Business Posts

From Minimum Viable Product to Scale Up

The Minimum Viable Product

At NaperLaunch and in the NaperLaunch Academy, we promote and teach the Lean Startup Process. As described on our blog, that process was developed by Steve Blank and Eric Ries to help would-be entrepreneurs start new enterprises and bring new products to market. Others, including Frank Robinson, Ash Maurya, and Alex Osterwalder, originated or helped define many of the lean concepts used today.

There is much to learn from these noteworthy entrepreneurs, authors, and teachers. One key concept common among all of them is the Minimum Viable Product, originated by Frank Robinson. This term is easily misunderstood and there are sometimes divergent ideas about what it is.

The MVP was originally intended to describe a faster method to develop new products. Instead of a lengthy, expensive process to build the perfect product, this method starts with a simple version of the product that is suitable for testing with customers to see if they will buy it and appreciate using it.

The Build-Measure-Learn Feedback Loop (see Fig. 1) is a key step in the Lean Startup and supports product design improvements and enhancements. The point is to develop a minimum viable product that allows for testing the value hypothesis – the belief that customers will find the product attractive, useful, and desirable.

The Build-Measure-Learn Feedback Loop
Fig. 1. The Build-Measure-Learn Feedback Loop

Building off initial ideas and using a MVP for customer testing, and then measuring customer feedback gives the enterprise faster and earlier learning opportunities. In this way, better iterations of a product offering come to market sooner and give a stronger advantage to the enterprise.

The Minimum Viable Offering

So how does this concept of a MVP relate to the business founder who is not creating a new product, or for that matter, isn’t offering a product at all, but is in a service business? While this concept was originally developed in the technology and software industries and intended specifically for new product development, we believe the concept is adaptable to the development of other types of products and even services.

In our opinion, a manufacturing, contracting, wholesale, retail, e-commerce, or service business can utilize the lean startup process and follow the same basic approach to get to a minimum viable offering. The offering can be whatever product or service is envisioned by the startup. It is the value offering of an enterprise for which customers will pay.

Any new offering should solve a customer problem, or there is no value in it. The offering must pass the value hypothesis test. This requirement is true even if the “new” offering is more of an enhanced version or a next generation improvement in the offering. To confirm the value of an offering, customer reactions are still the key ingredient – do they find value in the offering? If not, then the enterprise can continue the Feedback Loop process by experimenting and learning from customer interactions. From there, adjustments can be made in future iterations of the offering. The more customer interactions that are observed and measured, the better the development process and, ultimately, the better a product or service offering will be received in the marketplace.

The Pivot

The Lean Startup Process includes another step that is followed if a MVP cannot be built based on the initial ideas. In this case, it is time to pivot. An entrepreneurial pivot becomes obvious when customer feedback disproves the value hypothesis. This means that the offering is not accepted by customers or considered valuable to the marketplace. In this outcome it becomes necessary to change strategy without changing mission – the Pivot.

The search for a market/product fit continues, but new strategies are needed. In fact, this decision to pivot or persevere should arise regularly and at frequent intervals during the startup process.

Scale Up Success

When a minimum viable offering is achieved and the market feedback indicates that the offering has long-lasting value, then it becomes the foundation of the enterprise. Out of the various iterations of the offering, a final successful offering is determined. It should be duplicatable and should be produced over again and again. Build it fast and scale it as soon as possible and the enterprise will achieve significant growth and success.

Summary

Our modified approach to the concepts of Lean Startup and MVP are transferrable to other industries and business models. That modification has been proven successful by many dozens of NaperLaunch members who have succeeded by applying the concepts learned at NaperLaunch. More information about the NaperLaunch Academy and future workshop dates can be found on our website.

Reading List

For more information about the Lean Startup Process, check out these books, available at the Naperville Public Library.

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The Lean Startup by Eric Ries

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The Startup Checklist: 25 Steps to a Scalable, High-Growth Business by David S. Rose

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Running Lean: Iterate from Plan A to a Plan That Works by Ash Maurya

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The Startup Way by Eric Ries

Posted: 
Tuesday, February 16, 2021 - 09:00

Best Practices for Startup Break-even Analysis

Early in the startup process, it is important for founders to consider the financial needs of the potential business and complete a break-even analysis. After determining a customer problem that will be solved by a new business enterprise and determining how to create and deliver that solution through a new product or a new service, a founder should make sure delivery of that solution will not only cover operating costs but also deliver a profit. If break-even and a profit cannot be achieved, then the enterprise, product or service should not be pursued.

