How To Use Your Blog To Document Business Model Assumptions

In a previous post about minimum viable blogging I briefly discussed how a blog might transform into a potential product. I learned from several entrepreneurs and bloggers that they have had similar experiences.

So today I'm launching a small experiment taking this idea one step further. Here is how I'll use this blog to document our own business model hypothesis.

Business Model Customer Development

Simple structure of the business model testing scheme

As a part of some recent changes to this blog (moved to own domain), I have added a new structure that follows the Business Model Canvas.

This means that all posts will be categorized with one or more of the 9 business model blocks; customer segmentation, value proposition/product offering, distribution channel, customer relationship/demand creation, revenue models, cost structure, key activities, key partners, and partner development.

For subjects regarding external and competitive hypothesis I've added Strategy as an additional category. To this I attend to use Lean Startup and Customer Development techniques to develop our problem/solution hypothesis.

Why use a blog to test business model hypothesis

Why would I do this? First of all, I hope to share lessons learned in documenting business model hypothesis in the context of a digital startup. Posts will be living examples of how to do or not to do this.

Second, by documenting such hypothesis we'll be able to measure our own progress and decisions, and at the same time receive valuable feedback from fellow entrepreneurs as your self.

Third, by watching the emergence of methodologies such as Lean Startup and Customer Development, I believe that the social web has given breed to an academic sub-culture. I hope to contribute to such research in the field of entrepreneurial management.

For an example, we'd be able to see at what frequency which business model blocks are tested and if we'd need any additional blocks other than what the framework covers today.

"Speed Wins"

One major challenge though lies with broadcasting own ideas just about ready for any competitor to pick it up. However, as I do believe in the startup methods I here cover, "speed wins" is the winning argument.

Transparently documenting business model assumptions and receiving feedback from potential users would in principle be a source of advantage.

I hope to give fellow entrepreneurs a sense of what went wrong, what went right, and how to to better document business model hypothesis for their own business.

Update: Make sure to check out the Business Model Press WordPress plugin to begin "business model blogging".

Design-driven Business Model Development for Startups

Business plans are out and business models are in. The waterfall method is out and agile development is in. Now an entrepreneur would iterate the business model through design-driven approaches using agile software development alongside customer development.

But how would you use design-driven development in building your business model? A good start would be to iteratively identify and test key hypothesis for each component with your business model.

Previously I suggested a mash-up of the Lean Startup/Customer Development methodology and the Business Model Canvas. On the higher level, the "back-end" business model structure aligns with agile development principles, and the "front-end" structure with customer development principles. Causally executing product development alongside customer development would optimally lead to problem-solution fit, followed by product-market fit corresponding to your value proposition.

On the lower level, typical Lean Startup and Customer Development principles are segmented according to each of the nine business model building blocks. These are the techniques and tools that you would take into consideration when testing your business model hypothesis.

As all business model components have their own characteristics they also have their own hypothesis testing schemes. The following is an overview of techniques and tools to be used for testing each and one of your business model components from a Lean Startup and Customer Development perspective.

Customer segment

This is where you identify with customer prospects a specific problem that they agree upon. You would put the Customer Development methodology in order by getting out the building and mapping out a Customer Problem Presentation. For what questions to ask, the guys at Survey.io provide an excellent starting point.

Value proposition

Here you test to see if your solution fits the customer's problem. The key is Minimum Viable Product. A Minimum Viable Product has just those features (and no more) that allows the product to be deployed and tested. Especially if you are in the online business you would consider putting up landing pages. Further, A/B testing, split testing and multivariate testing are super techniques for testing hygiene factors. This allows you to test and validate customer demand and positioning. Unbounce provides you with many of these tools.

Distribution channels

Do conversion optimization whether it includes your web page, social media accounts, Google Adwords or partner's pages. Ask your self what is most cost-effective channel. Eric Ries wrote these awesome posts on how to use search engine marketing and Google Adwords in testing demand and value propositions.

