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The library of essays of Proakatemia

What to consider when founding a business

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The Lean Startup deals with the founding of companies in a risky environment. It aids young companies in avoiding common mistakes. The author Eric Ries defines a lean startup as an organisation aiming to create something new in an uncertain situation.

The lean startup method is described as focusing on fast product development as well as reacting to customer feedback. This method shortens the time of actual product development and enables companies to change plans on short notice. Furthermore, companies do not have to rely on creating long term product strategies because the lean startup method makes it easy to test products continuously. This might be counterintuitive for many business founders due to the fact that most businesses rely on long-term planning and only present products once they are highly developed.

Ries goes on to highlight the need of pivots during the product cycle. Pivots question assumptions about a products or service that have been made without data analysis. If a product is not successful right away, adjustments may be necessary. After considering market and customer data, changes may be made to the products, target group or marketing in order to make the product more successful.

The author continues to describe three engines of growth that are a fundamental part of every business. The first engine is called ‘The sticky engine of growth’. It is needed to maintain an established customer base that continuously brings in revenue. The focus is not on attracting new customers but to maintain old customers.

The second engine is called ‘The viral engine of growth’. It uses the established customer base as a marketing tool to attract new customers. The customers base spreads the word about products through word-of-mouth marketing, thus saving the company substantial marketing costs.

The third engine, the so called ‘Paid engine of growth’, is used to reinvest profits made through existing customers to attract new customers. It is important that the new customers bring in more money than the company spent on attracting them. Customer lifetime value is essential to calculate for this engine to be successful.

According to Ries, companies can make use of several engines at the same time, but it is important for them to establish one of the engines early in order to grow and make profits.

The book is a great tool for new startups to minimise risks and establish a successful company. Most of what the book describes makes a lot of sense for a start-up as it minimises the risks. It is helpful to know that products do not need to be perfectly thought out to be successful but that they can be adjusted once they are launched and data can be collected. What I found odd about the engines of growth is the sticky engine, as it does not actually grow a company but maintains an already established customer base. While Ries’ explanation makes sense and it is certainly important to maintain customer relationships, this is not an actual way to grow a business. In my opinion, however, it is linked to the viral engine of growth. This engine relies on word-of-mouth marketing, which is only helpful if the current customers are happy with a product or service.

Overall, this book has been very insightful even though it did not provide anything that has never been heard before. It is important that startups consider  the aspects described by Ries in order to minimise their own risks and sell products as successfully as possible.

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