Test Your Value Proposition: Supercharge Lean Startup and CustDev Principles

In my last post I described a new business tool, the Value Proposition Designer Canvas. In this post I outline how you can use the tool to not only design Value Propositions, but also to test them. You’ll learn how you can supercharge the already powerful Lean Startup and Customer Development principles to design, test, and build stuff that customers really want.

The Value Proposition Designer Canvas (VP Designer Canvas) allows you to zoom into the details of your Value Proposition and the Customer Segments you target. You can use it as a poster (cf image below) to design better Value Propositions with sticky notes. However, to make sure your customers really want what you design, you'll need to test all the assumptions you make with the VP Designer Canvas.
Value Proposition Canvas
We already now know how to do this kind of designing and testing for business models: by combining the Business Model Canvas with the Customer Development process. Steve Blank has impressively demonstrated this in his work.

We can achieve the same for Value Propositions by combining the VP Designer Canvas with the Lean Startup process. This will help us more systematically work towards achieving what the startup movement calls a product-market fit or problem solution fit. In other words, building/offering stuff that customers really want.

Design, Test, and Build Business Models & Value Propositions
In a nutshell, the Lean Startup process essentially consists of iterating through the “building” of, “measuring” of, and “learning” from product (and service) prototypes. The Lean Startup movement calls these prototypes Minimum Viable Products (MVP).

Supercharge the Lean Startup Process

The VP Designer Canvas can add two crucial things to this process that are currently missing. Adding them to the mix will bring us to a whole new level.

Firstly, the VP Designer Canvas gives you a simple and practical way to rapidly sketch out WHAT you are building and how you believe this will create customer value/benefits, as well as WHY your are building it: which customer jobs, pains, and gains you intend to address.

Doing this BEFORE building an MVP, will help you better track and manage the testing, measuring, and learning process.

Value Proposition Canvas: What and Why

Secondly, the VP Designer Canvas helps you distinguish between Product/VP and Customer assumptions. If you “just” build an MVP to measure and learn, you won’t know if a negative outcome of your experiment is related to your MVP or to a lack of customer interest.

In science such a significant bias would invalidate your results all together. Hence, you need to separate the testing of your product/VP assumptions (i.e. WHAT) and your customer assumptions (i.e. WHY) whenever possible. The latter is something you can observe and investigate even before designing an MVP.

Using the Value Proposition Designer Canvas - Step by Step

Let me walk you through a rough step by step process of how to use the VP Designer Canvas for testing. In reality, of course, these steps will be less sequential and much more messy. You'll also want to adapt this process to your needs and circumstances.

1. Fill Out Your VP Designer Canvas.

Describe the JOBS your customer is trying to get done and outline their PAINS and GAINS. List the PRODUCTS and SERVICES you intend to offer and describe how you believe they will ALLEVIATE your customer’s PAINS and CREATE GAINS. You can use the trigger questions in the poster and in my last blogpost if you need help.

1 - Fill Out VP Canvas

Voilà, you now have a great list of Produc/VP and Customer assumptions. You described who you think customers are and what you think would create value for them. It’s your best guess - but still just your (smart) opinion.

1b - Your Assumptions

2. Test your Customer Assumptions

Now it’s time to “get out of the building” - to use Steve Blank’s terms - in order to verify your customer assumptions. Talk to as many (potential) customers as possible to verify if they really are trying to get those JOBS done that you described in the VP Designer Canvas. Find out if those JOBS are crucial to them or unimportant? Find out if the really have those PAINS you believed they have. Are those PAINS severe or minor? Verify if they really value the GAINS you believed they value.

2 - Test Customer Assumptions

It’s even better if you can test your customer assumptions more rigorously. What I mean with that is going beyond simply talking to customers, but not yet building an MVP. The design professions have several techniques to achieve that.

3. Adjust your Customer Assumptions Based on Insights

Now that you better know who your customers are you should revisit the Customer Profile in your VP Designer Canvas. Ideally you now understand the significance of your customers’ JOBS, the severity of their PAINS and the intensity of their desired GAINS.