Customer relationship

This one is bit more qualitative in nature than the distribution and product offering schemes. It is more about making an arena for collecting feedback from your early customer segments. You would consider using tools such as wikis, forums and social networks as a basis for collecting data. It may include making a beta testers' community allowing for feedback, and distributing surveys and newsletters for measuring reach. Survey and form services such as KISSmetrics and WuFoo are useful tools for gathering feedback on-site.

Key activities

"Release early, release often" is a key tenet in agile software development. Question your self - how often you ship product. Do continuous deployment to learn and adjust. Testing should be a key activity itself. Automattic CEO Toni Schneider reported that WordPress.com averages about 16 product releases a day. Beat that!

Key resources

Arrange for the tools that you need in order to test the remainding components. For an example by signing up to Google, you can run Optimizer for split testing, Google Analytics for conversion optimization and Adwords for testing clickthrough on different value propositions. The good news is that this is cheap. Perhaps the most important resource - your co-founders and team members should embrace a learning culture and test-driven environment.

Partners

Here you would consider a similar approach to that of the customer segment. Your partners may also be the ones who provide you with key resources, such as Amazon for hosting or Google for distribution.

Revenue streams/cost structure

This is about defining the equation of your business model. If you are going for that 1 % of China's users cliché you are pretty soon on thin ice. Instead, do it bottom-up. For an example, numbers of users times ad revenue per user. The point is to convert your assumptions into metrics that are actionable. Sooner you would be a low-burn startup. By removing what is broken, test-driven business model development enable you to do so.

The bottom line: In systemizing hypothesis by the business model components you will simplify testing methods and reduce risk in building a lean business model.

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How Lean Innovation Goes Beyond Corporate Assembly Lines

Lean Manufacturing, Lean Production, Kaizen and Continuous Improvement (dear child has many names) have created buzz for many years. Originated with Toyota's production system, "Lean" was primarily created with manufacturing businesses in mind. Now, as manufacturing businesses are increasingly rendered by service and network businesses, can lean philosophies go beyond corporate assembly lines and keep up with the new economy?

In one of my favorite articles, Casting of the Chains (pdf) from 2003, authors Ø. Fjeldstad and E. Andersen make a fruitful observation.

The world has changed. From 1960 to 1999 manufacturing companies’ share of GNP in the US, as well as its workforce, fell from 30 per cent to 15 per cent, with the consequence that such businesses are now a minority of the S&P500. Banks, transportation, building, healthcare, research pharmaceuticals and other services companies have taken over. Strategic models of the world, however, have not changed. When managers develop strategies for their companies, they still use the tools and language of the manufacturing organisation.

In brief, the authors found limitations in applying Porter's Value Chain to other than traditional assembly line-based manufacturing businesses. Consequently, the authors extended the Value Chain to two more models; the Value Shop and the Value Network.

The Value Shop creates value by scheduling activities and applying resources in a fashion that is appropriate to the needs of the client’s problem (typically management consulting, lawyers and doctors). Value in a Value Network is created by linking clients or customers who wish to be interdependent (typically banking, social networks and dating venues).

Business Model Patterns on Value Chain, Shops and Networks

When I joined my current employer to work on online startups, I did at the same time choose from working on continuous improvement at one of Scandinavia's leading media companies (see Bharat N. Anand's Harvard Business Review case). Regardless of my interests in innovation methods and owing my conviction to entrepreneurship, working with startup ventures rather than cutting down "corporate bacon". Later I discovered the Lean Manufacturing Startup, which basically adopts lean thinking and agile development to startup ventures.

Although Lean Startup principles are argued to be generally applicable, it mainly has been applied to enterprise- and consumer software cases. Yet, as far as Microsoft creates value by linking consumers with third party software developers, and Google links consumers with advertisers, the software business generally acts as a value network. Hence, I believe that we start to see cases with the lean paradigm being adopted to the connected, networked economy.

In this manner, I assume that the new schools of lean methodologies not only help traditional management thinking avoid cramming business models with manufacturing approaches, but also preserve new-product introduction and disruptive innovation alongside continuous improvement.

