In the previous post we covered the first steps to building our MVP, or Minimum Viable Product. The question is… what are we supposed to do next? Remember that an MVPs goal is to get feedback for our product as early as possible, and learn from it so that we can iterate until we reach the product / value proposition that works.
To achieve a high efficiency level in this process we will use what Eric Ries, who we mentioned earlier, calls “The build, measure, learn, build… Cycle”. Once our MVP is built, it is very important to be crystal clear about what we want to measure, what actions we will take depending on those measurements and what we expect to learn. Seeing the results we can learn enough to build our next iteration. Here I would replace the word “build” for “iterate” in the cycle, as the lessons we will get from it will lead us to changes not only in the product or store themselves.
Let’s see an example. With our basic t-shirts store on-line, the first thing we will do is measure our CPA (how much does it cost us to acquire each new customer). We want to make sure that acquiring a client is cheaper than what we earn from each of them! Starting to figure out a scalable customer acquisition strategy is important, so we will create campaigns on AdWords, Facebook Ads and ideally a third channel. After one or two weeks with the campaigns running, we can look behind and see how each of them performed, according to previously defined metrics: in this case, mainly the cost per acquisition. Let’s imagine that the average CPAs for Adwords, Facebook and the third channel were $15, $40 and $22. From this we could learn that at the moment Facebook is not that profitable, we should focus on AdWords and still take advantage of the third channel. We also might discover that Facebook Ads traffic that was directed to red t-shirts resulted in a lot more sales than for other colors, and if we create a specific landing page for Facebook Ads campaigns featuring this t-shirt color then this channel could end up being profitable. In this example we measured the results of several campaigns, we learnt about their different ROI’s and ended iterating our customer acquisition strategy.
Imagine now that we made the assumption that a certain color would be the most attractive. So we gave it a lot more protagonism in our site and in our communication strategy, besides putting an extra effort in the manufacturing of that specific t-shirt. However, we learn from our users feedback that another of the colors is way more popular… By watching each color popularity metrics we could end up changing the whole web stores layout to make the color everybody loves king, and perhaps even making changes in the production process to optimize for the manufacturing of that t-shirts line. To speak about colors is actually a generalization of the issue: the logic I just described can (and should) well be applied to product features, product lines and so on.
It could also happen that the campaigns I just described won’t come as a great success, and that we end with astronomically high CPA’s. Good news is, we are discovering this pretty early (and before investing 10.000 dollars in a mind blowing website and another 50.000 in a huge manufacturing line) that the t-shirts we are selling might not be what people want. It’s clear that CPA is not the only thing to look at, perhaps the problem is we are using the wrong channels, or the wrong pricing model… The thing is: we can always reach a point in which we realize it’s time to make changes to our business, and when we reach that time it is important to make decisions based on data and experience, not just opinions.
How to Measure
How to get these metrics and how to get feedback is a key point. In some way building a startup is like learning how to fly a plane. Can you imagine attempting such an endeavor with no dashboard and blindfolded? I bet you wouldn’t have the faintest idea how high you’re flying, if you’re going up or down, how much fuel there still is in the tank and how far you’re from your destination. Because we don’t want to crash, we need the right tools and metrics to understand how business is performing and what to do about it.
There are two key tools worth mentioning. One of them is Google Analytics: it will let us get nice quantitative data about our users, where they’re coming from and their behaviour within our site, among others. The other one is Olark. Olark is a little chat plug-in that you can put on your website and will let you talk with users When it comes to getting more qualitative feedback, it is a fantastic tool: it lets you interact with users that would otherwise be mere numbers in your analytics package statistics.
Just as we don’t want to fly blindfolded, it doesn’t make any sense to go to the other extreme: if we’re learning to fly a plane and we try to follow the 250 instruments you can find on the dashboard, we will get dizzy and even as lost as if we weren’t looking at any of them. For this reason it’s important to choose the metrics we want to follow and focus just on them. For each business there will be a specific criteria, but as a general rule we should have a strong tendency towards looking actionable indicators: those we can use to trigger actions that will affect that metric. A way to get to that point is to take a very general number (e.g. traffic, users, unit margin) and ask ourselves on what variables they depend. Then to ask on what variables those variables depend, to finally reach the numbers on which we can really work.
With these tools we should be able to start working on our MVP, perfect it and transform slowly evolve it to a more mature version of our vision. As to these blog series, so long with the issues directly related to the idea, what we’re selling and its economic potential. In the next two posts we will cover two other fundamental topics: the founding team and how to finance our project.** As always, your comments and questions are more than welcome!** See you soon ;)
This article is part of a serie about going from “I’d like to start a business” to having a small start-up running, and beyond. If you haven’t read the previous articles, I recommend you do so by going to the first one, which includes a small table of contents.