3 - Adjust Customer Assumptions

4. Redesign your Value Proposition Based on Insights

Adjust which pains and gains you want to focus on, based on your customer insights. Then redesign your Value Proposition accordingly. Don’t forget that great Value Propositions rarely address all customer PAINS and GAINS. They address a few really well!

4 - Redesign your Value Proposition

This will give you a readjusted VP Designer Canvas.

4b Adjusted VP Canvas

5. Start Testing your Value Proposition

Now it’s time to build your MVP and continuously test and adjust your Value Proposition based on what you learn.

5 - Test with MVP

The VP Designer Canvas will serve as your map to permanently track assumptions and tests, while you're pivoting through the Lean Startup process. The moment this circle ends is when you've achieved a fit between your Value Proposition and what your Customers expect. This is what the startup movement calls product-market fit or problem-solution fit. It's when you build stuff that customers really want!

Lean Startup Process

Don't hesitate to give me your feedback, since this process is just a first suggestion of how to use the Value Proposition Designer Canvas.

7 Questions to Assess Your Business Model Design

Ultimately, customers are the only relevant judges of your business model. However, even before you test your model in the market, you can assess its design with 7 questions that go well beyond the conventional focus on products and market segments.

First things first. In order to assess your business model you should sketch it out on the Business Model Canvas outlined in the video below. If you want to know more about the Canvas and how to use it you can read Business Model Generation of which 70 pages are available for free on our website.

Assessing the basics

Every business model has a product and/or service at its center that focuses on a customer’s job-to-be-done. I call this the Value Proposition. So before even turning to your business model as a whole, you need to ask yourself some basic questions related to your Value Proposition and the Customer Segments that you are targeting.

  • First, ask yourself how well your Value Proposition is getting your target customer’s job done. For example, if a user of a search engine is trying to find and purchase the latest Nike running shoe, the measure of success will be how well the search engine helps the user get this job done.
  • Secondly, ask yourself how many people or companies there are with a similar job-to-be-done. This will give you the market size.
  • Thirdly, ask yourself how important this job really is for the customer and if she actually has a budget to spend on it.

That’s it as to the basics. However, even the greatest products are having an increasingly hard time to achieve a long-term competitive advantage. That is the reason why you need to shift your focus away from a pure product/market segment oriented approach towards a more holistic business model approach. Below are eight questions to assess your business model design. Rank your business model’s performance on a scale of 0 (bad) to 10 (excellent) for each question.

1. How much do switching costs prevent your customers from churning?

The time, effort, or budget a customer has to spend to switch from one product or service provider to another is called “switching costs”. The higher the switching costs, the likelier a customer is to stick to one provider rather than to leave for the products or services of a competitor.

A great example of designing switching costs into a business model is Apple’s introduction of the iPod in 2001. Do you remember how Steve Jobs heralded his new product with the catchphrase “thousand songs in a pocket”? Well, that was more than a product innovation focusing on storage. It was a business model strategy to get customers to copy all their music into iTunes and their iPod, which would make it more difficult for them to switch to competing digital music players. In a time when little more than brand preferences were preventing people from switching from one player to another this was a smart move and laid the foundation for Apple’s subsequent stronghold on music and later innovations.

2. How scalable is your business model?

Scalability describes how easy it is to expand a business model without equally increasing its cost base. Of course software- and Web-based business models are naturally more scalable than those based on bricks and mortar, but even among digital business models there are large differences.

An impressive example of scalability is Facebook. With only a couple of thousand of engineers they create value for hundreds of millions of users. Only few other companies in the world have such a ratio of users per employee. A company that has pushed the limits even further is the social gaming company Zynga. By building games like Farmville or Cityville on the back Facebook, the world’s largest social network, they could benefit from Facebook’s reach (and scale) without having to build it themselves.

