Lean Startup

Cost Driver

A cost driver is the unit of an activity that causes the change in activity's cost. cost driver is any factor which causes a change in the cost of an activity.

False Positive

A hypothesis is falsifiable when it can be disconfirmed through a decisive experiment.

Customer Value Proposition: Feature Set Pivot

A new venture may pivot to a new customer value proposition by expanding, contracting, or entirely changing its feature set. TiVo, for example, originally intended to sell home media servers; the venture contracted its feature set to focus solely on digital video recording, while still retaining its focus on the home entertainment sector. Chegg changed its feature set entirely while retaining its focus on college students: it pivoted from being a Craigslist-style marketplace for university communities to renting textbooks.

Lean Startup

A new venture that tests business model hypotheses using Minimum Viable Product tests. "Lean" does not necessarily imply "low cost"; rather, it refers to an imperative to "avoid waste."

Viral Coefficient

A quantitative measure of virality. Often calculated as the average number of invitations sent by each existing user times the conversion rate of invitation to new user. The viral coefficient is referred to as the K value.

Customer Value Proposition: Customer Set Pivot

A startup may also pivot to a new customer value proposition by expanding, contracting, or entirely changing its customer set. Zipcar, for example, broadened its target market beyond environmentally conscious young urbanites to include young urban professionals, offering BMWs and similar brands to the latter segment—cars that had little appeal for its initial customers.

Go-To-Market Plan Pivot

A startup may change its main methods for acquiring customers. Dropbox, for example, initially expected to rely on a combination of search engine marketing and distribution by partners such as PC security software vendors. When these methods proved uneconomical and infeasible, respectively, Dropbox shifted to viral marketing.

Cash Flow Formula Pivot

A startup may pivot by changing its monetization approach. Google, for example, initially tried to license its search technology to online portals and other websites before shifting to paid search advertising.

Roadmap

A strategic roadmap is a time-based plan that defines where a business is, where it wants to go, and how to get it there. It is a visual representation that organizes and presents important information related to future plans. Strategic roadmaps are a common approach to planning. They are an effective communication tool for managers, and link strategic initiatives with business plans. Roadmapping acts as a focusing device that marshals efforts toward achieving important goals.

False Positive

A test result that fails to disconfirm a hypothesis that in reality is not valid.

False Negative

A test result that indicates a hypothesis has been disconfirmed when in reality it is valid.

Smoke Test

A test that gauges demand for a product that does not yet exist, for example, a web landing page that describes a planned product/service and invites a page visitor to register to be notified when the product is launched.

Technology and Operations Management Strategy Pivot

An entrepreneur may choose to expand, contract, or shift the scope of activities that are performed internally, rather than externally by partners. For example, Keurig, after abortive efforts to develop the in-house capability to manufacture packaging line equipment and brewers and to develop its own brand of coffee, outsourced all of these activities to partners.

Business Model

An integrated array of distinctive choices specifying a new venture's unique customer value proposition and how it will configure activities to deliver that value and earn sustainable profits. These choices, summarized in Figure 2, can be grouped into four elements that define the new venture's customer value proposition, technology and operations plan, go-to-market strategy, and cash flow formula.

Falsifiability

As with the scientific method, a hypothesis is falsifiable when it can be rejected through a decisive experiment.

Customer Acquisition Cost

Basically, the CAC can be calculated by simply dividing all the costs spent on acquiring more customers (marketing expenses) by the number of customers acquired in the period the money was spent. For example, if a company spent $100 on marketing in a year and acquired 100 customers in the same year, their CAC is $1.00.

Breakeven Capacity Utilization

Capacity is the short-term limit of production that you can produce without a significant additional investment or increase in fixed costs.

Pivot

Changing some business model elements while retaining others; see Appendix E for a typology.

Contribution Margin

Contribution margin is a product's price minus all associated variable costs, resulting in the incremental profit earned for each unit sold. The total contribution margin generated by an entity represents the total earnings available to pay for fixed expenses and to generate a profit.

Demand Generation

Demand generation is the focus of targeted marketing programs to drive awareness and interest in a company's products and/or services.

