PS: – Below article was posted on LinkedIn in 2016, some of the data about marketing spends may not be relevant now but the whole idea still is valid.
In an era where startups are mushrooming in all verticals, there are different approaches which are gaining traction on how one can build and develop a new business. Lean startup is one such method for developing businesses and products proposed by Eric Ries. Based on his previous experience working in several U.S. startups, Ries claims that startups can shorten their product development cycles by adopting a combination of business hypothesis-driven experimentation and iterative product releases to validate businesses
Being an active advocate of ‘Lean Startup’ approach for the last 3 years, I would like to show how I validated a business model in under Rs 20k and in less than 30 days. To start performing a lean startup experiment, one needs to start with a hypothesis, which is essentially your hunch on how the business would work. The purpose of the experiment is to validate this hypothesis by testing this in a real market scenario.
Genesis Of Hypothesis
The hypothesis was the result of a chance conversation with a couple of friends in the restaurant business. One of my friends in the group suggested that it would be nice if there was a service which offered custom dining experiences in a five star restaurant to celebrate their birthday or anniversary. This idea led the conversation into thinking of options and soon we thought of a package which consists of
- Candle Lit Dinner at a five star hotel with a special setup.
- Ride in Luxury car- BMW, Jaguar and the likes
But we also realised that this option would appeal to a very small segment. The challenge was to test the concept and check if it would work without spending a lot of time in building a product or service. We decided to perform ‘Lean Startup Experiment’ to prove and validate if there is demand for such a service.
Lean Startup– Hypothesis
The hypothesis was that there exists good demand for such service in a city like Bangalore. The general public could be offered a service of this sort and we could gauge the level of interest. One of the core fundamentals of ‘Lean Startup’ is not to trust what people say, but validate things by what people do in real life situations. Thus, to verify the hypothesis, we had to take the product to the users in real situations. We made some assumptions on the pricing of the product and our expected profit from. Our aim was to see if the cost of marketing such a service would cover the expected profit for selling a package.
To validate the experiment, we need to reach out to the target audience with an offering. But building a product is extremely time consuming and expensive. Keeping in line with the Lean Startup approach, we just built what was needed to validate the hypothesis. So no actual service or product was built, instead we built a simple website landing page for the mobile and desktop and then advertised to the target audience via Facebook.
As part of the workflow, people could either call us on a number or leave a number so that we could call them back. Essentially, we would talk to the users who were interested in the service and walk them through the imaginary offering (close to reality, with all the details possible). Once they are interested to sign up, they would be told that the service is yet to be fully launched and this is just test marketing phase.
A lead becomes a qualified lead if he/she is willing to avail the service. To test this we went to the last point where people either wanted to get our bank account details or send an executive to pick up advance payments. So the overall effort was to build a landing page, market the concept to the target audience via Facebook and then get the results. In order to have a smooth conversation with the people who signed up, we visited all major restaurants and spoke to their management. Through this, we were able to present and pitch a good sale to see if people finally decided to bite the bait.
Targeted Advertising to promote the Landing Page
One of the real advantages which we had was that, we could do great targeting of ads via Facebook. Essentially the service was a luxury service so we didn’t see a point in advertising in general via Google Ads because we wanted fine control of specific audience. This is where Facebook shines as we are able to fine tune to a great extent. For instance, one of the segment consisted of married men in Bangalore with income higher than 15 lakhs per month. We could not get this data from Facebook but we chose to answer the income question by targeting Iphone 5s users only. Thus one of the segments we chose looked like this-
- Male Age- 29 to 40 years
- Users of Iphone 5 and above (iPhone 5, iPhone 5s, iPhone 5c and iPhone 6)
Note: Experiment was run in Feb, 2015, hence the focus was on iPhone 5 and phones above this range.
We ran the campaign in Bangalore across various segments for about a month. During this period, we executed with Rs 1k as Facebook budget for one day and here are the results.
– Rs 17k on Facebook Advertising
– Got 708 people of the target audience to visit our page and we did manage to speak to around 40 people who left their contact details with us.
– Average cost per click was Rs 24.
– Got 10 confirmed sign-ups (people willing to pay 6K to 10k)
Summary of the Experiment
After spending 1 month and Rs 17k on Facebook advertising, we figured that there is demand for such a service in Bangalore at the lower end of the spectrum of the range we advertised (ranging from 5K to 25k). Most people were willing to spend in the lower spectrum at 6k (some even wanted this at 4k) and a few of them were willing to spend up to 10k, but none were willing to go beyond this. Once the experiment was over, our hypothesis of demand existing for a service was proven, but the budgets at which people were willing to spend for these services were not enough to make economic sense. We realised that it is not possible to hire luxury cars on an hourly basis and we had to pay for the whole day. This meant that more than Rs 5k was to be spent on the car itself, thus making the whole proposal unviable as a business.
But we got more than enough confidence that there exists an unmet need in the city for providing an luxury experience package at a price of 5k to 10k.
Lean Startup is a full fledged approach to refine your product building using a method of iterative development in products to solve user problems. The above is an example of how a startup can use this approach to ratify a business model. It can be used to validate hypothesis in mature businesses too, so the tool and framework are relevant in all businesses.