A company that quickly learned its lessons regarding scalability was peer-to-peer communication company Skype in its early days. Their customer relationship collapsed under the weight of large numbers, when they were signing up ten thousands of users per day. They quickly had to adapt their business model to become more scalable.

3. Does your business model produce recurring revenues?

Recurring revenues are best explained through a simple example. When a newspaper earns revenues from the sales at a newsstand they are transactional, while revenues from a subscription are recurring. Recurring revenues have two major advantages. Firstly, the costs of sales incur only once for repetitive revenues. Secondly, with recurring revenues you have a better idea of how much you will earn in the future.

A nice example of recurring revenues is Redhat, which provides open source software and support to enterprises based on a continuous subscription basis. In this model clients don’t pay for new software versions because it is continuously updated. In the world of Software as a Service (Saas) these types of subscriptions are now the norm. This contrasts with Microsoft, which sells most of its software in the form of licenses for every major release.

However, there is another aspect to recurring revenues, which are additional revenues generated from an initial sales. For example, when you buy a printer, you continue to spend on cartridges, or when you buy a game console, you’ll continue to spend on games. Or have a look at Apple. While they still earn most of their revenues from hardware sales, the recurring revenues from content and apps is steadily growing.

4. Do you earn before you spend?

This one goes without saying. The more you can earn before spending, the better.

Dell pioneered this model in the computer hardware manufacturing industry. By assembling on order after selling directly they managed to escape the terrible inventory depreciation costs of the hardware industry. Results showed how powerful it is to earn before spending.

5. How much do you get others to do the work?

This is probably one of the least publicized weapons of mass destruction in business model design. What could be more powerful than getting others to do the work while you earn the money?

In the bricks and mortar world IKEA gets us to assemble the furniture we buy from them. We do the work. They save money. On the web Facebook gets us to post photos, create and participate in conversations, and “like” stuff. That’s the real value of Facebook, entirely created by users, while they simply provide the platform. We do the work. They earn the sky-high valuations of their shares.

Previously mentioned Redhat crafted another smart business model based on other people’s work. Their entire business model is built on top of software developed by the open source software development community. This allowed them to substantially reduce their development costs and compete head-on with larger companies like Microsoft.

A more malicious business model in which others do the work is the one practiced by so-called patent trolls. In this model patents are purchased with the sole intention of suing successful companies to extract payments from them.

6. Does your business model provide built-in protection from competition?

A great business model can provide you with a longer-term protection from competition than just a great product.

Apple’s main competitive advantage arises more from its powerful business model than purely from its innovative products. It’s easier for Samsung, for instance, to copy the iPhone than to build an ecosystem like Apple’s appstore, which caters to developers and users alike and hosts hundred thousands of applications.

7. Is your business model based on a game changing cost structure?

Cutting costs is a long practiced sport in business. Some business models, however, go beyond cost cutting by creating value based on a totally different cost structure.

Skype, for example, provides calls and communication almost like a conventional telecom company, but for free or for a very low cost. They can do this because their business model has a very different cost structure. In fact, Skype’s model is based on the economics of a software company, while a telecom provider’s model is based on the economics of a network company. The former’s costs are mainly people; while the latter’s cost include huge capital expenditures in infrastructure.

Similarly, Bharti Airtel, one of the world’s largest mobile network providers, has substantially modified its cost structure by getting rid of their entire network and IT. By buying in network capacity on a variable cost basis from a consortium around network equipment manufacturer Ericsson and IBM, they can now offer among the lowest prices for mobile telephony globally.

Redhat, which was mentioned previously, also built its business model on a game changing cost structure: by smartly building its own model on top of other people’s work.

How does your business model design perform?

Of course no business model design scores a perfect 10 as to every single one of the above questions. Some might even succeed in the market without scoring well at all. However, by asking yourself these questions and by scoring well on at least some of them you are very likely to substantially increase the long-term competitive advantage of your business.

Now all you need to do is test your business model with the real judge: the market. The best way to do that is by turning to Steve Blank's Customer Development process, which fits perfectly with the Business Model Canvas.

