by Bill Aulet
Don’t fall into this trap. Be vigilant as a team to maintain the level of objectivity, specificity, and rigor you learned in your primary market research work and that you have kept throughout the 24 Steps. If you do, you will much better understand whether the level of adoption is in line with what you should be seeing.
Just like you did in Steps 20 and 21, where you first identified your key assumptions and then tested them, in this step you will test the integrated MVBP you defined in Step 22. The ultimate test now is whether the end user is using the product and getting value, the economic buyer is willing to pay, and the champion is pleased enough with the results to keep championing your product and company.
There are many different ways to quantitatively measure your adoption rate.1 In this workbook, I recommend that for consistency, you use the framework from Step 18, Map the Sales Process to Acquire a Customer, as your initial foundational framework because it covers the full sales cycle from customer awareness all the way to repeat customers and word of mouth. The worksheet for this step presents the seven stages in the sales funnel and asks you to provide the conversion rates for each stage in the funnel, compare it to the industry average, and define other metrics useful to your startup.
Your instinctual qualitative observations can help guide you on how your product and go-to-market plan are working, but you need to combine them with quantitative data or you will be in the blindly optimistic or pessimistic world I described in the beginning of this step. Lord Kelvin expressed it memorably in saying: “When you can measure what you are speaking about and express it in numbers, you know something about it. When you cannot, your knowledge is of a meager and unsatisfactory kind.”2
So what numbers should you look at?
Initial interest: Once your target customers are exposed to your value proposition, what percentage of them actively seek to learn more? On a website, you can measure the click-through rate from a page that details the benefits of the product to a subsequent page.
Conversion rates: Once the target customer is in the sales funnel, the yield rates going from section to section of the funnel are extremely important numbers to understand, both the absolute numbers but also the trends.
Purchase and pay: The ultimate conversion. Whether the customer pays for your product is one very important indication of whether the customer is getting value. How long it takes the customer to pay, and what percentage of customers end up not paying after making an initial commitment (the “default rate”), are also interesting numbers to watch.
Retention rates: It is always telling to monitor retention rates, often referred to in the negative modality of “churn rate,” especially in subscription businesses. One way to measure retention rates is through support or maintenance contracts for postpurchase support. If the customer buys the product but doesn’t sign up for a maintenance contract at the end of the warranty period, in some industries that is a bad sign and you should take note immediately.
Customer advocacy: There is a huge difference between a satisfied customer and a very happy, evangelizing one. The latter is at least one order of magnitude if not more valuable to you. The simplest and most commonly used way to measure customer advocacy is the Net Promoter Score (NPS), developed by Bain & Company, Satmetrix Systems, and Fred Reichheld. You gather the necessary data by asking customers a single question: On a scale of 1 to 10, with 10 being the highest, how likely is it that they would recommend your product to a friend or colleague? By tallying the percentage of responses that are nines and 10s (“promoters”) and subtracting the percentage of responses that are sixes and below (“detractors”), you get your score, which can be as low as -100 (all detractors) and as high as 100 (all promoters).
Cost of Customer Acquisition (COCA) and Lifetime Value (LTV): Estimate these numbers again now that you have some sales. They are much easier to estimate the second time around! They are valuable, albeit imperfect, indicators of your success. If there are surprises in these numbers, then quickly dive into them and understand why.
Gross margin: Your gross margin, the difference between what it costs to make one unit of product and what you sell that unit of product at, should go up over time, indicating that you are getting strong word of mouth for your product. If it goes down, then you are possibly providing too many discounts on your product, so the number of customers may be going up because the price is artificially low. The gross margin trend is an imperfect indicator on its own (much like the other indicators here), but make sure you monitor it.
Don’t feel constrained by this list. There are plenty of other metrics that will be equally or more valuable for your situation.
While it is hard to capture all of these metrics, especially at the beginning, they will be highly useful to you, especially within the framework of the sales process from Step 18.