Getting Lean: A Startup’s Key Learnings from Web 2.0 Expo

Being fortunate to win a scholarship for this year's web 2.0 Expo in San Francisco (appreciation to @ericries, @SarahM and @TechWeb for having this opportunity), it is also in courtesy that I share a startup's takeaways and lessons learned from the conference.

In my approach writing for the scholarship program for lean startups, I pitched how EasyPeasy could learn from attending the conference and the Lean Startup Intensive. I described how EasyPeasy currently is seeking to validate Product-Market fit and, presumably in the customer validation phase, searching for its first transactions.

The Grand Pivot

Arriving at the conference after a 20 hours travel from Oslo, Norway and suffering from a mild jet-lag, I finally got to see Eric Ries, Steve Blank, Sean Ellis and Dave McClure and the reminder of the Lean Startup movement at work. In nearly every event that I was attending that week, either it was the in the talks, keynotes or unconferences, "Lean Startup" was buzzing. One major highlight was attending Matt Brezina's talk: 5 stages of Xobni's growth and 5 pivots along the way.

Having been a fan of Xobni for some time, I was excited to learn from their practical implications in pivoting from offering an e-mail analytics suite to that of "just" an outlook sidebar plug-in. Nevertheless, by talking to @brezina and @hnshah I had my thoughts about customer validation and pivoting matured. One week later, EasyPeasy is smoke testing for a new product offering.

Minimum Viable You

During the Lean Startup Intensive one common denominator came into view. Steve Blank, advocate of validating hypothesis about business models, talked about how a startup must strike balance between a product's minimum feature set and maximum sales. Accordingly, Dave McClure talked about how a startup must balance between user hypothesis and revenue. Lessons learned, and one key tenet with the Lean Startup methodology is that a focus on validated learning will enable startups to mitigate risk in new-product introductions, often by including continuous deployment, arguably a start-charging-now and learn fast/fail fast philosophy.

This is where the minimum viable product comes into the picture. At the second day of the conference a case of minimum viable tactics was elaborated by @drewhouston and @asmith in their excellent talk: From Zero to a Million Users - Dropbox and Xobni lessons learned. I think that this presentation gave a great many startups, including EasyPeasy, a lean toolbox at hand.

People Analytics

The Lean Startup advocates use of metrics for validated learning. Yet, there still is one vast amount of metrics to track, dependent on what line of business you are in. At the second day, Neil Patel gave an exciting talk on Web Analytics – Tracking People and Not Just Numbers, and an amazing Q&A session about what metrics you ought to track. In plenary, Neil asked the audience for their websites' URL, he quickly analyzed their pro and cons, and gave the audience applicable tips and tricks, all in real-time. I highly recommend his slides to be found on Slideshare, 5 Metrics You Ought to Track.

iPad, Flash and HTML5

Soon after arriving San Francisco I found that nearly every overseas visitor who I got to meet at the conference, in their very first morning in town, had been rushing over to the Apple store. Ourselves, arriving one day after our Norwegian fellows (we organized by extending the #w2e Twitter hashtag with #w2eNOR), we found that the iPad 3G edition was already sold out. We put our names on a notification list, hoping that another delivery would arrive at the store before we were on our way back home.

Nevertheless, web 2.0 Expo hosted a couple of very popular talks on the tablet innovation, here and here. iPad were on everybody's tongue and the big discussion tended to be about Flash vs. HTML5 and Adobe vs. Apple. Among a many good keynotes, Brady Forrest's chat with Adobe CTO Kevin Lynch did comb the debate. As when it comes to EasyPeasy, currently offering an open source operating system for netbooks, you might have a clue about how this might affect a pivot.

Learn Fast, Fail Fast

Truth is that there was many interesting talks, and unfortunately one did not have the time to attend all.  The main theme of the conference being Web as a Platform, there was a lot of interesting stuff on social media marketing, cloud computing, mobility, usability, virtual and social gaming. Many more events and people should be mentioned, yet I think that the above is sufficient to draw some main characteristics.

