Disciplined entrepreneurship is one of the best books I read lately. I recommend this to everyone who has slightest interest in entrepreneurship or product management. This book provides a framework that entrepreneurs and product managers can follow when launching new businesses and products.
What does it take to be an entrepreneur? What traits do they have? Are they born with some special gene that makes them different? What are the steps involved in starting up a company?
Bill Aulet, the author, answers these questions succinctly and provides a systematic approach for entrepreneurs embarking on their journey.
In this article, I would like to summarize the lessons learnt from this book.
Types of entrepreneurship
There are two types of entrepreneurship.
- Small and Medium Enterprise entrepreneurship — These types of businesses mostly cater to local markets. Innovation is not necessary to start such businesses. Typically, family managed businesses fall into this category. They grow linearly and generally do not need VC money.
- Innovation Driven Enterprise (IDE) entrepreneurship — These businesses cater to global/regional markets and are based on some sort of innovation. They focus on growth even at the cost of losing control. They generally start off by losing money, but if successful, they will have exponential growth.
What is Innovation?
Bill defines Innovation as a product of Invention and Commercialization.
Innovation = Invention * Commercialization
He says, entrepreneurs are not expected to create invention, it can come from elsewhere. But, they need to have the capability to commercialize inventions.
Invention is an important component but without commercialization of Invention, it cannot be termed as Innovation.
Google’s ad word based advertisement business model was originally invented by a company named Overture, but Google was the first to successfully commercialize it.
He lays out a 24 step process to create a sustainable innovation-based business. These 24 steps , divided into six broad themes, are listed below
Who is your customer?
To get started, discover a customer pain point that can be solved with an idea/product. Customer pain point is a problem that bothers them enough that they would be willing to pay for your solution.
Start by exploring opportunities in multiple markets and then narrow down to a single beachhead market.
Conduct primary market research on potential markets. Findings from the research will help you choose a beachhead market. Bill emphasizes the importance of doing primary market research and says that there is no substitute for it. If there is a market research report out there, then, he says, it is very late to enter that market.
Beachhead market has to be selected after evaluating target customers spending power, willingness to purchase the product, intensity of competition, company’s capabilities, scalability potential etc.,
Beachhead market has to be segmented until the market satisfies the following conditions:
- Customers within the market all buy similar products and they expect products to provide value in similar ways
- Sales cycle is similar and the tactics to acquire customers are not different
- There is word-of-mouth between the customers, or the customers serve as strong references for one another
A common mistake that entrepreneurs make during this phase is to have a loose definition of target customers. Catering to a broad segment leads to a mediocre product that does not satisfy anyone. Instead**, focus on a carefully defined narrow customer segment and dominate that segment in a shorter time with your product.**
After selecting the beachhead market, chalk out a customer persona. This should include needs, behaviors, motivations of the customer and most importantly purchasing priorities. This helps in creating a shared understanding of the customer and guides the company to take business decisions in line with customers interests.
The next step is to calculate the Total Addressable Market (TAM) for the beachhead market.
TAM is the annual revenue generated from all the customers in the beachhead market (assuming you achieve 100% market share). It can be arrived at by multiplying the total number of customers in the beachhead market and the revenue per customer. The goal is to have a big enough TAM so you can get healthy, positive cash flows. It is good to have an idea about the compounded annual growth rate (CAGR) of TAM.
Once the beachhead market is served with a superior product, that generates enough money to expand to adjacent markets.
What can you do for your customer?
Build a full life cycle use case for the customer describing how the product fits into customer’s life. Important questions to be answered when building a full life cycle use case are:
- How will the customer determine the need for your product?
- How will the customer find out about your product?
- How will he acquire your product?
- How will he use the product, perceive value and receive support ?
- How will he pay for the product?
- How will he spread awareness about the product?
- What are the barriers for adoption?
Next, create a high-level visual specification for your product. This helps gain consensus about the product and remove any misunderstandings. It is by no means final, it acts as a baseline on which the team can iterate and refine. Create a summary/brochure by listing out features of the product and their benefits.
Quantify the value the customers get from your product. Value generally falls into better, cheaper, faster categories. It can be quantified by comparing the as-is and to-be states.
Ensure the value proposition of the product is in line with the customers top purchasing priorities.
