Updated: Dec 15, 2020
Many consultancy firms state that you need a business plan to start your own company.
This is not true.
If you don’t have a lot of money to finance your business, you need to monetize fast and a business plan only slows you down.
In this article, you will learn how to start a business with a lean canvas, market your product or service even before it is actually available for sales and pivot swiftly when it doesn’t hit the target response from the market.
Table of contents
A BUSINESS PLAN IS OBSOLETE
Most entrepreneurs don’t always have huge capital to fund their business and this is the reason why they must earn profits as soon as possible.
The only way to do that is to shorten the time-to-market and validate a product/service fast.
A business plan is obsolete, because it postpones a company time-to-market.
Entrepreneur defines a business plan as:
A written document describing the nature of the business, the sales and marketing strategy, the financial background, and containing a projected profit and loss statement.
Such a document drains lots of precious resources (time and money) in the earliest stages of a company and the chances it is precise are low. As I always say, a strategy becomes successful only if it meets the expectations after being tested.
According to a 2019 study of CB Insights, the first reason why a startup fails is due to no market need (42%) and the second because of cash depletion (29%).
It means marketing a product or service fast is fundamental to understand market’s needs and, eventually, promptly pivot before running out of cash.
So, how can you start and market a business fast?
You apply a lean startup approach.
THE LEAN STARTUP METHODOLOGY
Before learning how to use and make a lean canvas, you need to understand how to take advantage of lean startup.
What does lean startup mean?
Lean startup is a methodology to validate a business model by shortening the time-to-market (or development cycle).
A lean startup approach focuses on the needs of early consumers.
Early consumers or early adopters represent your ideal buyers who are ready to purchase new products or services before they become mainstream.
According to The lean startup: how today’s entrepreneurs use continuous innovation to create radically successful businesses, published by the American entrepreneur Eric Ries in 2011:
A startup is a human institution designed to deliver a new product or service under conditions of extreme uncertainty.
It means that startup is not equal to company and has much in common with a context or developing environment. For instance, the scope of a big corporation’s department can be developing and testing new products, but the department itself is not a company.
In Ries’s definition, there is no reference to the team size or years of business. The only important element is the uncertain operating conditions.
This uncertainty can only be reduced by studying the interaction between a new product/service and its early adopters.
How can you do that?
With an MVP.
Develop your Minimum Viable Product first
Minimum viable product (MVP) is a term coined in 2001 by Frank Robinson, CEO of SyncDev, and then spread by Steve Blank and Eric Ries.
According to Ries, a minimum viable product is:
A new product which allows a team to collect the maximum amount of validated learning about customers with the least effort.
In other words, an MVP is a product or service with a basic set of features enough to catch the attention of early adopters and get intel on their preferences and expectations. It allows a business to:
Shorten the development cycle;
Test the demand before launching a full version of the product/service;
Cooperate with customers to further the development cycle;
Pivot in the earliest stages of development.
To be more pragmatic, an MVP is the fundamental business hypothesis.
For example, the founder of the online shoe and clothing retailer Zappos, Nick Swinmurn, wanted to test his hypothesis that people were ready and willing to buy shoes online.
Instead of building a full-fledged e-commerce site with a great footwear database, he approached offline stores, took some pictures of their shoes, posted them online and paid the stores full-price every time he made a sale. Then, he delivered the shoes to his customers.
Those sales indicated that there was an actual demand and Swinmurn finally decided to found the business model of Zappos on selling shoes online.
This story is very appealing, because it makes it seem very easy to turn an idea into a successful business. All the focus is on the MVP and the final success: the “creative” phase and celebration.
In reality, the MVP is only the beginning of a series of iterations and processes that lead to the validation of a business model.
How can you test an MVP fast and decide whether to pivot or not?
The best tool to do so is the lean canvas.
HOW TO CRAFT A LEAN CANVAS
A lean canvas (sometimes also called validation board) is a tool to validate ideas through experimentation.
Lean canvas was invented by the founder and CEO of Leanstack, Ash Maurya, to summarize in one page the customer-problem-solution paradigm.
This visual chart does not only guide entrepreneurs, but also other stakeholders. In fact, Maurya said that lean startup is:
The faster, more effective way to communicate your business model with internal and external stakeholders.
Download my free lean canvas template and market your MVP like a boss!
The purpose of a business is to create value and monetize it. But if the business doesn’t know what problem it is going to solve, how can it create value?
According to Maurya, a lack of problem understanding is one of the major causes of startup failure.
In the “problem” box, list up to 3 problems that your startup wants to solve.
In the section below, “existing alternatives”, list the alternatives that people already use to solve or work around the problems.
Once the problem is clear, you have to come up with a solution.
The “solution” box is small to help entrepreneurs align with the concept of minimum viable product. Besides, they shouldn’t fall in love with the first solution they come across, but keep testing and generating new ideas.
Maurya is also aligned with the thought of many other entrepreneurs. For example, during Philly Tech Week in 2017, I interviewed the CEO of OpenForge, Jedidiah Weller, about lean startup and design thinking. He promptly stated that:
The goal of a start-up is to find a solution.
