Alex is one of the world’s leading experts on the subject of business models and business modeling though these days he is focused on building a global software business of his own from his mountain lair in Switzerland.
In this video, Alex explains why he is obsessed with making strategy, innovation and entrepreneurship simple, practical, and applicable and will consider some of the tools that can help you run your business more effectively.
Video and transcript below
Next AMA: Josh Seiden & Jeff Gothelf Wednesday 15 March 2017 at 17.00 GMT.
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So, good morning everybody. And, let me just check, who of you has ever used the Business Model Canvas?
Great. So, quite a few.
We’re going to work with a slightly different tool today so make sure you have the statics, kind of sticky notes that might have fallen off the chair. So, we’re going to work with these later but before I get started, I just want to say that I’m extremely happy to be here and the reason I actually come to Business of Software is to talk to peers who are in the software business and I would like to thank Mark and the team for running a conference where we can come together and actually share our experiences that the problems we face we think we’re alone but we know there are other people that we can come and talk and share right that’s why the dinners are so interesting and the lunches and the brakes so thank you very much I think we should just applause Mark and the team for running such a great conference. [Applause]
So let me get started. This is actually the way I interact with Mark I send stuff on Twitter and say where I’m working and then he tweets back and says it’s raining here. So this is my office in Switzerland, and this is my office in the winter in Switzerland so I like working outside but our software team is actually in Toronto so two of the things that I do one is I consider myself a tool smith and I’m not talking about software tools more conceptual tools about think business and I wrote a book together years ago called Business Model Generation which was very successful but what’s really exciting to see is that a lot of people started using these tools a lot of you know the business model canvas in this talk.
I’m going to give a little more about the philosophy behind these tools and why my team and I are so obsessed by these tools and why we decided to build the software business or start it out from strategizer.com from and where we think this is going because the thing that’s troubling me is that we can send rockets to the moon and beyond and we can build amazing stuff, but we still make million-dollar billion-dollar business decisions based on PowerPoint.
It’s just not acceptable that when it comes to strategy and innovation, we don’t have more sophisticated tools, so I so think that in operations, when it comes to big data and so on, we have a lot of great stuff, when it comes to writing our warehouses or wherever we do we have very sophisticated tools but when it comes to more strategic thinking, shaping our vision, we don’t have very much and I don’t think the tools are very sophisticated and I think that is a shame.
And us in the software business we should change this right just change kind of our vision SAP and other companies change the way we do operations why not have the company that is the SAP of strategy that changes the way we think about big decisions and shape those in a better way. Ok, SAP may not be the best comparison nobody wants SAP but, that kind of thinking so, why do we need business tools anyways that’s what I’m to talk about little bit this talk.
I want you to imagine yourself in an operating theatre. Okay, you going to go through heart surgery pretty dramatic heart can go through heart surgery in the operating theatre and before the whole thing gets started your surgeon comes in and he or she comes in with only one tool. Heart surgery right? That’s the tool you surgeon has. Proud in their hands. How would you feel? It’s swiss, it’s pretty good. It’s good start. [Laughter] If it was a British knife okay maybe. But the point is that in business, I don’t think were even, when it comes to again more strategic thinking were not even at this swiss army knife level.
We use things like SWAT. They’re nice but you can’t make a good decision based on these kind tools.
So, second analogy. Imagine you’re in a business meeting with your smartest people and then the phone rings somebody has a phone ringing. He or she pulls out this phone. Anybody know which phone this is? The first mobile phone. Motorola Dynatak right? Somebody pulls that out in 2014. Nobody would do that. You have to be extremely eccentric to do that but not even then cause it’s probably too heavy to put anywhere right but we have no shame pulling out the tools from that era.
Tools from 1985 to think about our businesses, about the environment in which you make decisions. And, I think that’s not acceptable. Nothing against these tools are taught in business school but they come from a different era, where production is the main thing you did. And today we have more sophisticated choices to make. The world has become pretty complicated right?