A/B testing

Divides a set of similar prospects or customers into a control group that experiences a status quo product and a treatment group that experiences a product with at least one modified element. Used to determine whether modifications yield statistically significant performance improvements.

Constrained Functionality

IMVU, a startup whose users socialize in a 3D virtual world, tested its concept with an MVP that constrained functionality. IMVU's team did not initially provide early adopters with the ability to have their avatars walk from place to place, which would have required extensive programming. Instead, they tested an MVP that permitted instantaneous "teleporting" between locations—an easier programming task. This allowed the team to more quickly test demand for what they perceived to be IMVU's core functionality: social communications.

First-mover Advantage

In marketing strategy, first-mover advantage, or FMA, is the advantage gained by the initial ("first-moving") significant occupant of a market segment. It may be also referred to as Technological Leadership. A market participant has first-mover advantage if it is the first entrant and gains a competitive advantage through control of resources. With this advantage, first-movers can be rewarded with huge profit margins and a monopoly-like status.

Customer Lifetime Value

In marketing, customer lifetime value (CLV or often CLTV), lifetime customer value (LCV), or life-time value (LTV) is a prediction of the net profit attributed to the entire future relationship with a customer.

Product Bundling

In marketing, product bundling is offering several products for sale as one combined product.

Economies of Scale

In microeconomics, economies of scale are the cost advantages that enterprises obtain due to size, output, or scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output.

Product-market Fit

Occurs when the venture has the right product for the market: one with demonstrated demand from early adopters and with solid profit potential. Lean startups do not commence scaling until they achieve product-market fit.

Penetration Pricing

Penetration pricing is a pricing strategy where the price of a product is initially set low to rapidly reach a wide fraction of the market and initiate word of mouth. The strategy works on the expectation that customers will switch to the new brand because of the lower price.

Price Discrimination

Price discrimination is a microeconomic pricing strategy where identical or largely similar goods or services are transacted at different prices by the same provider in different markets.

Price Skimming

Price skimming is a pricing strategy in which a marketer sets a relatively high price for a product or service at first, then lowers the price over time. It is a temporal version of price discrimination/yield management.

Product Differentiation

Product differentiation is a marketing process that showcases the differences between products. Differentiation looks to make a product more attractive by contrasting its unique qualities with other competing products.

Conversion Funnel

Represents a multi-step process through which prospects may eventually be converted into loyal customers. The process resembles a funnel in the sense that fractions of prospects/customers fail to pass through each sequential step.

Switching Costs

Switching costs are the costs that a consumer incurs as a result of changing brands, suppliers or products. Although most prevalent switching costs are monetary in nature, there are also psychological, effort- and time-based switching costs.

Second-mover/Late-mover Advantage

The "second mover advantage" is the advantage a company gets from following others in to a market or mimicking an existing product. Being a first mover is often attractive to entrepreneurs and investors because of the upside potential and ability to capture and sustain market share.

Network Effect

The network effect is a phenomenon whereby a good or service becomes more valuable when more people use it. The internet is a good example. Initially, there were few users of the internet, and it was of relatively little value to anyone outside of the military and a few research scientists.

Sales Volume

The quantity or number of goods sold or services sold in the normal operations of a company in a specified period.

Minimum Viable Product

The smallest set of activities needed to rigorously disprove a hypothesis.

Constrained Operations

The technology used to deliver the MVP's functionality is often temporary and makeshift relative to the operational capabilities required for scaling. For example, when they were investigating demand for an online social question-and-answer service, Aardvark's founders relied on human operators rather than computer algorithms to identify individuals in a user's social network best able to answer questions.

Total Addressable Market

Total addressable market (TAM), also called total available market, is a term that is typically used to reference the revenue opportunity available for a product or service. TAM helps to prioritize business opportunities by serving as a quick metric of the underlying potential of a given opportunity.

Cohort Analysis

Tracks trends in performance metrics (e.g., customer retention rates) using sets of customers who were acquired during successive periods of time, typically via the same marketing method.