The only way to decrease uncertainty is being capable of measuring progress and making reliable projections. The issue is that startuppers struggle to keep up with all the numbers.
Most of them are doing it wrong, because they either focus on the wrong metrics or consider too many of them.
The 8-figure businessman Noah Kagan said that:
A startup can only focus on one metric. So you have to decide what that is and ignore everything else.
Failing in identifying the right metrics can ruin a startup.
You should fill the “key metrics” box with a list of numbers which tell how your business is doing.
A lean canvas is as dynamic as the data in it. You should change your key numbers according to the business stage you are in.
Eric Ries underlines the distinction between actionable metrics and vanity metrics.
While actionable metrics give a real view of a business performance, vanity metrics reflects just a narcissist picture of the company.
For example, if you are selling shoes online, you can’t only rely on the number of web page views, because it is not a metric which affects revenue or profit.
On the other hand, if you are an online magazine which monetizes traffic with ads, the number of web page views can be a good metric, since it affects the actual economic performance of the business.
In the “value proposition” box, you should list the products or services which your startup offers to meet the needs and wants of your target audience.
A value proposition is a promise of value to be delivered. It’s a single, clear, compelling message that states why you are different and worth paying attention to.
It usually answers the following questions:
What value do we deliver to the customer?;
Which one of our customer’s problems are we helping to solve?;
What bundles of products and services are we offering to each customer segment?;
Which customer needs are we satisfying?.
Value can be created by many elements like:
Getting the job done;
In the section below, “high-level concept”, you should describe your solution with analogies in order to make people understand what you're talking about.
Sometimes, startups are so innovative they become difficult to comprehend. If the product or service is too complex, people won’t buy it.
For instance, when YouTube was born, they associated it to Flickr. But instead of being a community based on photos, it was based on videos.
You can do the same by listing your X for Y analogy.
The “unfair advantage” box is for something that cannot easily be bought or copied.
Many startups don’t have one, that’s why they have to work hard to fill this space.
If a startup is successful, but it doesn’t have an unfair advantage, copycats will come and push it out of business.
The “customer segments” box is for target customers and users.
List here the groups of consumers you want to serve and if you need help to figure out how to find your best audience, read my article on market segmentation.
In brief, to find your market segment, you can ask yourself:
For whom are we creating value?;
Who are our most important customers?.
In my article, I also deepened many different types of market segments including:
The section below, called “early adopters” is a space for your buyer persona. Here, you can describe your ideal customer.
Early adopters will be your first niche of buyers. They are like a spark that ignites your money machine. Also, they will help you validate and improve your product/service.
List in the “channels” box your path to customers (inbound or outbound). This is the space for the channels that you’ll use to deliver your message, value, product and service.
You can rely on partners, like wholesale distribution channels, or build a way to the customer by yourself through social media, for example.
Usually, a multi-channel approach (which mixes owned and third party channels) is preferred.
To find your channels you can answer these questions:
Through which channels do our customer segments want to be reached?;
How are we reaching them now?;
How are our channels integrated?;
Which ones work best?;
Which ones are most cost-efficient?;
How are we integrating them with customer routines?.
Each channel has its own life-cycle and marketing activities must be tailored for each phase:
Awareness. How do we raise awareness about our company’s products and services?;
Evaluation. How do we allow customers to purchase specific products and services?;
Delivery. How do we deliver a value proposition to customers?;
After sales. How do we provide post-purchase customer support?.
The “cost structure” box is for listing the fixed and variable costs of the organization.
It answers these questions:
What are the most important costs inherent to our business model?;
Which key resources are most expensive?;
Which key activities are most expensive?.
The cost structure is very important, since it determines the business setup. For example it can be:
Cost driven when the business model aims at minimizing costs and cutting off gewgaws (leanest cost structure, low price value proposition, maximum automation, extensive outsourcing);
Value driven when the business model focuses more on generating value than overall costs (focused on value creation, premium value proposition). Usually, high-end brands like Prada or Rolex uses this model.
Characteristics of a cost structure can be:
Fixed costs: they don’t vary based on production output (rents, utilities...);
Variable costs: they vary according to the production output (salaries, raw material...);
Economies of scale: when production increases, costs decrease. It can also indicate a company which degree of output doesn’t affect its costs. For example, if you sell a recorded online class, you can have as many clients you want without increasing your costs (you just have to pay a fixed amount for the streaming platform);
Economies of scope: when companies with a direct relation to the manufacturing cycle or product/service are incorporated.
In the “revenue streams” box, you should list all the possible ways to gain money from the different customer segments.
To find your sources of revenue, answer these questions:
For what value are our customers really willing to pay?;
For what do they currently pay?;
How are they currently paying?;
How would they prefer to pay?;
How much does each revenue stream contribute to overall revenues?.
DIFFERENCES BETWEEN A LEAN CANVAS
AND BUSINESS MODEL CANVAS
Maurya modified and adapted the business model canvas outlined by Alexander Osterwalder in his Ph.D. thesis The business model ontology: a proposition in a design science approach, published in 2004 by the University of Lausanne.
