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Wednesday, May 02, 2012

Validate your new business proposition

Interesting case study on validating your Start up business proposition.

Ben Fisher + Anna Curran
Like yoga, Lean Startup Methodology is more than just a skill set you acquire–it’s a practice that you must apply in order to get any value from it.
In a nutshell, lean offers you a validated way to learn about your startup—-Is there a market for your business? How can you gather key information about the features and functionality of a business concept? Lean will help you practice how to identify your market and develop product-market fit.
So, how do you get started?
Step One: Pick an Idea
One word practitioners of lean rely on heavily is “validate.” The workshops we teach are designed to help people understand what it means to validate an idea or product.
The last time we taught this workshop, we provided our class with an app idea to validate or invalidate. It was called Cut the Line, and the concept was a mobile app that helps you to skip the line at restaurants and other popular attractions. The idea drew inspiration from Disney’s FastPass and applied it to all of New York City. Imagine being able to skip any line anywhere…for a price.
“Yes, that would be awesome,” was the response we got from most people when asked whether they liked the idea.
Step 2: Define the Assumptions
Before committing to the business idea as we had originally conceived of it and investing precious resources to build the “perfect” product, we challenged the class to identify whether there was a market for Cut the Line, and if so, the bare minimum feature set people would actually pay for. Our class mapped out the idea’s riskiest business assumptions to reveal the bare minimum facets of the business (consumer behavior, pain) that must truly exist for this business to work.
Assumption #1 – Patrons would pay to skip lines.
Assumption #2 – Restaurants would accept payment for allowing some customers to skip the line.
Assumption #3 – There is a large enough market for this product to build a sustainable business.
Step 3: Validate Your Assumptions
After mapping the riskiest assumptions, we took to the streets to meet real, live potential customers and observe their behavior. Our learning exercises started with offering strangers money for their spot in line in efforts to define if we could pay to create a spot online. We experimented with a range of price-points; if they refused a small sum, we countered with a higher offer.
Step 4: Analyze Lessons Learned
Our experiments highlighted one key fact about consumer behavior: while you can gain some valuable qualitative information about your customer through conversation, people are generally terrible judges of hypothetical behavior. The only reliable way to test whether someone will pay for something is to actually charge them for a product.
#1 Lesson Learned - Patrons felt paying to skip the line was unfair to the others in the line
Many patrons refused the offer to pay us to Cut the Line. When we asked why, we got an interesting array of responses that included: Parents with children said that waiting in the line was a part of the “sight seeing experience.” Tourists enjoyed waiting in line because the longer the line, the better the restaurant. It was how they judged if a restaurant was good. One surprising exception: a man on a date paid to skip the line.
#2 Lesson Learned – Restaurants did NOT want to let some clients to skip the line
Restaurants did not want to seem unfair giving certain customers special treatment. They were afraid that any additional revenue generated by the FastPass would be offset by losing the business of irritated potential customers.
#3 Lesson Learned – Our target market significantly narrowed as we spoke with potential customers.
The class expected the average patron waiting in a long line would be willing to pay to skip to the front. And with the refusal of venues to allow some patrons to skip the line, we were left wondering was there an opportunity for this product at all?
Step 5: Identify Flaws in the Experiment and Consider Next Steps
There are some natural limitations to any experiment. Some potential issues that may have influenced our learning and warrant further exploration: (1) We looked very “unofficial;” approaching patrons at restaurants in line wearing street clothes. (2) Our small data-set that was geographically limited to Times Square. (3) Our pool of potential customers we were predominantly limited to restaurants, so a person’s level of hunger may have forced a different behavior. (4) Lastly, a digital solution such as a mobile app would have increased anonymity; in the in-person setting, we expect some would-be customers felt peer pressure to not cut the line. Had our class extended beyond three days, our next step would have been to explore those learnings further and to address some of those limitations.
Step 6: Decide Whether or Not to Proceed with the Idea
After three nights of validated learning inquiry into Cut the Line, we didn’t feel confident that there’s a market for the product; at least not with the implementation that we had envisioned. Our student who did make a sale had a brilliant customer development hack: he put his name to get a table for dinner at the Hard Rock Hotel, waited 30 minutes until his buzzer would be called next and then sold his spot in the line to a patron who had only been waiting 5 minutes (the gentleman on a date).
Key Takeaway
There are a number of other factors to consider as well, but social factors like “perceived fairness” and peer pressure are clear barriers to successfully monetizing the business idea. The biggest lessons we hope our students took away, though, is that just because people say, “Oh yes, I would pay for your product” doesn’t actually mean they will or that there’s even a market for it. Uncovering insights and understanding the nuances of a potential customer’s behavior is key to learning whether there’s a market for your business idea.


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