Pivoting, minimum viable products and analytics were just some of the themes that were buzzing throughout web 2.o Expo. What these subjects have in common and what was an overall takeaway, whether we are talking about ever changing technologies, markets or startups, is that a strong learning culture can be source of success, or at least to fail fast. I certainly will attend the next year's web 2.o Expo.

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What’s in a Startup Methodology?

Back when I did the transition from studying software engineering to entrepreneurship, one question kept coming to me - while methodologies are inevitable for successfully building software products, why isn’t there an integrated methodology for launching and taking that product to market?

Take for an example the Perpetual Beta and Spotify, a successful online peer-to-peer music streaming service. Spotify did not only use beta versions to test engineering requirements with early users – using beta-invites enabled Spotify to create demand for their service at the same time.

Software developers have been embracing agile practices such as Continuous Deployment for years, but merely from a technical viewpoint. I believe that the Perpetual Beta represents a new line of ambidextrous practices that not only enables a startup to plan, test and build – but also serve, distribute and market their product at a lower cost.

Astonishingly, methodologies that help entrepreneurs facilitate software product development alongside commercialization are still scarce. At the one hand there exist a variety of methodologies to manage risk in agile software product development, including Scrum, Extreme Programming and Adaptive Software Development.

However, none or few of these methods, to my best knowledge, encapsulate risk in commercialization. To simplify, think of it as Scrum + marketing (Scrumm). At the other hand traditional management practices have been argued not to fit the extreme uncertainty in startups, and often comes too short in terms of aligning with disruption driven by Internet technologies.

At the time I was also more than inspired by Crossing the Chasm that addresses the specifics of marketing disruptive high-tech products. But I still find the Pre-chasm phase left unintended. In my last post I wrote about diagramming the product-market fit, which I here have aligned with the Technology Adoption Life Cycle.

Pre-Chasm Startup Methodology

In many ways I think that new-product introduction is about ramping the Pre-chasm, where building and taking new products to market are not two separate activities.

Obviously a startup needs ambidextrous qualities. Working engineering and marketing in parallel will enable a startup to discover the holy grail of product-market fit – a key tenet with Customer Development and Lean Startup thinking. Together with elaboration on 37signals' Getting Real and Rework, I look forward to seeing what this emerging school of startup methodologies brings.

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Diagramming Product-Market Fit at Lean Startup

Continual iteration is a fundamental principle in agile thinking as well as in startup methodologies such as Customer Development and Lean Startup. Basically, its premise is that a startup will mitigate risk and uncertainty by shortening product and customer learning loops, and adjust its product-market fit accordingly.

A startup achieves product-market fit when it masters the balance of building a solution, or product that acts on a customer’s problem, or vice versa. Both product development and customer development each has its own iterative loop structure. I believe that the two should be reciprocally acting and proceed in parallel towards the goal of product-market fit and that this makes a multiple-loop system. This invokes an ambidextrous challenge to early-stage ventures.

Building on my former post on Disciplined Creativity with Mihály Csíkszentmihályi’s Flow diagram, I would add to the Lean Startup model.

The diagram above shows product-market flow as a result of efforts in parallel iteration between agile product development (at the y-axis) and customer development (at the x-axis). In order to achieve a product-market flow state, that is product-market fit, a balance must be struck between customer development and product development. If a startup is drifting too far along one of the axis without iterating, flow cannot occur.

I believe that iteration beyond the product-market flow zone could be considered pivoting - that is when you change a fundamental part of your business model in regards to products and customers. To successfully iterate between product and customers and achieve product-market fit, you would develop a minimum viable product offering that enables you to learn about your customers needs and wants.

At startup you must pay close attention not only to the iterative tasks within customer development and agile product development separately, but also to the feedback loops in between the two. However, time is limited, and you should be aware of trade-offs in achieving flow in a Lean Startup. This is where continual iteration and validated learning allows for greater risk reduction under extreme uncertainty.