So, I like this quote, “our age of anxiety is the result of trying to today’s job with yesterday’s tools”.
When you’re in business, you often face difficult decisions, you have a lot of things going on around you and you don’t know what to do. What we do today is listen to anecdotes we draw from my experience or talk to peers. That’s a great start, but what if we had business tools to leverage that experience. Just like an architect can draw on computer-aided designs why can’t we use those kind of tools in business to make those kind of decisions.
We use our brain and the intelligence of our teams and other people around us but we have tools to shape our decisions so I think it’s time that you do that and back to surgery, if you take surgeons the reason I make it his analogy is that they don’t just have one tool when they go heart surgery or whatever you want that a series of tools that work together and that were made in a very sophisticated process.
A lot of research goes into these tools before they’re made and here’s the big thing, the surgeon, before he or she starts operating on you, is trained for 13 years. 13 years, to manipulate these tools to understand anatomy. Why don’t we understand the anatomy of business? Why don’t we have tools that were trained to use for a long period of time?
Well, the thing is that it’s only becoming a profession today is the idea of strategy innovation to make decisions. I think we’re very good operations very good a lot of tools.
Take software engineering. Everything that’s close to operational stuff with software we have a lot of tools but when it comes to strategy innovations, good decisions, valuable propositions we don’t have these tools, and it’s just not acceptable because we’re talking about a lot of money in many cases right? Or the future of our business for entrepreneurs your business – so that’s why I get excited about tools.
Now let me just draw kind of the context in which and I’m going to continue this little talk and then I get you to do some stuff afterwards. So, let’s just take it entrepreneur who starts with an idea? This is an entrepreneur has an idea, and it could be that you are already have a business but this is an idea of how to improve your business or you’re an existing company with 1500 million euro in in revenues and you’re trying to extend your business right?
So basically you want to go from idea, to this. Now does anyone know what this is? Can you figure it out? What is this? C’mon, I’m disappointed. This is $100 million business can you see that? It’s pretty clear c’mon.
So traditionally, were kind of taught, for those of you who went to some kind of business education MBA business school whatever after doing whatever you did well you know a lot of people were taught to do this business plan and then people are taught to do this. Make up the numbers? Anybody ever written a business plan? It’s a waste of your time.
Because the reality is it’s not that you go from idea, write a business plan and then implement it.
For any of you who have built something some kind of business or business line a business or business line? Does it look linear like that? No way.
Something like this. You progress, you regress, figure out what works and what doesn’t and eventually now in particular with all these methodologies, you kind of figure out what to do. It’s a pretty difficult and painful process to get through from idea to business.
There’s basically two phases here. The first phase is the search for the right valuable position for a customer’s and the right business minds that create value for your business and once you figure that out that’s when you execute right. The problem is we go through execution to quickly just based on a good idea.
What I want to focus on today is how to reshape, how do we shape our ideas and business models here? Well, we need better tools and the one tool that many of you already know if the business mall canvas I just talk easily on that, I want to tell you what I think a good business tool actually is and then we’re going to look at another tool actually a book that were writing right now focusing on but the idea is here to make this process less messy.
And now if you’re an existing business – you have a business product and your value proposition around that well guess what? It’s not going to last forever. You don’t have to improve it and will look like this, or you going to have to do this is my extension if you improve it you can continue this line so we need tools to manage this messy process in a better way.
So let me switch back here, and just stop on the business mall canvas for a second and tell you what kind of what our motivation was behind a small canvas. So what happens when you have the smartest people of the organization the team in a room and you start talking about business models valuable positions, strategies, reinventing your company, what happens?
Very often my team and I included, look something like this. Smart people talking sitting around a table then it starts. We have to reinvent our valuable positions were not competitive enough anymore blah blah blah. Now if you don’t use good tools or shared language, this is what’s going to happen. When we talk about these fuzzy terms like value proposition or business mode. We’re not going to have a good conversation people are going to understand each other then the next person’s turn blah blah blah blah blah blah we don’t have good tools to manage discussion, same thing. We’re not going to understand each other; we’re not going to have good strategic conversations.
