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Kindle Notes & Highlights
by
Eric Ries
value in a startup is not the creation of stuff, but rather validated learning about how to build a sustainable business. What products do customers really want? How will our business grow? Who is our customer? Which customers should we listen to and which should we ignore? These are the questions that need answering as quickly as possible to maximize a startup’s chances of success. That
Lean Startups practice just-in-time scalability, conducting product experiments without making massive up-front investments in planning and design.
Sustainable growth follows one of three engines of growth: paid, viral, or sticky.
The one envelope at a time approach is called “single-piece flow” in lean manufacturing. It works because of the surprising power of small batches. When we do work that proceeds in stages, the “batch size” refers to how much work moves from one stage to the next at a time. For example, if we were stuffing one hundred envelopes, the intuitive way to do it—folding one hundred letters at a time—would have a batch size of one hundred. Single-piece flow is so named because it has a batch size of one.
The small-batch approach produces a finished product every few seconds, whereas the large-batch approach must deliver all the products at once, at the end.
What if it turns out that the customers have decided they don’t want the product? Which process would allow a company to find this out sooner?
Toyota discovered that small batches made their factories more efficient. In contrast, in the Lean Startup the goal is not to produce more stuff efficiently. It is to—as quickly as possible—learn how to build a sustainable business.
by reducing batch size, we can get through the Build-Measure-Learn feedback loop more quickly than our competitors can. The ability to learn faster from customers is the essential competitive advantage that startups must possess.
Startups struggle to see their work-in-progress inventory. When factories have excess WIP, it literally piles up on the factory floor. Because most startup work is intangible, it’s not nearly as visible. For example, all the work that goes into designing the minimum viable product is—until the moment that product is shipped—just WIP inventory.
Our goal in building products is to be able to run experiments that will help us learn how to build a sustainable business. Thus, the right way to think about the product development process in a Lean Startup is that it is responding to pull requests in the form of experiments that need to be run.
Thus, it is not the
customer, but rather our hypothesis about the customer, that pulls work from product development and other functions. Any other work is waste.
New customers come from the actions of past customers.
There are four primary ways past customers drive sustainable growth:
Word of ...
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As a side effect of product usage.
When you see someone dressed in the latest clothes or driving a certain car, you may be influenced to buy that product. This
Through funded advertising.
As long as the cost of acquiring a new customer (the so-called marginal cost) is less than the revenue that customer generates (the marginal revenue), the excess (the marginal profit) can be used to acquire more customers.
Through repeat purchase or use.
These sources of sustainable growth power feedback loops that I have termed engines of growth.
Engines of growth are designed to give startups a relatively small set of metrics on which to focus their energies. As
There are always a zillion new ideas about how to make the product better floating around, but the hard truth is that most of those ideas make a difference only at the margins. They are mere optimizations. Startups have to focus on the big experiments that lead to validated learning. The engines of growth framework helps them stay focused on the metrics that matter.
both businesses rely on having a high customer retention rate. They
companies using the sticky engine of growth track their attrition rate or churn rate very
The speed of growth is determined by what I call the rate of compounding, which is simply the natural growth rate minus the churn rate.
Like a bank account that earns compounding interest, having a high rate of compounding will lead to extremely rapid growth—without advertising, viral growth, or publicity stunts.
The Viral Engine of Growth
social networks and Tupperware
This is distinct from the simple word-of-mouth growth discussed above. Instead, products that exhibit viral growth depend on person-to-person transmission as a necessary consequence of normal product use. Customers are not intentionally acting as evangelists; they are not necessarily trying to spread the word about the product.
Like the other engines of growth, the viral engine is powered by a feedback loop that can be quantified. It is called the viral loop, and its speed is determined by a single mathematical term called the viral coefficient.
The viral coefficient measures how many new customers will use a product as a consequence of each new customer who signs up. Put
a viral loop with a coefficient that is greater than 1.0 will grow exponentially, because each person who signs up will bring, on average, more than one other person with him or her.
even tiny changes in this number will cause dramatic changes in their future prospects.
A consequence of this is that many viral products do not charge customers directly but rely on indirect sources of revenue such as advertising. This is the case because viral products cannot afford to have any friction impede the process of signing customers up and recruiting their friends.
The Paid Engine of Growth
If either company wants to increase its rate of growth, it can do so in one of two ways: increase the revenue from each customer or drive down the cost of acquiring a new customer.
Although I have explained the paid engine of growth in terms of advertising, it is far broader than that. Startups that employ an outbound sales force are also using this engine, as are retail companies that rely on foot traffic. All these costs should be factored into the cost per acquisition.
Technically, more than one engine of growth can operate in a business at a time. For example, there are products that have extremely fast viral growth as well as extremely low customer churn rates. Also, there is no reason why a product cannot have both high margins and high retention. However, in my experience, successful startups usually focus on just one engine of growth, specializing in everything that is required to make it work.