At this point of time, you have to connect with top 10 customers in your beachhead market and validate the assumptions you have made, be it with respect to purchasing priorities, needs, value proposition etc.,
Analyze and figure out how you would be able to deliver the product/solution better than anyone else. This could be cost, customer service, engineering, user experience, sales strategy etc., This is something you have capability for/can invest in to differentiate from competitors. This is your moat, your core and cannot be replicated easily. This is your best bet against competition. However, this is not the reason your customers buy from you, it only helps you build a better competitive position.
Competitive positioning is how customers perceive your product in their minds w.r.t the competition. In a positioning chart, you will show how well you fulfil customers top purchasing priorities versus your competition.
The axes for competitive positioning chart have to be customers top purchasing priorities.
How does your customer acquire your product?
To successfully sell the product to the customer, you need to understand who makes the purchase decision and who influences the decision.
Key questions to be answered in this phase are:
- What are the different stages customer goes through before he decides to purchase your product? Example— Awareness, Interest, Desire and Action.
- Who are the key players involved in each phase?
- How can they be reached out to and influenced?
- How long does the customer take to go through each phase?
- What does it cost to acquire the customer?
- What are the hidden barriers that limit your ability to sell the product and get paid?
This phase includes all the activities you undertake to Go-to-market (GTM).
To improve the effectiveness of this phase, stay focused on the beachhead market and don’t get distracted by prospects outside the target market. This will improve word of mouth,quality of leads and conversion rates.
How do you make money off your product?
A business model is a framework by which you capture some portion of the value your product creates for your customers. While business model is about how you plan to charge your customers, pricing is how much you charge them. Choice of business model has a direct impact on your profitability.
When pricing your products, following points have to considered
- It is better to price the product based on the value the product creates than on the cost of the product
- Understand the customer’s willingness to pay
- Understand the prices of customer’s alternatives
- Different types of customers pay different prices; Technology enthusiasts are willing to pay higher prices to get instant access to the products. Early adopters are price inelastic. Capturing early majority helps the company scale and the pricing strategy has to be planned and laid out keeping them in mind
Calculate the unit economics to understand how profitable your business will be in the beachhead market.
In order to do this, you have to estimate the Lifetime Value of the Customer (LTV) and the Cost of Customer Acquisition(CAC).
LTV is the net present value of profits per customer discounted with cost of capital, generally calculated for five years. Beyond five year period, the compounded cost of capital negates the profits. Key inputs to calculate LTV are – revenue, gross margin, retention rate, cost of capital.
LTV in itself will not tell about the attractiveness of the business. It has to be considered along with CAC. Rule of thumb for SaaS businesses is an LTV to CAC ratio of 3:1.
CAC is the total sales and marketing expenses your company incurs to acquire customers divided by the number of new customers acquired. This should also include the expenses that you incur to reach out to people who didn’t turn out to be your customers. If a portion of expenses are dedicated to retaining customers, that amount has to be deducted from the total sales and marketing expenses.
Typically, in early stages of the company, CAC will be higher than LTV, you lose money with every new customer you acquire. For sustainable businesses, CAC gradually decreases over time until it is substantially less than LTV.
How do you design and build your product?
Before you actually get to building the product, list out key assumptions and quickly design empirical tests to validate them. These tests could be completed by speaking to a couple of customers or by doing some secondary market research.
Bill says that the MVP definition from lean startup methodology is limited to specific product features to test assumptions about a new business idea. He introduces the concept of Minimum Viable Business Product (MVBP) that satisfies the following conditions.
- Customers gets value from the product
- Customers pay for the product
- The product is good enough to start the customer feedback loop
MVBP combines all the key assumptions into an integrated product that can be sold.
MVBP lets you test the most important assumption – that the customer is willing to pay for your product.
Take the MVBP to your customers and see if they actually use and pay for your product. Measure the adoption, engagement and revenues.
Once you receive traction with your MVBP, then prepare a full fledged product plan by including features beyond the minimum set.
How can you scale your business?
While maintaining focus on the beachhead market, it is important to think about what markets that can be captured next and what their size is.
A company can scale in two ways — by selling additional products to the same set of customers or by looking at adjacent markets that can be targeted with same basic product.
While the first approach of selling additional products to the same customers helps you leverage existing investments, a key question to ponder over is whether the company’s capabilities are suited to develop these products.
The second approach, often taken by many startups, requires you to tweak product features, pricing, marketing communications or packaging but it is in line with your capabilities and expertise.
After identifying the follow-on markets, calculate the TAM of follow-on markets. This exercise helps you understand the long term business potential of your product.
Success in follow-on markets happens only after winning the beachhead market.