Some more info on my workshops, speaking, and projects.

PS: I will be running a series of workshops you might be interested in. Sign-up or pre-sign-up here. In Paris (French: Sept 27/28), in Boston (Oct 27/28), and in Munich (German: Nov 24/25).

PS2: These days are your last chance to get your name into a book project that I'm involved in: Business Model You. Check it out here.

PS3: I wrote this post as a guest post for the Business of Software conference where I'll be speaking in October.

Business Model Generation on Amazon.com Now

The first print-run of Business Model Generation was sold out after a few weeks only. We couldn't keep up with demand and were out of stock for a while. Now the book is available again. You can get it directly on Amazon.com in a deluxe or portable version.

Business Model Generation has been selling phenomenally well - and that without a publisher and 0 marketing budget. Last week it even ranked #2 in sales of management books on Amazon.com. For this second print-run we decided to produce two slightly different versions: a deluxe version for your office and a portable version for the road. Deluxe Version

The particularity of the deluxe version is its beautiful cardboard cover and special binding, which allows you to lay it flat open on a table. Yet, it's not only attractive, but also offers you the perfect working experience that you would expect from a hands-on and practical book. However, be careful: deluxe versions are objects of envy - it's not unheard of that copies get stolen when you leave them unsupervised on your desk.

buy now

Portable Version

We introduced the portable version in order to offer you a lighter and more portable copy at a lower price. The content is the same, but its format (perfect bound and softcover) is designed for taking it on the road. Business Model warriors will likely own both versions. One to show off at their office and one to take with them anywhere they go.

buy now

Caveat

Unfortunately, Amazon.com currently restricts us from offering a top-notch service to some customer segments. Readers outside the US cannot benefit from expedited shipping. Also, Amazon.com does not ship the book to Canada, due to internal restrictions. Hopefully, we can find a way around those limitations in the future.

Mapping Business Models (a Knowledge Game)

Mapping out a business model with a group of people is like playing a game. That's what I came to realize when my friend and leading visual thinker, Dave Gray, introduced me to his new project called Knowledge Games.

I was instantly fascinated by the project, because it is extremely relevant for anybody who wants to understand how creative work is starting to be organized in today's organizations. Yet, most interestingly, the Knowledge Games project is utterly practical, since it aims to outline a series of games designed to help you get more innovative, creative results in your work. The authors of the project, Dave Gray, Sunni Brown, and James Macanufo are on the best path towards creating the next reference guide for the creative business professional and business innovator. The metaphor of games refers to the most natural of human mechanisms of exploring the world: games & play. And what could be more important than exploration when it comes to defining strategy and business models in a competitive environment characterized by volatility, unknowns and constant change:

Games come naturally to human beings. Playing a game is a way of exploring the world, a form of structured play, a natural learning activity that’s deeply tied to growth. Games can be fun and entertaining, but games can have practical benefits too.

When Dave asked me to formulate the usage of the Business Model Canvas as a Knowledge Game I was immediately hooked. Here is the blogpost I wrote for the Knowledge Games project (check out the original post):

Objective of Play: Visualize a business model idea or an organization's current and/or future business model in order to create a shared understanding and highlight key drivers.

Number of Players: 1-6 (depending on the objective). Works well individually to quickly sketch out and think through a business model idea or an interesting business portrayed in the press. To map an organization's existing and/or future business model you should work in groups. The more diverse the group of players (marketing, operations, finance, IT, etc.), the more accurate the picture of the business model will be.

Duration of Play: Anywhere between 15 minutes for individual play (napkin sketch of a business model idea), half a day (to map an organization's existing business model), and two days (to develop a future business model or start-up business model, including business case).

