The Lean Canvas has swept the startup and general business world off their feet. The Lean Canvas is an articulation of the Lean Method which is inspired by Toyota’s manufacturing practices in the 60s. Its a more simple and practical version of the business model canvas. But what is the Lean Method and how can it help you bring your ideas to life?
Most companies start by looking for or constructing a business plan which they will then execute. Steve Blank, a seminal thinker and outspoken advocate of Lean Methodology, coins this as «Fallacy of a Perfect Business Plan». A business plan’s main problem is that it is static, inflexible and company-centric. Instead, Lean startups root themselves in customer input. They view their ideas as a series of untested hypotheses about what solution the customer wants to a specific problem or set of problems.
Core Principles
At the core of the Lean Method lies the Minimum Viable Product (MVP). This is not the final product nor is it the perfect product. Instead, it is the most efficient provision of your lean startup's Value Proposition to your Customer Segment. Your first goal as an entrepreneur is not perfection but failure in order to launch a cycle of continuous improvement that is rooted in customer-based learning. Feeling lost? Don't worry! This guide maps out all the core terms and concepts below.
The method behind the Lean Canvas is a research-intensive one. It’s a three-part cycle (Build, Measure, Learn) that in essence never ceases. Your ethos should be constant creation of value for the customer. The Lean Method eliminates superfluous content, resources, energy and focuses on perfecting the value creation process and streamlining it. It’s a knowledge-based growth strategy focused on bespoke customer solutions. Everything is and should be optimized to create a maximum value proposition within a minimum viable product. Your focus should be adapting to your audience. Let their tastes and needs inspire your product development and aid the articulation of your growth strategy.
As an entrepreneur and future leader, your function is to provide a goal. Define your ambition and trust in your employees and the information you’ll gain from your customers to achieve it.
Customer Segments
A customer segment (CS) is a group of prospective customers that share similar needs and buying characteristics. This means that your product will simultaneously be the best product for your whole segment while requiring a single marketing strategy to get them to adopt it. Customer segmentation is the foundation of a successful go-to-market strategy as it gives you the insight and the knowledge to fully adapt your product to your market before having launched it. This is crucial help for later on and the main reason why it's the first step on the Lean Canvas.
Customer segments are traditionally composed of three elements: target customers, ideal customers, and early adopters. While early adopters and ideal customers can be seen as subcategories of the overall target market, they are slightly different and deserve to be treated and defined as such. Your ideal customer is the ideal, often unrealistic, portrait you have of who is buying your product. Early adopters, on the other hand, are the people most likely to adopt your product from the get-go. Good customer segmentation ensures that your target audience includes both the people you want to be talking to (ideal customer) and the people who will want to listen (early adopters).
As a future entrepreneur, you have the competitive advantage of not having to adapt to an existing segment. On the other hand, you still need to identify a selection of customers that will form your niche market. By getting to know your target segment, you’ll be able to not only become the solution they need, but also shape their future desires.
Filling in the Lean Canvas
Now to the hard part: how do you segment a market? The first step is to look at your competitors. And if you don’t know who your competitors are yet, find out who you’ll be running up against. If you think about your competition, you’ve already defined in part your customer segments. Naturally, your target audience includes that of your competition.
Differentiate your customers from your user. For example, Facebook’s customers are advertising agencies and businesses while for the most part, its users are regular people. Your customer can be your user but doesn’t have to be. This customer/user dichotomy is also expressed through the customer/consumer difference: your user are your consumers and they don't necessarily have to be your customers.
The next step is to be as precise as you possibly can on the Lean Canvas. Your customer segment cannot be vague as it is the lifeline around which you will orchestrate and build your product. A vague segment leads to vague metrics and impedes the Measure and Build steps of the Lean Method.
Here are questions you should use as guides when filling in the Lean Canvas:
- Who you want to represent your brand?
- What face and/or lifestyle would you ideally love to see associated with you and your idea?
- What kind of lifestyle will your customers have? (early adopters)
- What context does your CS use your competitors in? Will you be in the same context?
- What motivates them to use your product? What do you want their motivation to be?
- Who is more likely to be open to a new solution and how will they go about adopting it?
Real World Example: Facebook
Facebook’s initial customer segment was Harvard College students who wanted to know who was in their class and who people were on campus. Facebook now has dozens of customer segments.
Problems
The problem box of the Lean Canvas is pretty easy to fill in and goes hand in hand with your customer segmentation. Identify the top 3 problems your customers need to solve today. Once that’s done, think about any alternatives your CS uses to solve these problems. This helps you identify indirect competitors you might not have seen as competition in the previous step. It also gives you hints about the scope of issues your product will have to resolve.
Filling in the Lean Canvas
Here you should take your major step: engage with your potential audience. Look at social media, find out where they communicate their frustration. Ask around. You need to interact with your customer segment to not only understand their wants but also their frustrations.
Here are questions you should use as guides when filling in the Lean Canvas:
- What do they not like about the existing competitors?
- Why would they choose a slightly inconvenient alternative in addition to what is out there?
- How can you apply the criticism you’ve collected to your service or product?
- Are the problems limited to a specific time and/or context?
Use the Keyword Magic Tool, to search for specific question-based keywords that allow you to find the questions that your target audience is searching for. In addition, the competitive research toolkit provides you with multiple tools that can help determine which existing alternatives are a threat to your business.
Real World Example: Facebook
Expanding on the previously mentioned Facebook example, some problems users faced were: privacy, honesty and authenticity. Most Facebook users stopped considering its use to be an authentic or even beneficial experience for them. Fewer users mean a less valuable product Facebook can sell to its customers (advertising agencies and businesses). This problem has been solved by platforms such as Snapchat or Vero: a subscription-based app which focuses on the user’s desire to connect over selling user data.
