What is a Lean Startup?

     Lean principles were developed in the early 1970s by Toyota in Japan. This company implemented the lean manufacturing method to optimize its production processes (Womack & Jones, 2003). The basic idea of lean principles is to streamline the production process by reducing any waste in this process – this can mean either reducing resources (human or material) or eliminating unnecessary activities or expenses, such as reducing warehouse space. This strategy has revolutionized the production processes in the automotive industry.

   Since then, lean principles have also become important for management as such, but also for other fields, such as IT, where lean concepts are widely used. These methods are also applied in purely non-manufacturing environments. An example is the “Lean Startup” (Ries, 2017), an innovative method for start-up companies, which claims that the most effective innovation is the one that users are interested in and in demand for. According to Ries (Ries, 2017), the biggest mistake is creating a product or service that no one needs. This concept is highly relevant to any strategy or method aimed at working with innovations

   The term “Lean Startup” was developed in the IT branch for software startups. However, the term is increasingly being used for other types of innovation projects in other industries. A startup is defined as a human institution designed to create new products and services under conditions of extreme uncertainty. Therefore, not all new companies are classified as startups and, on the other hand, even established large multinational companies can sometimes fit the term startup. (Ries, 2017).

     If a startup cannot afford to have its entire investment hinge on the success of a single product or service, the lean startup methodology suggests that by developing and launching a minimum viable product (MVP) that is not yet complete, the company can leverage customer feedback to further tailor the product or service to the specific needs of its customers. (Ries, 2011)

Lean Startup – methods

      In the following section, we will introduce the most used tools of the lean startup method, defined by Erick Ries in his book The Lean Startup (2011), and also other methods that build on and enrich these methods.

MVP definition

   One of the most important steps of the Lean Startup methodology is the definition of the Minimum Viable Product (MVP), which is necessary to start the learning process by integrating feedback from early adopters (Lenarduzzi & Taibi, 2016).

   A minimum viable product (MVP) is a variant of a new product that allows a startup to gather the maximum amount of validated customer information with the least effort. The goal of the MVP is to test basic business hypotheses and help entrepreneurs start the learning process as quickly as possible by putting this particular MVP into user testing. (Ries, 2011)

The key elements of MVP according to Pixelfield (“MVP – What Is It and Why Is It Crucial for Your Business?”) include:

• Functionality – a set of features that create a clear value for users
• Design – the design must be of the highest standards
• Reliability – the highest reliability must be achieved through testing 
• Usability – MVP must be intuitive and easy to use 

Build-Measure-Learn Feedback Loop

     Build-Measure-Learn Feedback Loop emphasizes speed as a key element of product development. The effectiveness of a team or company is determined by the ability to generate ideas followed by the speed of creating a minimum viable product, i.e. by embodying this idea and then measuring how it works in the marketplace and learning from this test. It is a learning cycle of turning an idea into a product, measuring customer reactions and behaviors towards the embedded product, and then decide, whether to persist or pivot the idea; this process is repeated as many times as necessary. (Maurya, 2012)

Customer development

     Customer development is a concept defined by Steve Blank. Customer development is one of the three parts that make up a lean startup (Business Model Design, Customer Development, Agile Engineering). Blank first defined customer development in his book “The Four Steps to the Epiphany” and subsequently revised his ideas in “The Startup Owner’s Manual”. (Blank & Dorf, 2012)

     The idea behind this method is that except for the product development process, a startup also needs a customer development process to find customers and understand their needs. This method leads to the development of solutions that are based on an approach that focuses primarily on the user and their needs. This process assumes that startups have untested hypotheses about their business model. They don’t know exactly who the customers are, what functionality they want, what communication channel to use, and there are many other areas they don’t know. The key approach is to “go to the people as early as possible” and get their direct feedback (Maurya, 2012).