Material required: Mapping business models works best when players work on a poster on the wall. To run a good session you will need the following:

  • A very large print of a Business Canvas Poster. Ideally B0 format (1000mm × 1414mm or 39.4in × 55.7in)
  • Tons of sticky notes (i.e. post-it® notes) of different colors
  • Flip chart markers
  • Camera to capture results
  • The facilitator of the game might want to read an outline of the Business Model Canvas (free 72 page preview of Business Model Generation



How to Play: There are several games and variations you can play with the Business Model Canvas Poster. Here we describe the most basic game, which is the mapping of an organization's existing business model (steps 1-3), it's assessment (step 4), and the formulation of improved or potential new business models (step 5). The game can easily be adapted to the objectives of the players.

  1. A good way to start mapping your business model is by letting players begin to describe the different customer segments your organization serves. Players should put up different color sticky notes on the Canvas Poster for each type of segment. A group of customers represents a distinct segment if they have distinct needs and you offer them distinct value propositions (e.g. a newspapers serves readers and advertisers), or if they require different channels, customer relationships, or revenue streams.
  2. Subsequently, players should map out the value propositions your organization offers each customer segment. Players should use same color sticky notes for value propositions and customer segments that go together. If a value proposition targets two very different customer segments, the sticky note colors of both segments should be used.
  3. Then players should map out all the remaining building blocks of your organization's business model with sticky notes. They should always try to use the colors of the related customer segment.
  4. When the players mapped out the whole business model they can start assessing its strength and weaknesses by putting up green (strength) and red (weakness) sticky notes alongside the strong and weak elements of the mapped business model. Alternatively, sticky notes marked with a "+" and "-" can be used rather than colors.
  5. Based on the visualization of your organization's business model, which players mapped out in steps 1-4, they can now either try to improve the existing business model or generate totally new alternative business models. Ideally players use one or several additional Business Model Canvas Posters to map out improved business models or new alternatives.

Strategy: This is a very powerful game to start discussing an organization's or a department's business model. Because the players visualize the business model together they develop a very strong shared understanding of what their business model really is about. One would think the business model is clear to most people in an organization. Yet, it is not uncommon that mapping out an organization's business model leads to very intense and deep discussions among the players to arrive at a consensus on what an organization's business model really is.

The mapping of an organization's existing business model, including its strengths and weaknesses, is an essential starting point to improve the current business model and/or develop new future business models. At the very least the game leads to a refined and shared understanding of an organization's business model. At its best it helps players develop strategic directions for the future by outlining new and/or improved business models for the organization.

Variations: The Business Model Canvas Tool can be the basis of several other games, such as games to:

  • generate a business model for a start-up organization
  • develop a business model for a new product and/or service
  • map out the business models of competitors, particularly insurgents with new business models
  • map out and understand innovative business models in other industries as a source of inspiration
  • communicate business models across an organization or to investors (e.g. for start-ups)

Customer Feedback not on elBulli's Menu

I just came across an interesting post on Harvard Working Knowledge. Julia Hanna writes about a Harvard Business School case study that shows how Chef Ferran Adrià creates innovative customer experiences in his world-famous restaurant elBulli.

elBulli's numbers are impressive:

Each year, some 2 million hopeful diners vie to be one of the fifty customers he serves each evening for the six months that elBulli, his restaurant, is open.

However, what struck me most about the article was Ferran's focus on creating a unique customer experience. This includes a two hour travel from Barcelon to the restaurant on narrow, twisting mountain roads. Another example is elBulli's mysterious reservations system. It's more like a lottery system. If you are lucky to "win" one of the 8'000 available bookings a year, you are given a date and time to show up. This is everything else than convenient for customers.

elBulli seems to violate any common sense marketing rule (e.g. good location, listening to the customer, etc.). More interestingly, what elBulli does is also the opposite of the new "design thinking mantra" of observing customers and then designing services according to the gained insights.

In fact, elBulli's magic and success ultimately lies in Ferran Adrià's passion and his desire to create a one-in-a-lifetime experience. Now that takes real leadership! And in my opinion leadership is one of the most under-discussed ingredients of innovation. Other great examples of innovation leadership include Steve Jobs at Apple or Elmar Mock at Swatch in the 80's.