The Lean Business Model Explained

In the world of business, it’s no secret that minimizing wasteful expenses can forge a surefire path to success. Although many business models tackle this dilemma in different ways, one of the most efficient strategies is the lean business model.

What is the Lean Business Model?

The lean business model describes a business philosophy centering around the idea of minimizing waste to maximize profit and efficiency. Where other business models differ in their approach to improving profitability, the lean business model strips business processes down to bare essentials. Leaving little to no room for unnecessary tinkering.

Key Components

Multiple factors require consideration in order for the lean business model to be executed properly. Each step of the process in your business, from design to manufacturing to marketing and eventually to the actual transaction, should ideally be as condensed and simplified as possible, not only for you but also for your customers.

Minimum Viable Product (MVP)

One of the first and most important steps in the process of developing a lean business model includes designing and creating what is called a minimum viable product, or an MVP.

The core philosophy behind this business model is to spend the least possible amount of investment while maximizing the return. That investment doesn’t always have to be money, either – other resources such as labor, time, and real estate also play an important role.

One way to minimize investment, especially early on in the startup process when the risk is highest, is to develop an MVP. An MVP is a simplistic, prototype-esque version of the product you intend to sell. An MVP should be the version of your product that is the least polished and requires the least amount of money, time, and labor to produce.

Designing an MVP is critical, particularly in the early stages of a startup. Often during this phase, important information is revealed through public feedback. For example, if your MVP turns out to be unpopular with one group but surprisingly well-liked among another, you can use that information to pivot. This puts you in a position of receiving valuable input from consumers. Also, you’ve only sunk a minimal investment.

It’s important to remember that your MVP isn’t going to be perfect. This product is meant to be flawed so that it starts a dialogue between you and the consumer. If you feel slightly embarrassed showing it to people, you’re probably on the right track.

The Learn, Build, Measure Cycle

As your MVP receives feedback from consumers, you can use that data to improve upon the initial product behind the scenes. At this stage of the lean business model, your focus should be to improve the product as much as possible. This is so that you successfully resolve a customer’s need while enduring minimal expenses.

This is where the“Learn, Build, Measure” cycle comes into play. This refers to the cyclical process through which you internalize information about your product, use that information to try something new, and test it with the general public.

It sounds simple on paper. But putting it to practice is a little more complicated. First and foremost, you have to be open-minded enough to hear out customer complaints, not just praises. The world of business is cutthroat, and if you refuse to accept external opinions about your ideas, you’re going to go nowhere.

This cycle operates in a way that one step cannot be successfully completed without the others. For example, let’s say you design and display an MVP that performs poorly due to not being portable enough for consumers. If you didn’t know that previously, you could have sunk a much higher investment into a product that lacks something your target audience prioritizes. Yikes.

Importance of the Build Step

However, that knowledge is also useless on its own. Once you know why your MVP fails to impress, you have to take the time to improve it. This is where the Build step comes into play. This step takes the longest and requires the most patience. You might encounter this step over and over as you work on the MVP.

Each time you encounter the “Build” step of the cycle, you want to add quality to the MVP in some way. All without breaking the bank. Product development can take months or even years, so be prepared for lots of tinkering. After each Build improvement, you reintroduce the MVP to the public to gauge their response. Once the MVP performs well consistently, you can finalize your product.

The lean business model tends to be very forgiving during the product development phase. This is because, at each turn, you’re only investing in the product the bare minimum required to bring customers what they want. This saves a lot of small businesses from creating an endless black hole of expenses before they’ve even turned a profit.

Understanding Value

In the lean business model, your focus as an entrepreneur should be to trim the fat wherever possible and slim down business processes. Ideally, you should not be investing in anything that doesn’t create value for your business. In this business model, there are 3 types of value that your efforts can create.

Validated Learning

One form of value is validated learning. Validated learning happens when you receive input about your MVP, implement it into a second design, and the results are an improvement between your product and the consumer. Going back to the example from earlier, if you redesigned your MVP to make it portable and thus more accessible to customers, you might see a spike in interest.

Validated learning is considered valuable and not a waste of investment. This is because without having gone through that process, your product would not have reached its higher potential. And thus, wouldn’t succeed. Remember that negative feedback does not mean your product is a failure! Instead, it creates an opportunity for improvement.

Customer Value

Another type of value in this business model is Customer Value. This refers to the benefit that your investment brings directly to the customer’s experience. If you invest in the addition of a mobile app, for example, you’re adding value to the checkout experience by making it simpler. Customer Value is important because consumers recognize these efforts and respond to convenience.

Customer Value investments should accomplish at least one of the following:

• Adds something to the MVP that customers desire
• Contain something that customers are willing to pay for
• Give a competitive advantage
• Improves customer engagement/generates leads
• Makes the MVP more appealing to customers
• Increases the chances of returning customers

Business Value

Business Value refers to investments that contribute to the streamlining of business processes. In some cases, these investments and expenses are mandatory by legal regulation. Other times, these costs can be chalked up to keeping staff well compensated, affording necessary machinery, and so on.

Business Value investments should accomplish at least one of the following:

• Adheres to a legal mandate or regulation
• Reduces risk for the company
• Plays an irreplaceable role in the production

Minimizing Waste

Anything beyond what is considered “value” in the lean business model falls into another category: waste. Waste refers to any investment which produces little to no return or is not mandatory for the business processes to take place. In the lean business model, waste is where you want to cut corners because your MVP can still thrive without these extra expenses piling up around it.

Ultimately, you’re responsible for deciding whether something is absolutely necessary. Remember that wasted investments don’t exclusively refer to money, either. It can also indicate a waste of time or labor as well.

Here are some things often considered to be waste in the lean business model:

• Shipping/Delivery
• Waiting (losing time)
• Unused facility space
• Part-time workers
• Overproduction
• Mistakes

Benefits

There are many benefits to using the lean business model. With the rate at which modern technology continues to evolve, it’s becoming more and more important to stay on top of changes in customer demands. Through the lean business model, you’re putting customers’ needs and opinions at the center of your empire. If your product performs well and you stay on top of feedback, you can go far.

This business model also appeals uniquely to startups that rely on no or minimal funding at their disposal. Through these tactics, almost anyone can jump into the world of entrepreneurship so long as they strategize and respond to customer input.

Challenges

The lean business model isn’t for those who can’t handle the heat. If you’re stubborn or naturally resistant to criticism, this business model won’t be a good fit. You need to be willing to constantly adapt and grow in order to fully take advantage of everything this business strategy has to offer.

Additionally, there is a lot of trial and error involved in this process. You have to be resilient and persistent in the face of what may be months or years of pushback. If you pursue this business model with very little capital, you can also expect the product development phase to last a lot longer. This is because you’ll need to be meticulous about where you’re investing at every turn.

Conclusion

Although it’s not for everybody, the lean business model has a lot to offer. Especially, for the most determined and flexible of entrepreneurs. It provides an excellent, low-risk opportunity to make the most of a product before committing to a finalized design. If you can handle the pressure and you’re dead set on your dream, this business model might be perfect for you.