A business model canvas is a strategic management and lean startup tool to develop new or document existing business models.
Download my free business model canvas and get your marketing strategy done!
The main difference between business model canvas and lean canvas is that the latter takes for granted that value creation is a pre-requirement to value capture. If you don’t understand your customers’ problem first, you can’t describe how you create value.
For this reason, the main paradigm shift lies in the introduction of the “problem” box.
In the image below, I’ve highlighted the 4 boxes that change between the two canvas models.
Entrepreneurs don’t have a lot of resources to start a business and usually rely on their problem solving skills to make something out of nothing. That’s why lean canvas starts with the “problem” box. If the problem is worth solving, they acquire the necessary resources to realize a solution.
In other words, the entrepreneurial approach of lean canvas makes product and business model equal.
A business model canvas focuses on a strategic conversation and position which is more useful for a dialog with business stakeholders.
HOW TO IMPLEMENT A LEAN CANVAS IN YOUR MARKETING STRATEGY
The main criticism about lean startup that caught my eye regards its core: the minimum viable product.
The MVP might not match the quality standards expected by customers and lead to:
A drop of brand esteem, even before the business takes off;
A strategic advantage for competitors which enter the market with superior features/value.
So, how can you implement a lean canvas in your marketing strategy and dodge these threats?
The first element to include in your marketing strategy is a pilot experiment, alternatively called pilot study or pilot test.
You should apply the lean canvas on a selected and limited public. In this way, you don’t burn your brand reputation with the entire market if the MVP doesn’t work out.
A small scale study is also used in other fields like medical science. In fact, in 2010, BMC Medical Research Methodology issued A tutorial on pilot studies: the what, why and how where it is explained how a pilot test allows to evaluate feasibility, costs, threats and gather data for design and performance improvements. The only difference is that, in our marketing context, the research project is the MVP.
For example, Drew Houston and Arash Ferdowsi launched Dropbox in 2007 even before they had the technology to provide the service.
They ran a pilot study on Digg (an online news aggregator) with just a landing page to catch subscribers and a simple explainer video to showcase the concept.
In 2010, during an interview with Mac Slocum (director of online content at O'Reilly) called Marketing lessons from Dropbox: a Q&A with CEO Drew Houston, Drew Houston revealed:
To the casual observer, the Dropbox demo video looked like a normal product demonstration, but we put in about a dozen Easter eggs that were tailored for the Digg audience. References to Tay Zonday and “Chocolate Rain”, and allusions to “Office Space” and XKCD. It was a tongue-in-cheek nod to that crowd and it kicked off a chain reaction. Within 24 hours, it had more than 10,000 Diggs. It drove hundreds of thousands of people to the website. Our beta waiting list went from 5,000 people to 75,000 people literally overnight. It totally blew us away.
Build-measure-learn feedback loop
Another strategic element to keep in mind when implementing a lean canvas is the build-measure-learn feedback loop as described in Eric Ries’s book.
The faster you go through this cycle, the faster your MVP will succeed. Basically, this feedback loop depicts the creation-validation process of an MVP.
You make a product/service out of an idea. You do it fast and without spending a lot of money: release a solution with just essential features.
Use a pilot experiment (described in the previous paragraph) to test the product/service with just a selected few number of people.
Get data about what they like and don’t like about it.
In this way, you can learn the necessary improvements for a full-scale release.
You iterate this loop till you are satisfied. If your MVP receives a positive response from the market, it means you are doing a good job and you should persevere in your work.
If the feedback is negative, you should pivot and ideate something else.
The latter option is pretty easy to implement, don’t you think?
You keep things that work and trash things that don’t.
So, how can you improve the performance of something that already works?
One method is called split testing.
I want to spend some time on split testing, because I keep seeing companies doing it wrong.
According to Ries, a split test (or A/B test) is an experiment in which consumers are exposed to two different versions of the same product or service. This method allows to study changes in consumer behavior and the impact of each solution on a specific metric.
There are mainly two ways to conduct a split test, but both share a common important rule: you must change only one element at a time in each version A and B.
You can present the same solution to the same audience at different times to compare the seasonality.
Or you can also expose different solutions to the same group of consumers at the same time by dividing your audience and assigning a percentage of them to test one solution and a second to test another (see image below).
A/B testing can be used for almost everything. For example, the image above represents a split test of a landing page.
50% of visitors are directed to variation A and the other 50% to variation B. The two variations share the same content except for one image. At the end of the experiment, variation B converted more visitors than variation A. It means that variation A will be discarded.
Many entrepreneurs start A/B testing right away and this is a huge mistake.
Split testing requires time, effort, money and energy to be analyzed. If the first version doesn’t match the ROI, it’s not the time to do an A/B test.
You can do a split test only after reaching your return on investment.
Think about it.
If the first version is not able to make a return on your investment, it’s useless experimenting a similar version. You would be better off starting again with the build-measure-learn feedback loop.
A lean canvas represents a powerful tool only if it is used and implemented correctly. The key factor is speed and the main drive is the iteration of small tests.
After reading this article, do you agree with me in saying that a business plan is obsolete?
Tell me yours in the comments below.