Business Models, Revenue Models & the Lean Startup Methodology Dr. Sean Wise, BA LLB MBA PhD Business Models, Revenue Models & the Lean Startup Methodology

In this module you will learn: The Difference between a business plan and business model How the Business Plan has evolved into the Lean Canvas Lean Startup Methodology fundamentals Hypothesis based entrepreneurship Customer Development Pivots A/B Testing

The Changing Process 20th Century 21st Century Build in Secret Go to customers early and often Only focus group in Secret Share, share, share Only have 1 chance to make a first impression of customers Name it BETA and let customers shape it Engineering Driven Customer Driven Business Plans Lean Canvas

Business Plans vs Business Models A business plan is an internal document, created without customer feedback, meant to create a path for the startup But it is wrong, based on assumptions, out of date the moment it is printed A Business Model is the how the venture operates (e.g. how it makes money)

What’s a business model? A business model describes the rationale of how an organization creates, delivers, and captures value, in economic, social, cultural or other contexts. Business model = revenue model – cost model The revenue model breaks down all the sources of revenue that your business will generate. The cost model identifies how you are spending your resources to make money. It includes your cost of goods sold (COGS) and your operating expenses. Business Model has 9 components

Create your business model Cost Model Cost of Goods Sold Operating Expenses Revenue Model Sources of Revenue

9 Parts of a Business Model

Business Model Canvas

Business Model Canvas

Business Model Canvas: Amazon

Business Model Canvas: Netflix

Testing the Business Model

Lean Startup Canvas

Lean Startup Canvas

The Changing Process

Product Market Fit Scale now Startup Lifecycle Product Market Fit Scale now (LTV > COCA) Problem Solution Fit

Customer Development:

Testing the Business Model

The Lean Startup Methodology a rigorous process for iterating from Plan A to a plan that work teaches how to drive a startup-how to steer, when to turn, and when to persevere-and grow a business with maximum acceleration a scientific approach to creating and managing startups to get a desired product to customers' hands faster The lean startup method is a principled approach to new product development Lean is about putting a process, a methodology around the development of a product every startup is a grand experiment that attempts to answer a question. The question is not "Can this product be built?" Instead, the questions are "Should this product be built?" and "Can we build a sustainable business around this set of products and services?" The unit of progress for Lean Startups is validated learning For more read: http://leanstack.com/how-to-identify-a-lean-startup/

Lean Startup Methodology

Lean Startup Methodology

Hypothesis Testing

Hypothesis Testing A hypothesis is a way of taking a scientific question and turning it into testable prediction. A good hypothesis is important because it leads to good experimental design. Good experimental design is important because you need it to properly validate or invalidate what you’re doing. “What is the simplest thing we could do here to prove our hypothesis?” The key outcome of an experimental approach is measurable evidence and learning.

Hypothesis Testing The basic structure is this: I believe [target market] will [do this action / use this solution] for [this reason]. A good hypothesis must be: Written down in advance Be written in the negative / falsifiable Be testable Be quantifiable

Hypothesis Testing

Hypothesis Testing The hypothesis actually to be tested is usually given the symbol H0, and is commonly referred to as the null hypothesis, this is what you are trying to falsify the null hypothesis is assumed to be true unless there is strong evidence to the contrary e.g. similar to how a person is assumed to be innocent until proven guilty. The other hypothesis, which is assumed to be true when the null hypothesis is false, is referred to as the alternative hypothesis The alternative hypothesis is the one listed on the business model canvas or lean canvas We are actually trying to prove or disprove the null hypothesis Let’s say we are Facebook. The Facebook lean canvas lists the assumption that users will post pictures from their lives to share with friends (solution segment). That is the alternative hypothesis. The null hypothesis would state: Facebook users WILL NOT post pictures to share with friends. One would then (test) look at 100s of users of Facebook and count what percentage posts pictures on Facebook. If the % is greater than 0, then the null hypothesis was proven untrue, and the assumption that users will post pictures is proven true. This changes the lean canvas assumption to true and no pivot is required. Note: normally 40% is the benchmark used in the real world (e.g. if more than 40% of facebook users post pictures than no pivot is required).

Hypothesis Testing Examples: U.S.-based investors WON’T read NextMontreal on a regular basis because they do not have a growing interest in the Montreal startup ecosystem. I believe that people would NOT want to download their content to have a separate place in case of being audited or canceling an online service. More people would NOT catch the train if they got an SMS message 15 minutes before they needed to leave. If we add logos of our existing customers to our landing page, it will convey trust as a key value proposition to Bernie, our customer persona, and he will NOT sign up. Potential partners will NOT fill out a lead sheet when they view a partner page explaining our 3 key value propositions. Customers are NOT willing to pay more for a hotel based on the time of day they book.

Results of Testing

A/B Testing A/B testing (sometimes called split testing) is comparing two versions of a web page to see which one performs better. You compare two web pages by showing the two variants (let's call them A and B) to similar visitors at the same time. The one that gives a better conversion rate, wins!

A/B Testing

Some Startup Revenue Models Product or service is free, revenue from ads.  Freemium model.  Cost-based model.  Value model.  Subscription model.  Product is free, but you pay for services.  Product line pricing.  Tiered or volume pricing. Feature pricing.  Razor blade model. 

In this module you learned: The Difference between a business plan and business model How the Business Plan has evolved into the Lean Canvas Lean Startup Methodology fundamentals Hypothesis based entrepreneurship Customer Development Pivots A/B Testing Startup Revenue Models to explore

End of module 4