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In this post, we’ll look at some key concepts from Chapters 7 and 8 of Eric Ries’ “The Lean Startup,”

Eric Ries

TLDR: Actionable Insights for entrepreneurs and business people:

  1. Set S.M.A.R.T. short and long-term goals for your company. Revenue, customer retention and brand awareness goals.
  2. Make a vision statement for your business and let it guide your strategic goals.
  3. You can’t take lessons learned to the bank.
  4. Use actionable metrics like customer retention, net profit and customer lifetime value to measure the health of your business.
  5. Pivots are a necessary part of business growth. Don’t be hostile to change.

Rigorously Measure Where It Is Right Now

“A startup’s job is to (1) rigorously measure where it is right now, confronting the hard truths that assessment reveals, and then (2) devise experiments to learn how to move the real numbers closer to the ideal reflected in the business plan -Eric Ries ”

Setting goals is essential before you can even measure where your company is. You can set goals related to:

  1. Finance: Revenue goals are the most common. You can set a goal to reach a particular revenue figure and profitability by a given date.
  2. Customer acquisition and retention:  That is, the number of new customers you want to acquire within a given period and the number of those customers you want as loyal buyers over time.
  3. Brand awareness and marketing; which can include social media reach, growth, and engagement.
  4. Strategic partnerships and collaborations.  This can be related to revenue from partnerships or brand awareness.
  5. Operational efficiency

Setting SMART Business Goals

  1. Specific: This means you can clearly identify and quantify your goal or target.
  2. Measurable: That is, you can track the progress of your goal.
  3. Achievable: Although ambitious, it’s realistic based on the resources you have.
  4. Relevant: That is, in line with your mission, values, and overall business goals.
  5. Time-bound: Having a clear time frame or deadline to achieve the goal.

Business Vision_ The Lean Start up_Eric RiesBusiness Vision

“Most products—even the ones that fail—do not have zero traction. Most products have some customers, some growth, and some positive results. One of the most dangerous outcomes for a startup is to bumble along in the land of the living dead”

Be careful of initial successes because they can lead to stagnation which jeopardizes the long-term survival of your business. This is why it is important to have a vision for your business. Your business vision is an aspirational statement about what you hope your business will achieve in the long run and It helps you in setting strategic goals for your business.

Testing Assumptions

“When one is choosing among the many assumptions in a business plan, it makes sense to test the riskiest assumptions first”

Assumptions are fundamental ideas or statements about a market, product or customers. The riskiest assumption is usually how customers will react to your product offering. So, get in front of customers as fast as possible.

Vanity metrics vs. Actionable metrics

Be careful of vanity metrics. These are metrics that give a nice impression of your business without offering insights into its actual health. Some examples include total revenue, number of customer sign-ups or website traffic. In case you are wondering why I consider total revenue a vanity metric, that’s because it does not provide information about the total cost of sales or outstanding receivables from customers. Metrics that are actionable, on the other hand, provide clear and direct insights that can be used to make improvements in your business.

According to Eric Ries, “for a report to be considered actionable, it must demonstrate clear cause and effect.”

This cause-and-effect link indicates that taking a specific action should have a measurable impact on the desired outcome. For example, if a new feature is added to a product, it should be easy to assess how that feature affects user engagement or conversion rates.

Examples of actionable metrics include:

  1. Conversion rate (which is the percentage of website visitors who make a purchase)
  2. The shopping cart abandonment rate
  3. Churn rate
  4. Retention rate
  5. Customer lifetime value

The Lean Startup offers two other characteristics for actionable metrics. They are:

  1. accessible
  2. and auditable

Accessible:

“All too many reports are not understood by the employees and managers who are supposed to use them to guide their decision-making”

This means that the metrics should also be available to the various stakeholders and decision-makers across the company and they should be easy to understand and interpret for decision-making. Real-time availability enables teams to make fast and well-informed decisions based on the most recent data.

Auditable:

This means that the metrics must be correct and reliable. In other words, its source must be credible and the approach to collection should be consistent. It’s important that when the metrics are audited, they yield the same results every time.

Pivots

“A pivot requires that we keep one foot rooted in what we’ve learned so far while making a fundamental change in strategy in order to seek even greater validated learning- Eric Ries”

In other words, while you making a significant change to your product or approach, take note of lessons learned and leverage historical data for decision-making.

“Lessons Learned” Can’t Pay Bills

“You can’t pay staff with what you’ve learned- Eric Ries ”

This is a practical reminder that, while vital and significant, information and lessons learned are not a form of tangible compensation that can be used to remunerate or support employees. Your company cannot be sustained on “Lessons learned”. This is not to suggest that experiments have no place in business, the point rather is that experiments should be designed to test well-formulated hypotheses about the potential impact of a business decision. According to Ries, “When an entrepreneur has an unclear hypothesis, it’s almost impossible to experience complete failure, and without failure, there is usually no impetus to embark on the radical change a pivot requires.

Types of Pivots

I also found the following types of pivots highlighted in the book interesting.

Zoom-in Pivot

In this type of pivot, what was once a single feature or component of a product is now acknowledged as the key emphasis of the entire product itself. In other words, what was formerly a secondary feature of the product gains prominence and becomes the primary offering.

Zoom-out Pivot

This is the reverse of the zoom-in pivot. When one feature is insufficient to support a whole product, it becomes a component of a larger product.

Customer Segment Pivot

Here, the company realizes that the product it is developing addresses a real problem for actual customers, but they are not the type of customers it had planned to serve.

Also read: Chapters 5 and 6