4 steps of the Customer Development Process:

• Customer Discovery – Hypothesis generation based on the founder’s business vision. Based on this vision, a plan is created to test the reactions of the customer.
• Customer Validation – Tests whether the business model is repeatable and scalable.
• Customer Creation – Creating end-users through demand stimulation.
• Transforming a company from a startup to a company scaling its established business model. (Maurya, 2012).

Smoke test

     The Smoke test is a method for determining whether there is sufficient customer demand for the value proposition of a product or service to justify the creation of a real product or service. Therefore, a one-page website is usually used to describe the product and ask the visitor to sign up for the product or service before the product or service is actually available. The customer is not aware that the product or service does not yet exist but must enter some form of payment or similar interaction to gain access. This interaction can be done through money, the equivalent of money, time, attention, sharing within the user’s network, or simply through data (requesting an email address to register). (Blank & Dorf, 2012)

What is Lean Analytics and how it can help?

     Lean Startup helps to structure the startup development process and then identify and analyze the riskiest parts of a certain project. Lean Analytics is used to measure this process and helps us ask the right questions, at the right time.

     There are several subcategories within the Lean Startup methodology. One of them is Lean Analytics, which covers the Measure and Learn part of the methodology. Because if we can’t measure, then we can’t learn and make decisions. Companies applying the lean startup methodology need to know what is important to track, why they should track it, and how to track it.

 Definition of the Right Metric

     Before defining what the right metric is, we must first define what analytics is in the first place. Yoskovitz (Croll & Yoskovitz, 2013) defines analytics as a measure of heading towards business goals.  Once we know our business goals, we need to measure whether we are achieving them. A good metric according to Yoskovitz must be:

• Comparable
• Understandable
• Rate or Ratio
• Influential in our decision making

Types of metrics

     The Lean Analytics methodology divides metrics in several ways. First, in a basic way, into qualitative and quantitative.

     It further divides them into so-called “Vanity metrics” or “Actionable metrics“. Vanity metrics are metrics that make us happy but don’t have a deeper reach. Whereas actionable metrics, are metrics that have an impact on our behavior and make us change it.

    It further divides the metrics into “Exploratory” and “Reporting“ metrics. Finally, they are divided into lagging and leading metrics. Lagging metrics are metrics that tell historical facts, such as web traffic. The leading metrics also describe historical data, but these are data that can predict a certain future problem. For example, the number of customer complaints is a leading metric as it can predict the fact that we may lose these customers in the future (Croll & Yoskovitz, 2013). 

Segmentation

   According to the book Marketing Principles (Pride et al., 2012), market segmentation is the process of dividing mass markets into groups with similar needs and wants. The reason for market segmentation is to achieve a competitive advantage and better company performance. Thus, segmentation is used to:

• identify demand segments
• target specific demand segments
• define specific “marketing mixes” for each segment

   From the economic point of view, segmentation is based on the assumption that the diversity of demand allows the demand to be divided into segments with different demand functions. (Dickson & Ginter, 1987). On a website, we can segment visitors according to a range of technical and demographic data. (Kaushik, 2009)

Cohorts

    To understand what a cohort analysis is, it is first necessary to define “cohort”. This term refers to a subset of people grouped together based on a common parameter, e.g. date of the first purchase. (Kaushik, 2009) Google (The Cohort Analysis report – Analytics Help) defines it as a group of users who share a common characteristic determined by a dimension of the Google Analytics tool. Thus, cohort analysis is the process of analyzing the behaviour of groups of users. We can compare groups against each other and look for differences and trends.

A/B testing and Multivariate testing

   A/B testing is a user testing methodology based on comparing results of 2 or more test variants. (Longbotham, b.r.). Different groups of people are exposed to different forms of user experience. If the change consists of changing only one parameter, we talk about the A/B test, if the change consists of changing more than one parameter, we talk about the multivariate test. (Croll & Yoskovitz, 2013)

Summary

Lean startup and lean analytics are very interesting methodologies for developing and managing a startup. At the same time, when combining them, we get an interesting synergy. I definitely recommend working with both methods. This way you will get the best results.