And then it goes on, another person has a right to talk. So we talk a lot. Anybody ever been in a meeting like this? Rhetorical question. Do you know how you call this is a specific term for this phenomenon? Yes it’s a meeting just another term.
It’s called blah blah blah.
I think we have a lot of this the land of blah blah blah in our business meetings and when we’re not just talking up operations but were talking about more strategic things or talking about what kind of new products and valuable propositions could we build. What’s the right business model for this idea?
We’re often stuck in the idea blah blah blah. It’s very hard to get out of the blah blah blah it happens to my team and myself as well so we have to be very strict on using tools and processes to not fall into this land of blah blah blah of useless conversations.
So Dan wrote this book. A friend of mine says that any problem can be made clear with a picture. This is something we really experienced with the business model canvas. There’s one aspect that I totally underestimated even when we wrote this first book – a Business Model Generation – we knew it was a visual tool but we didn’t realize that the act of putting up sticky notes on a canvas in a meeting changes the conversation substantially.
Because you get out of the land of blah blah blah you put something on a board if somebody doesn’t agree, hey this is not our customer segment, they we violently oppose. If you’re just in the land of blah blah blah you’ll stay in this fuzzy space where you can hide in fuzziness. There is much less opportunity to hide here. Things become clear you have a conversation you get to a consensus ok, so it really does, a very simple tool that changes the conversation and I believe we can do the same thing for valuable propositions which were going to do together afterword’s I believe it can do the same thing for organizational culture.
Why is that such a fuzzy term? Because we don’t have tools to work on organizational culture. What if we had tools to just do that or pricing or practical which is a big topic for millions right I think we need tools to have these conversations.
Now just a couple words on tools, we started with the business model canvas a couple years ago and it was great to see that a lot of other people try to make tools, but I think it’s actually a profession to be business tool tools smith. It’s not just about throwing a couple of boxes on a piece of paper putting some labels on it and calling it a tool. I think there are business tools and there are great business tools, they have an exceptional user interface and they have an unbelievably good user experience which means you can start to use them in a business meeting almost without explaining it. So it takes a lot of work actually to make good business tools.
And what I’m happy to see is that there are people who are really putting real effort into this so if you’re really interested in this idea organizational culture, go Google culture map and Dave Gray and you’ll find somebody who put effort into making a tool around the idea of business culture right? It’s pretty interesting. So I’ll show you little video why what I mean with the tool that’s well thought through conceptually sound and has a relatively good user interface by giving the you analogy of the theatre to explain the business model canvas so that if you don’t know the model canvas or you forgot you have one in front of you just as a reminder, can you show an intro to that but I’ll show you what I think really works with this particular tool before we go to another one okay.
sp2 By now you probably know the business model canvas pretty well. With nine basic building blocks you can describe any business model in a more tangible holistic way. To better understand the dynamics of the business model canvas we can use the metaphor of the theatre. Imagine the right-hand side of the canvas as the front stage of the business model. Just like the front stage of the theatre that is visible to the audience. The front stage is where you interact with your customers’ clients and users. Like in the theatre, if we go behind the curtains we end up backstage. The backstage of your business model is what makes the show in the front possible but most customers won’t see who’s back here or what they’re doing. The front stage is what represents value to customers’ clients and users and what they’re willing to pay for. The backstage makes it all possible and it drives costs. At the end of the day the equation is pretty simple. A sound business model requires your revenues at least as big as and healthily much bigger than your costs. That outcome is called a profit. Now that you got a handle on the business model theatre, will you be able to put on a show?