This blog post will describe best practices to make that analysis as real and as useful as possible. Here we will consider the information that might be included in such an analysis to assure a thorough review that will support good decision making.

First, choose a period for this analysis. We suggest making a monthly forecast. Operating costs and sales revenues are sometimes easier to forecast on a monthly basis. Remember to account for any seasonal adjustments in expenses or sales if applicable to your product or service, as this might make a big difference on an annual basis. This can be done by using the average of what is expected monthly.

Second, identify and list expenses that will be incurred to create and deliver the proposed solution (product or service). This listing might include expenses related to producing, packaging, marketing, selling, transporting, and shipping a product or service. The salary or wages of management and employees can also be included. For startup founders who are dependent on income from the business to cover living expenses, we recommend that the founder’s living expenses also be added into this analysis, as shown in Fig. 1. Your list might be more comprehensive and detailed than this one.

Fig. 1 Monthly Operating and Living Expenses
Monthly Operating and Living Expenses

Next, establish a unit price based on the unique value proposition of the business. The best price is the highest price that a customer will pay. As described in our previous post on how the UVP influences price, the value of a product/service will be determined by that product/service’s quality, how well it solves the customer problem and how it compares in the marketplace. The more relevant, valuable, and unique a product/service is, the higher the price the market will bear. Other factors influencing price are market conditions and competitor products or services.

After collecting these underlying numbers – expenses and price – it is time to put them together in a break-even analysis. Calculate gross margin per unit by subtracting total costs of producing and selling a unit of product or service from the selling price per unit (see Fig. 2). As Fig. 2 shows, small changes in the selling price or unit cost of your product or service can have a big impact on the number of sales required to reach your target gross margin.

Fig. 2 Income Statement to Gross Margin
Income Statement to Gross Margin

Lastly, consider any price adjustments or sales offsets such as discounts, credit card or delivery charges per unit. Figure 3 illustrates the impact of accepting credit card payments and covering delivery (or shipping) costs on the number of sales required to achieve total gross margin.

Fig. 3 Sales Offsets
Sales OffsetsFig. 4 Monthly Break-Even Analysis Monthly Break-Even Analysis

Many thanks to John Galati, NaperLaunch Coach and SCORE Volunteer, for preparing the spreadsheets used in this post. For more in-depth discussion on this and related topics, consider registering for the NaperLaunch Academy workshops. NaperLaunch coaches and SCORE mentors are also available to provide one-on-one virtual assistance.

Posted: 
Monday, February 8, 2021 - 08:30

Unique Value Proposition, Part 2: Use Your UVP to Create a Value-Based Pricing Strategy

As we have written in previous posts, a business’ unique value proposition (UVP) should clearly state why customers will want to buy from that business. It must identify the value promise being made for a service or product. That means that a strong UVP is relevant to a target customer group’s specific problem, promises certain benefits of quantifiable value, and states how a service or product is different from other offerings in the marketplace.

There are several common types of pricing strategies. Cost-plus pricing is simply calculating your costs and adding a mark-up. Competitive pricing is setting a price based on what the competition charges. Price skimming is setting a high price and lowering it as the market evolves. Penetration pricing is setting a low price to enter a competitive market and raising it later. Each of these strategies has its pros and cons and may be appropriate in certain situations.

However, after differentiating your business by building delivery capabilities so that the value promised in a strong UVP becomes reality, your best pricing strategy is value-based pricing. This means setting a price for products and services based on the value the customer believes they are getting from what you are selling. The better you solve people’s problems, which simply means the more value you deliver, the higher the price you can charge for your products and services.

If the product or service offering has been built to match the requirements of a strong UVP – it is relevant to customer problems, delivers beneficial quantifiable value, and is unique in some way – then the business owner and the customer have a win-win outcome when doing business together. When the target customer perceives beneficial value in the solution you offer, then you have a better customer fit. Value-based pricing allows you to be more profitable, meaning you can acquire more resources and grow your business.

You cannot be all things to all people. By establishing a UVP, you are assured that you will be targeting a market segment with a solid customer-to-product fit that will attract the customers who need and will appreciate your offering. The relationship between a UVP and a value-based pricing strategy can lead to greater success.

For more guidance on these topics, contact a NaperLaunch coach or register for the NaperLaunch Academy.

Posted: 
Wednesday, January 27, 2021 - 14:00