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How to Design Your Business Model as a Lean Startup

If you spend time exploring innovation frameworks you know that their configuration to a large extent apply, assembly or build upon previous work (hat off to science). Here, I explore the conformity of two emerging frameworks: the Business Model Ontology by Alex Osterwalder and the Lean Startup methodology by Eric Ries. The result, the Lean Startup and Business Model Canvas pattern.

Osterwalder's Business Model Ontology proposes a single reference model based on the similarities of a wide range of business model configurations. The business model canvas (used as basis for the illustration above) describes nine building blocks that form a high-concept business model.

Eric Ries coins the Lean Startup, a methodological approach for creating and managing startups using principles of Steven Blank's customer development  methodology alongside agile development methodologies.

The Lean Startup Business Model adopts key principles from the Lean Startup (i.e. agile development and customer development) with the building blocks of the business model canvas. In his recent book, Business Model Generation, Osterwalder uses the notion of Design Patterns alongside the ideas of Christopher Alexander and Tim O'Reilly among others to describe common configurations of business model components. Hence, the Lean Startup Business Model Pattern.

The Lean Startup Business Model Pattern aligns the pillars that constitutes the Lean Startup methodology; customer development and agile software development as well as technology commoditization.

As illustrated in the business model canvas above, one key tenet with the Lean Startup methodology is the Product-Market fit, which optimally results from agile product development, the solution offered, to match with customer development, the problem that is solved for a customer.

The Customer Offering or Value Proposition component of the template can be understood with the Minimum Viable Product concept used with Lean Startup method (see also whole product or doughnut diagram in Crossing the Chasm). The Customer Segments in which the Minimum Viable Product is offered, typically is characterized by early adopters or lead users in the social system.

Eric Ries also speaks of how free and open source software (FOSS) availability and user generated content reduce startup costs. This is typically allocated the Key Resources component. That is, technology leadership is a key resource to a Lean Startup. Similarly, open web hosting services are recognized with the Partner Network component. As is convenient search engine marketing with the Distributions Channels component. Social media supports the Customer Relationship component, enabling user-generated content, viral loops, and interaction with customers.

Data-driven approaches based on customer-centric metrics applies to Distribution Channels, but can be considered a key activity as well. Among the Key Activities are agile software development methods and techniques, and use of metrics (e.g. Dave McClure's AARRR, Startup Metrics) to help a startup measure performance and adjust its direction accordingly.

Although “listening to customers” is considered a technique within the agile development methodologies, this is central not only to customer development, agile development and the Lean Startup – it is also central to Business Model Generation (Emphatic Design), disruptive innovation (Jobs-to-be-done), lead user innovation, and voice of the customer among other customer-centric innovation frameworks.

The conformity of the frameworks is not straightforward though. One challenge is that the level of abstraction differs - think numerator and denominator. How to distinguish between tactics, process, strategy and concepts herein? According to Steven Blank’s customer development methodology (slide #29 in this presentation), product development and customer development can be viewed through the tactical lens, while the business model view could be viewed through the strategic lens. Osterwalder understands business models as a facilitator between business processes and strategy. Myself, I would start from the premise that strategy or goals often come as consequence of continuous learning in early stage ventures where resources are scarce and uncertainty is extreme.

Another challenge is how to make the pattern illustrate iterative development and internal feedback loops that are fundamental to the Lean Startup methodology. When working with models and methodologies there is a general challenge in uniting behavior (process) and structure; to what extent the two frameworks are integratable in terms of methodologies and notations.

Borrowing from areas such as software engineering and system dynamics, future work would envision a tool that aid in rapid entrepreneurial learning and aggregates key metrics in order mitigate risk in new-product introductions.

Further discussion should consider which principles from the Lean Startup methodology that should be included in the Business Model Pattern and where they belong. Coming up, I will address how a startup could use this pattern to validate their business model as a part of their lean methodology. Stay tuned.

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