Sp 1 K, so the idea here is, that on this tool, you have all the important decisions to describe the blueprint of your strategy. Nine big questions you need to ask. And the way we designed this was really four areas. The value you create, that’s your stage, your theatre if you want, that the customers can see, and that allows you capture value, capture revenues right, this is the front stage. And then on the backstage you have everything that’s required to create the front stage and those are your costs and then the equations is pretty simple while the revenues are bigger than the costs right, but we thought this tool through in a way that you have that profit equation at the bottom. And we built it based on existing knowledge.
We didn’t just throw a couple of pieces on a paper and then called it tool. We try to really stress test it with business people ranging from startups to senior executives so they could really work on their business model. And my hypothesis is this tool actually got some traction because it was visual, allows you to have better conversations, it’s simple, we avoided any kind of buzzwords we even killed some on the way that didn’t work so business people can use it without trying to figure out what is this thing, experiences?
I don’t know what the fuck is an experience. Make it very concrete, resources, activities; value propositions may be a little bit of a buzz word we’ll see how to go into that. We made it very practical. So people can start using it right away. So, I always get this comment that aw, this block missing and that block missing and I think well, should a tool do everything? One tool? No, a tool is for a specific use. You don’t use a screwdriver to hammer a nail into the wall right? Well you don’t use business model canvas to think about your competitive environment. It’s actually not the best tool to think about your value proposition so I believe, in business, we should get to this.
Where we have tools that work together and even more exciting, what if we had APIs between the conceptual tools? So as business people, because if you’re running a business line or business or building a business you are a business person if you consider yourself a coder, then you can make better decisions shape your ideas based on these kind of tools. So I think were at the very beginning of this movement of becoming more professional in business decisions. And it’s very exciting to see that actually the software world is at the forefront of using these kinds of tools. Larger companies are only coming on board now, companies like MasterCard, Procter & Gamble. They’re only systematically doing this now okay.
So let me move to another tool. Who of you has heard of the value proposition canvas? K few of you right? Cause were only writing the book and I should be writing the book now rather than speaking at Business of Software cause it’s not finished and the deadline was last Friday. K but it’s being finished somehow somewhere. So we thought what if we made a tool for value propositions around your product. So, this is the book we’re writing.
It’s actually the back cover so the front cover is good value proposition design, but we thought what if we had a back cover that that would tell you all the things not to do, so we thought let’s create a new tool that allows you to zoom into this part, sketch out your customers and sketch out the value you create for customers and when I say sketch out I mean shape it in a way that the business model canvas allows you to shape with the value you create for you is business what if we had a tool that allows you to shape and explain the value you create for your customers cause the business model canvas does not allow you to do that, k?
One tool is how do I create value for my business, and the tool we’re going to look at now is how am I creating value for my customers? What’s the value proposition which we’re going to look at now, k? And the moment I kind of realize this would be a good idea a good thing to do is when I worked for a company called SCA, while I’m a software entrepreneur, to keep my feet on the ground I do actually run workshops every now and then for companies to kind of figure out what the real problems are. I see that as an anthropologist, I can dive into an organization and understand what are they really struggling with so I do this workshop with SCA Swedish company and they make the second largest producer of tissue paper, toilet paper, and that kind of stuff, but they also make installations for public buildings or big buildings right, soap dispensers and so on. So I did a workshop with them at their European headquarters in Munich, and I saw this team sketching out a business model for these solutions right.
