The Lean Startup movement has become a popular approach to considering and validating new business opportunities. It focuses on customer discovery and taking an iterative approach to designing and developing the business.

Although it’s generally associated with the development of completely new businesses, we are using it at ReadyTalk to identify new areas of business. I believe it combines the best of both worlds: exploring new opportunities while still having the security of a steady paycheck.

Actually, some would say that missing out on that drive to turn your first dollar could slow our progress, but in this era of big VC dollars, a lot of startups seem to be flush well before their ‘businesses’ are profitable, so I dont think we’re being too coddled.

I haven’t blogged in awhile, but this is going to be the start of a new segment of my posts, focusing on what we’ve learned as we explore this new opportunity. I hope it’ll be useful for others seeking to implement Lean Startup principles in the enterprise.

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The Alchemy of GrowthIn 2000, Consultants from McKinsey & Company, Inc proposed a portfolio management approach known as the Three Horizons. Each of these horizons describes projects at a point of evolution. The premise of the book “The Alchemy of Growth” in which the approach was first described is that an organization must have initiatives in each of the three horizons to ensure long-term success.

We used the Three Horizons approach in the Innovation team at LexisNexis, and we have recently started using this vernacular at ReadyTalk. We are coming at it in a descriptive fashion, attempting to classify the initiatives we already have in flight, and there is enough difference in opinion that often we abandon the effort. Is the classification really important, or is it just semantics to help us feel we are being sufficiently diversified in our initiatives?

Ultimately, it is important to understand the difference in these horizons – and it is much more clear if we look at the project lifecycle. There are two reasons this classification is important from the standpoint of the success for each specific initiative, in addition to the importance of portfolio management and diversification.

1. PROJECT SUCCESS METRICS AND RISKS: There are different questions to be answered and risks to be mitigated in each horizon. Those must be clear to stakeholders to be able to assess if a project is still on track and should continue to be pursued.
2. PEOPLE: There are different skills required for those operating in each horizon

The authors of The Alchemy of Growth describe a staircase, but I see the easiest way to look at the three horizons is as a funnel. All ideas start out in horizon 3, and then activities must be undertaken to be sure the idea has merit and be a viable business. Once the initiative has achieved product/market fit (see: all the lean startup books that are out there now), has identified its engine of growth, and has validated it has the potential to be profitable, it can exit from horizon 3. Many of the ideas in horizon 3 may never become profitable, so the focus is on the velocity of learning and having a pool of ideas to explore. This is the wide end of the funnel.

If you have an idea and you’re not sure:
1. does it solve a customer need? (market risk)
2. is it technically feasible? (technical risk)
3. do you have a financially feasible engine of growth? (business model fit/risk)
It’s horizon 3. Work on answering these questions as quickly as possible. If you get a No at any stage, it’s time to pivot or kill the idea.
The people in this stage must be creative, curious and flexible. I’ve heard that the best person you should get into this role is “the black sheep”, someone who is willing to push limits and not simply follow the rules.

If you can answer a yes to the three questions above, the idea moves onto horizon 2. At that point, it’s time to start looking at developing something that has growth targets. Can you get traction? In horizon 2 you’re likely still investing money into the project – profitability is not yet the main focus. Rather, you are still just trying to make sure you can attain the positional advantage and market share necessary for the business to be sustainable.
At this point, you need individuals who are business savvy and diligent. They must be bought into data-driven decision-making.

Once the product is profitable and you have traction, it can be considered to be a horizon 1 project. At this point, your focus is on profitability: cost optimization, efficiency and increasing margins. Horizon 1 businesses are those that generate the revenues to finance the activities in the other two horizons. Individuals who thrive at this stage are focused on optimization and efficiency.

I have seen descriptions of each stage that mention that H1 is your flagship, H2 is adjacent markets or different business models. I think that this can describe initiatives in these horizons, but it should not be the way to classify them. You can have several H1 initiatives that have different business models, that are both profitable. You could have two products serving different markets, again, both profitable. it is more about the activities taking place in the different stages and the maturity of the product than the market it serves.