Before you release your product, make sure you clearly define what metrics you will be observing, how you will observe them, and what constitutes success against those metrics. In the worksheet for this step, I suggest coming up with percentages for conversion between each step of the sales funnel, as well as monitoring gross margin, LTV, and COCA. You’ll also want to roughly define the time period(s) over which you’ll make your initial observations, since you’ll need to give customers some time to hear about and evaluate your product, but not too much time or you might expend too many resources on a product nobody wants. If you release your product without carefully defining what constitutes success, it is all too easy to pretend that whatever results you get are indicators that you have a good product. Don’t fall into that trap!
GENERAL EXERCISE TO UNDERSTAND CONCEPT
Viral video and then what? A new product comes to market via a highly entertaining video that goes “viral,” meaning millions of people view it over a short time period. However, very few people go to the product’s website (less than 0.1 percent), and very few of those people convert to paying customers for the product, which is a subscription business (0.2 percent conversion rate of those who visited the website). How would you assess the situation? What has this company done well? What has it not done well? What should its next steps be?
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
WORKSHEET
What time period(s) will you measure metrics for (give duration and units—e.g., two weeks, two months, )? _____________________________________
Are Your Customers “Eating the Dog Food”?
Stage in funnel (starting at top) Est. industry conversion average (%) Your conversion goal (%) Actual conversion rate (% and trend) Next steps if your actual conversion rate is lower than your goal
#1—Identification (leads)
#2—Consideration (suspects)
#3—Engagement (prospects)
#4—Purchase intent (qualified prospects)
#5—Purchase (customers)
#6—Loyalty (satisfied customers)
#7—Advocacy (evangelists)
Gross Margin, LTV, COCA
Expected for short term Actual for short term Next steps if actual is lower than expected
Gross margin
LTV
COCA
Define and Test Other Metrics
List custom metrics here: Expected for short term Actual for short term Next steps if actual is lower than expected
Net Promoter Score (NPS)
Reflections
What surprised you about what customers actually did versus what you expected them to do?
_______________________________
_______________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
What didn’t surprise you?
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
Summarize your action plan now that you have tested adoption of your MVBP. Do you need to revise your work from previous steps?
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
Congratulations on making it this far! You have broken through, and now you have to grow your beachhead and start to scale up your product and company.
NOTES
1 Dave McClure describes a good approach and specifically addresses the front end (i.e., the initial sale) of this with his “Startup Metrics for Pirates” presentation, but he does not talk about the back end (i.e., after Step 6 in your sales funnel) as much, which is critical as well. See http://www.slideshare.net/dmc500hats/startup-metrics-for-pirates-long-version.
2 He also said, “In science, there is only physics; all the rest is stamp collecting,” so while very quotable, he was certainly no diplomat.
STEP 24
Develop a Product Plan
WHAT IS STEP 24, DEVELOP A PRODUCT PLAN?
Describe how you will improve your product over the next several versions so that you can fully capture your Beachhead Market and then start to address follow-on markets.
WHY DO WE DO THIS STEP, AND WHY DO WE DO IT NOW?
Putting together a broader plan for your product allows your team to have a solid foundation stepping out from the 24 Steps into a more dedicated incremental product development cycle. You will continually refine the work you have done in this workbook, even though there are no more formal steps to be followed in this methodology beyond Step 24. At this point, if all of the steps have been completed, you have successfully launched your product.
By the Book: See pages 253–255 of Disciplined Entrepreneurship for basic knowledge on this step.
See page 255–259 of Disciplined Entrepreneurship for an example of how a company addressed this step.
Step 24 points in the direction for your next trip, which is likely another lap through the 24 Steps for the next release of your product.
PROCESS GUIDE
Step 24 is the beginning of an ongoing and evolving plan to scale and grow your product and business from its initial success. You must think longer term beyond the Minimum Viable Business Product (MVBP) and the Beachhead Market. Each time you expand to a new market, you will need to iterate on the basic concepts behind the 24 Steps in detail if you want that market to be successful. In fact, for each new market, you will cycle through the 24 Steps again for that market to generate the detailed plan for the product for that market. Don’t worry, however, because each subsequent time you execute the process, it is easier and most likely faster. For now, you will just lay out a high-level game plan.