So this was a team working on value propositions for facilities managers. So this is the canvas the said we provide hygiene solutions k, to three customer segments. Users go to the bathroom, facilities managers who run these buildings and resellers who sell the stuff k, to the customer, to these facility managers. So I saw this and I thought… oop, something’s wrong. What’s wrong with this? I saw it from across the room just by the colours of the sticky notes. So I went over and I asked them okay, so you have one value proposition and you have three customer segments. They said yeah can just see it? Hygiene solutions right? So I said, ok, so let me ask you this, take the uses of bathrooms. What are their jobs to be done, what are they try to get done? So they kind of get embarrassed or after they done the business they want to washed her hands they just want to leave as quickly as they can all that kind of stuff so just use the bathroom. K so that’s their job to be done. Well what about the facilities managers. Do they have a different job to be done all of course they have to restock the toilet paper the soap and they want to do that at the lowest cost possible. Okay great. What about the resellers? Do they have to a different job to be done? Did have to address a different task? Well of course all they wanted do is earn money. So you’re telling me that you have three different customer segments with three very different jobs to be done and you’re telling me you’re offering them the same thing? It clicked. I understood what they really would want to do is sketch out the value proposition to the users, the value proposition to the facilities managers, and the valuable propositions to resellers.
If you take a company like Google, same thing. Value propositions to advertisers and value proposition to us users who do search. Well, do we have any tools today that allow us to sketch out our value propositions? So I started researching and no, it really doesn’t exist. Some stuff on value propositions for sure, but no business tool. So our team went out and we thought what if we could build a tool to help us think about valuable propositions?
so do not hesitate to hold it up when I digress into blah blah blah k, so please not now, maybe towards the end. But I’m serious that blah blah blah should not be an option anymore when we talk about important stuff. We should have tools, not just Excel or PowerPoint I mean conceptual tools maybe software based. What are the gains that the customers want? What are the things they want to achieve, the outcomes they want to have just think about the CIO for a moment whether the gains they require desired outcomes benefits desires they want the gains come on give me a couple gains are looking for.
Audience: Go home early on Friday.
Alex: Go home early on Friday. We’re talking about the British CIO’s here, the Canadian ones we have our software team. Bonus right? So that’s a big one, they want their bonus. What else? Recognition, so social and outcomes, and the difference if you want between customers and jobs is that things are trying to get done and here are the outcomes they want to avoid and the outcomes they want to achieve. You want to be ultra-precise. When you say bonus, well ask yourself, what kind of bonus? How much is it? Is it just recognition? Is it being recognized by the boss or is it 10,000, 50,000, 100,000, half a million euro in bonus. Be very precise in terms of outcomes cause the more precise you are, the more you can tailor your value propositions to their jobs pains and gain. So for their pains and gains, be extremely precise because this is how your customers measure success and measure failure K? So, very simple concept, so if we take the CIO, might look like this, so now we ask ourselves well, ok, we now know all the jobs pains and gains, which jobs should we focus on if we’re trying to build some service for them ok. So we take maybe one or two these sticky notes and then we ask a series of questions. So we take this simple tool and we start applying a little bit of soft analytics to it.
First question would be, well if we take these two jobs here, create value for the Corporation design and IT strategy will failing this particular job here lead to extreme pains or does it lead to them missing out on some gains so kind and gives it a ranking, a scoring. Second question, to qualify this job to be done, well can the customers actually feel this pain immediately to some pains are pretty big but if you can’t feel them every day they kind of somewhere in the background. Small tangible pains often get more attention so you rank it higher. Then you ask yourself well are these pains unresolved? Are they unsatisfied pains, are others already doing something there, do you want to probably go into more unsatisfied territory, and then the last one, you ask yourself are there many customers with this job? Many CIOs that have this particular job that we just described here. Or are they very few that are willing to pay a ton of money for you helping them with this particular job to be done?
So you have a very simple tool little more analytical rather than being in the land of blah blah blah and making up what you think is important for them. Now you start sketching out in a structured way.
So what I want you to do now when you look at it together and figure out what the other jobs that might be interesting to focus on what it want you to do now is take if we can distribute the customer profiles so everybody’s going to get a customer profile and the other side of the value proposition canvas that we’ll look at afterwards, and I want you to sketch out individually one of your customers as quickly as you can going to give you six minutes to do so k? In the real world you will probably with your team do this in 40 minutes maybe even with customers in the room or interviewing customers but we’ll try to do it in six minutes I want you to try to put yourself into your customers shoe. Everybody listen for second. You choose one customer. You sketch out their profile so this is how it looks when we do this. This is how it looks at the end. Important thing here is, forget for a moment, forget for a moment what you are offering your customers.