This classification also means you can have individuals with particular talents or proclivities at each stage. Some people are naturally more creative and don’t want to be bothered with analyzing usage metrics. Others may thrive in such an environment. By identifying the critical activities at various stages of a product lifecycle, you can ensure the best resources are being put to the task, and appropriate measures of progress and success can be identified.

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Both the free trial and the freemium model lower the barrier of entry for prospective new customers. But what is the difference, and when is it appropriate to use one versus the other?

The free trial offers users a way to try a full-featured product for a limited period (generally time-based) before requiring them to pay to continue to use the product. The premise is that users need to have proof of the value of the service through usage, and will convert after the experience. At the end of the trial period, all users become either paid users or non-users.

The freemium model allows users to engage with limited functionality for an indefinite period of time. Paid premium features are available, but it is expected that the majority of users will NOT convert to the paid features. They will find sufficient value in the free offering, and will use it without giving the company revenue. Users may become paid users, free users, or non-users at any point.

Why would a company want to offer the freemium model and support freeloading users? The answer that that these users provide something apart from monetary support; they provide data. The freemium model is very data-driven and having a large user-base can help product designers make data-driven decisions based on user segments and user behavior.

If it were obvious what features your target customer found valuable and were willing to pay for, there would be no reason to offer a freemium version. You could charge everyone (perhaps offering a free trial initially to lower the barrier to trial) and earn revenue from everyone. But it’s not obvious, and offering a freemium version gives you the opportunity to learn from your users and create offers that speak to what they value and are willing to pay for. At that point you can earn more incremental revenue from specific segments than you could in offering a standard paid offering to everyone. The best freemium product is adaptable and highly customizable, so that you have the best chance of earning revenue from a portion of your users. A good rule of thumb is conversion of 5% of your users to paid.

A freemium model is not a stopgap on a path to convert all users to paid users. It is particularly important to have a broad pool of users when the product takes advantage of network effects; you do not want to limit your usage only to those who pay. Rather, it is a platform that allows you to gather insights about user behavior and segments so you can match users with features they value and what they are willing to exchange for them.

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Administering Business Masterfully

May 13, 2014

I havent written much in the past two years, as I was working on my MBA. I suppose a lot of my thoughts and effort went into that. But now that my head is out of that water, I know I need to do it the justice of thinking and writing about it. Over the […]

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SXSW 2014 Day 3: Organizational Change and Program Development

March 13, 2014

On Sunday, I attended a few sessions that reminded me of some of my MBA studies, and organizational change and relationships. “Don’t be Ned Stark” and “The Hard Thing About Hard Things” were both about being successful and effective within an organization. I love establishing new programs and taking on new challenges, and one key […]

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SXSW2014: Combinatorial Creativity: The Future of Innovation

March 8, 2014

This session, which was quickly renamed “Awesome combos” by the panelists, was described as follows: Some of the most transformative new ideas and products are being created in both the skunkwork labs of tech giants and by digital artists, hackers, and other collectives; and in some instances the two sides are joining forces. The thread […]

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The Maker Movement, Creativity and Artifacts

March 8, 2014

I was just perusing the SXSW Bookstore, and lots of the content was of interest. Yet there were only a few I considered purchasing the hard-copy of. One was Show Your Work by Austin Kleon. The book is a square shape, and it doesn’t read like a “normal” book. The pages seem scrawled, like the […]

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SXSW 2014 Themes: Day 1

March 8, 2014

Today I attended four sessions, although one was a dud. Of the other three, however, I started to see some themes emerge. Wheres in years past I’ve felt like many sessions focused on the “ooooh shiny” factor of technology, I’m really starting to see a maturity and focus on process. What Do We Build Next […]

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sxsw 2014: How Adobe Decides What to Do Next

March 7, 2014

The first session I attended at SXSW2014 was “What do we build next” by Adobe. It really spoke to their innovation process. To some extent I wonder how much I am just set on going to sessions whose kool-aid I already drink. Adobe has a team called “pipeline” that seems to be their innovation/prototyping department. […]

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Mary Poppins was a Product Strategist

January 8, 2014

“In ev’ry job that must be done There is an element of fun You find the fun and snap! The job’s a game And ev’ry task you undertake Becomes a piece of cake A lark! A spree! It’s very clear to see that A Spoonful of sugar helps the medicine go down The medicine go […]

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