Start by planning out features and functions for the next two versions of your product for the Beachhead Market. For purposes of this chapter, make both versions functional releases, but keep in mind that you will likely need to intersperse with releases that focus on improving the quality of existing features. At one of my hardware startups, SensAble, we defined that releases should alternate between a functional release and a quality assurance release. At Google, they use the phrase “ship and iterate” to emphasize the importance of releasing something, even if the software has bugs in it, and commit to both making improvements to the quality of the existing product and to adding new features. Make sure quality is continually addressed in the product, even if it means removing features as appropriate. Otherwise, feature releases (which are frankly more exciting) just keep coming and quality slips away.
The features and functions should be linked to specific benefits that will make your product even more invaluable to the target customer in your Beachhead Market. One of these releases may be a good opportunity to replace concierged parts of your MVBP with a more scalable solution, even if it means temporarily taking your product off the market in order to do so.
You’ll also want to understand how each additional version leverages your Core. As you expand your product’s capabilities, you do not want to forget the work you have done in Step 10, Define Your Core, and Step 11, Chart Your Competitive Position, because those are the key elements that will sustain your company and provide you a lasting competitive advantage. If you ignore your Core and do not strengthen it over time, you will have developed a wonderful product specification, no longer just a high-level spec like in Step 7, but a full blueprint backed by strong primary market research, only to see another company swoop in and reap most of the profit and rewards because you have no lasting competitive advantage relative to them.
Also, consider what resources are needed to develop and implement each new feature or functionality. Then, assign a priority to each feature or functionality based on how important it is to your customer, its relationship to your Core, and whether you have the available resources to pursue it at this step.
It is impossible to know exactly which of these features you will end up implementing, but you should continue to make and test assumptions related to your customer and product because careful planning will significantly increase the odds of your success. You have to be open to changing your plan as new data comes in, but if you have no plan, you will waste a lot of time trying things out without understanding the metrics for success. Great entrepreneurs mix planning and flexibility so that they can both rapidly and productively iterate. Balance is the key.
While you are planning features and functionality, also consider what other activities you will need to do in parallel with releasing new versions of your product. Perhaps there will be regulations you need to keep in mind as you expand, or you will need to invest time in providing specific services that support the end users’ use of the product.
Next, consider the various follow-on markets you initially sketched out in Step 14, Estimate the Total Addressable Market (TAM) Size for Follow-on Markets. At this point, you have a lot more information than you did when you made your first pass on this question, so take another look at your candidate follow-on markets, and determine which will be the top markets for you to pursue next. Keep in mind that from your Beachhead Market, you either sell the same or similar product to a different target customer, or you sell additional products to the same target customer, and each time you conquer a new adjacent market, you can only change one of those two variables. Changing both variables will put you well outside your expertise and require you to do a level of primary market research akin to starting the 24 Steps completely over, which you do not have the time or resources to do.
Finally, you’ll want to visually represent your Product Plan so it is clear to everyone on your team how your product will grow over time as it better serves the Beachhead Market and begins to serve adjacent markets. I’ve provided a general worksheet in this chapter, but feel free to modify as needed and do not feel constrained by the specifics. In Disciplined Entrepreneurship you’ll see other examples of displaying a visual Product Plan that still use a graph with two axes but display the information differently. What is key is that you have a plan and that you can communicate its essence concisely, witho
ut overloading it with details.
GENERAL EXERCISES TO UNDERSTAND CONCEPT
See the back of the book for sample answers to these questions.
Creating a market but not owning it: Can you think of an example of a product where one company went in and showed the world an exciting new market, but then the company was unable to capture the benefits of its vision and execution? What do you think they could have done differently? ______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________