I want you to have things up there like social recognition is an important job for them it’s not necessarily something related to your solution right? Sketch out your customer profile, give you six minutes okay let’s go. You can use a sticky note, use a sticky note. Rule number one, rule number one… can I have one of these? Don’t ever write on these. It’s like the holy cow in India! Why? Because you have these kinds of sticky notes now make sure you take one at a time, these are sticky. They’re, take your feminine side k? And the reason is what you want you sticky notes for studies because when you have several jobs, what’s the first task you can do once you mapped this out, you going to rank them to put the most important job at the top and the least important ones at the bottom. If you write on you thing you can’t move them around anymore so that’s what a business tool is so six minutes to sketch out your customer profile K. As quickly as you can don’t think just brain dump just, brain dump. Try to focus for six minutes fill it out, brain dump as fast as you can all the jobs to be done if you customer, all the pains that are holding you back from doing these jobs and all the gains. Make sure the pains are gains a specific if you if your customers want something to be faster say how much faster? If they want to increase their budget, tell them how much more budget. If they want to decrease the time it takes to sell from customer contact to selling, say how much less time to do they want to spend make the outcome ultra specific otherwise you don’t know how you can create value for them.
Remember go beyond what you have to offer them so don’t just ask yourself pains and gains related to your stuff but ask, look at them in a more general way. What are all the jobs pains and gains of your customers? And you don’t have to talk about them getting divorced at home but just try to expand your vision a little of your customer beyond what you have to offer them. Ideally you would want to do this on a wall with the poster or in a software tool right, so you can reuse the stuff. K, two more minutes. If you’ve never seen a customer, ask yourself how he or she looks like. Can be right? Shouldn’t be like that, could be. One minute to go. Okay, so let’s continue together. So in the real world you take maybe 40 minutes with our team we take 40 minutes do this for a customer.
So you might say well but you know well we might just make this up in a meeting room. Well, your task is obviously then to talk to customers or get your team to talk to customers to verify if every one of these points you put up is actually true and we’ll see how you can test these kind of things with the lean start-up methodologies and customer development and processes out there ok?
So, that’s our starting point and again, this is not something you haven’t thought of but have you ever use the structured central structure tool to have these conversations in a team and to track customers like this. So what we do actually is after every interview we have with potential customers, so we’re breaking into the enterprise market we talked to a lot of people we sketch out the customer profile for each one after each one of these interviews and then we try to see are there similar profiles K. So the next step then is to ask yourself well how you are creating value for this customer.
Now you’re going to describe your value proposition I’m going to get you to do a very simple exercise after, so the three things you want to describe when you’re describing how you creating value for these customers is very simple.
Number one, look at first thing, is you’re simply going to describe okay what products and services, it’s like a show window, what products and services am I offering this particular customer. Bundle of product and services, that’s the easy part, that’s what we all do but here’s the thing. Here’s where it gets interesting. Now you make explicit how your products and services or features if you want, kill a customer pain that should be over here because nobody gives a shit about a feature a product of service if it doesn’t kill a pain or create a gain. Now, you might say well now that’s obvious but can you explicitly point to the pains your products and services kill or to the gains that they create. If you don’t have this kind of map it might be fuzzy so remember yesterday, tall Jeff was talking about turning a founder’s vision or leader’s vision into something that the sales team can sell. Well if you don’t make these things explicit, a product or service or a valuable proposition around a product or service remains fuzzy. Here we’re starting to make it a little more tangible so describe which particular pains your addressing and then describe which particular outcomes up here gains are you helping them achieve.
