does not exist or is not willing to pay for your product.

• Gather feedback from customers as early as possible.

• Iterate as often as possible in small measurable steps.

• Customer Development vs. Product Development

Customer Development vs. Product Development

• Why startups fail*: consistent vs. inconsistent– Scalation before proven CPS / MVP / business

modell– Waste time on product development instead of

unterstanding customers

Source:http://visual.ly/why-startups-fail

Customer Development

• Talk, listen, research, refine, talk, listen, research, refine … do, refine … do, refine … tune, talk, tune … profit

• Steve Blank: 4 Phases– Customer Discovery– Customer Validation– Customer Creation– Business Creation

• Its all about product / market fit and proving assumptions / hypothesis

• Don’t burn marketing/sales budget on unproven productsSource:http://www.amazon.com/The-Four-Steps-Epiphany-Successful/dp/0976470705

MVP

• Minimum Viable Product = minimum set of features of a product or service for that a user is willing to pay (best is money, time also good for hypothesis validation hint)

• Philosophy: Adress only one specific problem that is solved by your solution for províng your problem / solution hypothesis

• 80:20 rule -> spent 80% of your time on existing features and 20% on new ones

A-B / Split Testing

• Marketing and product development term for improving / refining a component– Can be color of design element, wording, feature, tag

• Two alternatives run and tested at the same time by the same targeted audience

• Whichever shows better results will be used in the future

• The other one is abandoned (BUT not forgotten!)Þ validated learning

Pivots

• Pivot: A switch from on X to another where X can be a market, distribution channel, revenue channel, partner, business modell, etc

• Generally a replacment or change of a larger business modell component

• Often occurs when a business model doesn‘t seem to be working or other option is more profitable or customer oriented

Startup Feedback Loop• Mantra: everything is

beta, get to market asap for customer feedback and refine

• Continuous iterative process for product refinement to achieve and enhance product/market fit

• One change per iteration so you don‘t mess up cause and effect• Keep changes small and effects measurable (right KPI!)

Source: http://blog.octo.com/5-bonnes-raisons-de-deployer-en-continu/

Funnel Analysis

Your goal:- Customer uses/orders

product/feature you are trying to sell.

Your task:– Visualize / separate process steps on

getting there– Use available tools to track user

journes, e.g. KISS metricsÞ Maximize step-to-step conversion

and minimize drop-rateÞ Understand what is important to

customer and what is not => simplify (don‘t make customer think!)

Source:http://www.volacci.com/blog/ben-finklea/2010/february/08/social-web-analytics-part-1

Cohort Analysis

• A cohort group is a group of people with similar characteristics

• Dont‘t just look at your usergroup as a whole but at subgroups at different stages of their lifecycle

http://blog.kissmetrics.com/wp-content/uploads/2012/01/cohort-

analysis.png

How can You grow?

1. increase new customers per month (obvious!)2. decrease churn rate

2nd should be prio 1 because– already using your product so no additional COAcq– and this seems to be your target market– and (once again) you want a compelling/sticky product

=> Once you achieved product/market fit and decreased churn rate go back to 1 => SCALE!

Scaling customer considerations

• Different kind of users– Visitor, no use of product– One-time-user, no retention, no referral– X-time-user, low retention, no referral– X-time-user, high retention, no referral– X*Y-time-user, retention, referral

=> You want the last type for scaling your business for exponential growth (viral! = free marketing)

Source:http://www.seedcamp.com/resources/startup-metrics-for-pirates-by-dave-mcclure

Measuring improvement over time

• Look at # of new customers per period• NOT # of total customers

Increased # of marginal customers tells you if your iteration was good for your business

It‘s nice to increase your total # of customers but you want to find out if a certain product change is worth keeping or reverting to original.

So how do I make money?

• 7 basic revenue streams on the internet *,**– Service Sales (skype) scalable?– Retail (amazon) warehouse/returns?– Subscription (WOW) compelling offering?– Commission (ebay) side deals/rate?– Ads (google) annoying?– License Sales (apple) quality content– Financial (still emerging) trust

• Freemium and 5/95 rule– On the internet it is possible to create a sustainable

business with only 5% of paying customers (-> the long tail)• Combinations and derivates possible• Source: Simply Seven: … (Schlie, E et al, 2011)

Basic Revenue Calculation

• M Market Size (# of potential customers)• m Market Share (your estimate, compare with

competition)• X Purchases per Period (month, year, day?)• Y Periods (how often will one customer buy)• P Price

R = m * M * X * Y * P

(very basic but a quick and dirty way to show revenues)(when calculating revenue over time consider churn rate of 25%)

So what about costs?• Fixed costs

– Not dependent on size/number of business output– Capacity costs, Idleness costs, step costs– Necessary for keeping the business operable at a minimum scale– E.g. rent, administrative/general expenses, long term wages

• Variable costs– Dependent on size/number of business output– Economics of scale– E.g. material, wages, traffic, storage, short term wages

• Generally C = Cf + n * Cv– Where Cf = sum of fixed costs and Cv = variable costs per business output

Other Frameworks• Strategy Diamond• Porters 5 Forces• Porters Generic Strategies• PESTIELD• Bowman’s Strategy Clock• SWOT/TOWS

• These and more can be found at http://www.mindtools.com/pages/main/newMN_STR.htm

• Following are a basic complement to BMC

Strategy Diamond

• “Strategy is about what to do and what not to do” Highlights choices and choice-gaps to str. Goals

• Arenas: Where will we compete? (external environment)– Products, customer / geographic market, technologies, value creation stages

• Vehicles: With what we get there? (ratio internal activities /partners)– Internal development, JV / M&A

• Differentiators: Why will WE be successful?– UVP, value prop, brand, price, customization

• Staging & Pacing: How will we get there? What’s our actionplan?– Sequence and speed of strategy implementation, decision points

• Economic Logic: R – C = $$$– Lowcost (scale/scape), premium price (service quality / product features)

Sources:http://www.strategyhub.net/2012/07/framework-of-week-84-strategy-diamond.htmlhttp://www.provenmodels.com/598/strategy-diamond/donald-c.-hambrick--james-w.-fredrickson/http://www.nwcor.com/NWCOR/Content/Readings/Chapter%2013-%20Strategy-%20AME%20CLassic.pdf

Porters 5 Forces

Source:http://www.mindtools.com/pages/article/newTMC_08.htm

Book Recommendations

• Business Model Generation• The Lean Startup• Four Steps to Epiphany• The Startup Owner’s Manual• The Tipping Point• From Good to Great• Don’t make me think• This is Service Design Thinking• Venture Deals: Be smarter than your lawyer and VC