So is your software helping them decrease the time you know from sales lead to sales? Could be. Well, that’s helping them with a specific gain. Can you prove that you are helping them decrease that time for you know one month, two months? Well, that is only a gain if that is within the measures of the success that your customers are defined. So here you have a very simple map to sketch out your value proposition for the customer segment simple map to sketch out in a tangible way the things you’ve already thought of. If you haven’t thought of this, probably might not want to be in business but you did. Here, I’m just giving you a simple map. But a map that integrates with the larger tool the business model canvas, so you have kind of an API between the two.
So little exercise I want you to do now, I’m going to give you one minute to do so and think of it as a prototype. I want you to ask yourself what’s the next feature I’m going to put in my product. The one feature. And then you describe how that feature is either killing a specific pain that you should have, may be not yet cause you didn’t have a lot of time on your customer profile, or a specific gain that your customers have on their customer profile. So you’re going to give you one minute to prototype one feature. It’s easily feasible right? So, all you do is pick a feature, describe if it kills a pain, if it creates a gain or if it does both. Okay? Let’s go, one minute.
Pick one feature for one of your products or services and make explicit how it kills the pain or how it creates a gain ok? It’s just a little prototype, a little thinking exercise. Didn’t think you’d have to come to work this morning right? Business of Software is hard work. Okay, so pick a feature or product describe at least one pain, may be at least one gain.
Okay, so I hope you got it. Who got everybody get it. Hands up if you were able to sketch that out. Were you able to map it to specific customer gain or customer pain? Great. Ok, so you want to do this specifically for explicitly for all your products right on a larger scale. So, yesterday one on by big learnings was to put this into your PowerPoint [laughter] so I had to put it in there right? You don’t want this to happen…I didn’t think this would work but look at this, now everbody believes me right? [laughter],so this is kind of visual right?
You don’t want this to happen. Now, a lot of entrepreneurs and companies are doing this using these kinds of tools because they want to make stories of value creation explicit. So one of the projects I was working on with MasterCard, they literally say we want our product managers to be able to tell a story of how they’re creating value for customers that we describe here, and how their product managers are creating values for the company. That’s what you do in the business. If these people don’t have tools they will just talk, they won’t have a shared language.
So across the organization now they went through online course they put 500 product managers through this course, they have a shared language to discuss these things. If you’re in a small team, if you’re a founder, this is a way to make your ideas explicit. You know, connecting it to Jeff’s talk yesterday to make things explicit between product development and sales. There shouldn’t be a rift between you and your customers. There shouldn’t a rift, this gap between the product development and sales either right? These are tools that help us become more sophisticated with those kinds of things. So the last thing here is was we can make up whatever customer profile and whatever feature we want. The end of the day what’s on paper doesn’t matter. This is where these tools that I talked about today connect with the whole customer development and lean startup movement is of course you need to test. But yesterday I just I was pretty amazed to see this almost like a little bit of a backlash thing. Well you can’t optimize yourself to the perfect product and I fully agree.
You need a founder’s or leader’s or product manager’s vision. You want to shape that, but then you do want to test those things and were not talking about optimization, we’re just talk about testing. You want to test the things that we put on our canvases right? So if you have a business model canvas or a value proposition canvas, you want to go test. I’ll give you one example. This was our first test, we said we want to become an enterprise software company but will going to start with the simple iPad app ok, so we said let’s make an iPad app we can sketch out business models with the numbers.
One of the hypothesis we had, we asked ourselves, what has to be true for this iPad app to work. This was our little test before building an enterprise software company. So two hypothesis, one was people actually want to sketch out their business plan on an iPad and number two, they would pay $29. This was at a time when people would pay nothing or one dollar right, so pretty bold bet. So, how do we test this hypothesis right? We were just starting out this is when I discovered this movement. We did what everybody did then, you know, landing page, email sign up, and then we asked them would you pay hundred dollars for your, for our app? So we got thousands of people to sign up and then we the got to the question, would you pay hundred dollars, well, 50% said you’re criminals, 30% said I’d never pay hundred dollars but I’d pay 20, 30, 40, 50, 60 so they would give us their highest price and 20% said hey, where can I send you the money to get started please right?
So I showed this to my friend Sal and he said that’s nice, you don’t have data. I’m like what, course we have data. I mean yeah, you have opinions. Did you get them to do a transaction, simulated transaction? You can’t do that you have the App Store. Well, do people know that they can do this on the App Store why don’t you just have a button…so that was the beginning and now we start testing everything when we do new prices of course we test we raise our prices 50%. By testing we knew we took zero risk so you can do this kind of things.
But when we went on, and I’ll finish with this, I want to get you to do this exercise but you can just take it in as the last tool I’m going to present to you. We did a lot of these kinds of tests, but in a broader way. For new things that we were going to build. So we did interviews and did a lot of stuff but it was it didn’t give us the best results. So I talked to people I looked at a lot of blogs and there wasn’t very concrete stuff on how do you really do good testing, the obvious stuff right, AB test and so on, but we just didn’t get the results so I asked myself, could we have a tool, a simple tool to verify each hypothesis so we came up with a test card.
Last concept I’ll annoy you with. We said what if we could take this hypothesis and structure it so we could have these test cards that we would follow throughout the process. So our thinking, our testing would became more structured, so we came up with this card. It’s actually a prototype. We said first thing you want to do is you want to describe what needs to be true for your idea to work so I showed you the two hypotheses for the iPad app. So here we believe that people are interested in using iPad app to sketch out business models K that we believe. There was no app we didn’t know nobody didn’t do anything similar it was completely new, so then you say okay, to verify that, what are we going to do? To verify that we’re going to create a landing page with an email sign up. So you just describe the test you going to do. Then the next step is well, what am I going to measure? So we just apply the whole lean startup principles but in a structured way in a test card that we can follow so again these things become explicit and they’re not something fuzzy that’s just moving around your organization. So we said to verify that we will create a landing page, what we are going to measure the proportion of people who sign up compared to total website visitors.
So, this is very basic test anybody can do. But we started doing this for our customer interviews. We started doing this for stuff we test on LinkedIn to see if one customer segment product managers are more interested in our stuff than for example strategy managers or innovation managers. So we started describing our tests in a structured way so all these things become explicit. What we’re trying to do is to professionalize our strategic thinking. We’re trying to take our ideas and our vision, shape them with tools, and put them into processes to test them, so we can kind of guarantee an outcome.
So the last piece here in this test card is then, we do put a threshold. So what do we think success actually look like it’s always been difficult to say in advance, but if you don’t have anything not ideal so here we said we’re right if over 20% of visitors sign up, we think that would be a success that’s something we can work with, so you need to say what you consider a success for your assumption.
So we started doing this and it puts structure into the testing part of our strategic thinking. I think strategy has this terrible, if you say strategy people get scared they think it’s this big thing. Strategy should be a day job. It should be as operational as managing whatever else you do, because if you’re good at operations, and you do something extremely well that you shouldn’t do, so doing the wrong thing right, are you doing a good job? You don’t want to do the wrong thing right. What strategy helps you do is to figure out what is the right thing to do and then do it right. So you want to play with these kinds of tools not going to get you to write your own test cards, I just ran out of time. So but what you want to do is take these things, ask yourself what’s true, write a test card and go test it. So I believe we should have more structured tools in our strategic conversations that go from paper to software.
I think it’s unacceptable that we make million-dollar billion-dollar decisions based on PowerPoint and made up Excel spreadsheets in a time where we can send rockets all over the place and we can do crazy stuff with software but we accept that our investment decisions are turning our dreams our ideas into reality are not done in a professional way. I think we can do better, and I think the software community in particular is going to help do a better job. I hope you learned something. Thank you very much for your attention. I’ll be sticking around.
Next AMA: Josh Seiden & Jeff Gothelf Wednesday 15 March 2017 at 17.00 GMT.
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