Solutions
The Solution step of the Lean Canvas is as simple as its counterpart. Just outline a solution to each problem you’ve identified. These solutions shouldn’t be biased or focused on how your product will resolve the aforementioned issues. Instead, they should be objective solutions to a customer problem. Your solutions can be hypotheses instead of definite opinions, but again, they must aim to solve the problems of your CS.
Filling in the Lean Canvas
This can a step where you do a lot of research, go out and interview the CS. It can also be very detached from in-field interrogation. Regardless of the approach you take, focus on the individual problems you are set to resolve. Think about the context in which they arise and how a possible solution adapts, modifies or interacts with that context.
Here are questions you should use as guides when filling in the Lean Canvas:
- How do the solutions fit with your CS’ motivations to find alternatives?
- How do they resolve their need to search for an alternative?
Real World Example: Vero
The solution to the problem of lack of privacy on Facebook due to excessive marketing and ads is to no longer have ads. Vero adopted that solution and centered its business model around it.
Revenue
Here comes the hard part: deciding how you’re going to make money. Most modern startups are confronted with the complex challenge of selling people a product they don’t need, probably don’t want and definitely don’t have the desire to pay for. The abundance of new technology, gadgets and innovations has led to the unfair expectation that everything is or will be free. Your pricing strategy can be decisive in the long-run and can determine the longevity of your company.
Filling in the Lean Canvas
Before thinking about a specific business model, keep in mind that the way you define your revenue stream needs to be fully integrated with your customer’s needs. By adapting your revenue stream to your customer segment, you create a symbiotic relationship between their needs and your growth. Your business model should be sustainable. You don’t need a concrete conception of what your costs will be to envision a model that generates growth instead of relying on generated growth. It should also be scalable. As growth both implies and necessitates expansion, choose a model that is best suited to that eventual expansion. If you’re planning on expanding your CS: what model is more likely to convert more users as well as retaining them? If you’re planning on expanding the scope of your solutions: what model covers this repertoire extension?
Scalability, adaptability and sustainability are key in maintaining a healthy startup. On that topic, keep the Build, Measure, Learn process in mind at all times.
With this in mind, here are 5 popular business models:
- Free product with ad-based revenue
- Freemium content
- Traditionally priced product
- Subscription-based product
- Percentage of transaction
Here are questions you should use as guides when filling in the Lean Canvas:
- How does this method of gaining revenue allow you to improve in the future?
- How can you measure that improvement and its effectiveness (Key Metrics)?
- Do you have room to learn with this model?
- How does filling in the revenue slot relate to and affect other areas of your Lean Canvas?
Real World Examples
Free with ad-based revenue: Facebook
Most social media and news outlets follow this model. A potential problem is that the user-base needs to be substantial before advertisers will even consider signing up.
Freemium content: Vimeo, Tinder, Box
The freemium model is one where access to the basic functions of your product is free and premium or bonus content is available for an additional fee. A good portion of apps and games have this model. Candy Crush’s virtual rewards are a version of this. Think Tinder, Vimeo, Box, iCloud and the list goes on... The freemium model is great for getting users to join your product (i.e. acquisition), but might be expensive in the long run if you aren’t able to convert users to the premium offer. It also tends to lengthen the learning cycles as you can only collect valuable data from paying customers and not free users.
Traditionally-priced product: Sketch
You ascribe a certain value to your product which can be evaluated according to market value, based on your costs, based on the future value on your product... Think anything from a phone to Sketch. Sketch is an interesting example, since contrarily to most design software it doesn’t come in the form of a subscription service but rather a fixed license fee. Once your license expires, you get to keep the product but no longer have access to any upgrades. Sketch is the perfect hybrid between traditional pricing, freemium pricing and a subscription-based service.
Subscription-based product: Netflix
This model has become increasingly popular and has Netflix as the public face of its success. It can be an easy and reliable way to cover costs. The trouble lies in determining the base price for your subscription and aligning it with what consumers are willing to pay.
Percentage of transaction: Paypal, Amazon etc.
If your service provides access to another service or is a middleman for another transaction, taking a percentage of what is exchanged or charging a fee for that exchange is an option. Most e-commerce platforms follow this model. Think Paypal, Amazon or Airbnb.
Unique Value Proposition
Finally, you get to put your product/service at the center of things. The Unique Value Proposition (UVP) is at the center of the Lean Canvas because it’s the most important step and the hardest to do properly. It is, in essence, your core message: why people should bother buying your product and what differentiates it from the rest? It can be seen almost as your philosophy or ethos: A concise statement explaining why your product is different and how it’s a solution to your customer’s problems. Defining your UVP is your first step to articulating a working marketing strategy.
Filling in the Lean Canvas
Start by reflecting on what you’re offering your consumers. Combine the data you’ve collected on alternative methods, problems and solutions, and find a way to integrate that data with your mission. Your UVP should be able to turn a random person into an avid consumer by revealing a problem with their status quo through the provision of its solution.
Try coming up with an analogy regarding how you are disrupting the industry. Here’s an example: Depop is Ebay for vintage and second-hand clothing.
Here are questions you should use as guides when filling in the Lean Canvas:
- What type of added value are you providing and why is that enough for people to switch to your product or service?
- Are you an innovator or an improver?
- How does this solution fit into the customer’s needs, the target market and larger scheme of things?
Keep in mind that these answers don’t need to be fixed. They’ll adapt with each cycle of the lean startup process until you’re able to whittle down your UVP into a fully differentiating novel phrase. Again growth and adaptation should be in the back of your mind. Your UVP should be scalable.
Real World Example: Slack
Slack’s UVP can be defined as "Be More Productive at Work with Less Effort".
It’s simple, summarizes their services pretty well and gives a clue as to who they’re speaking to and what their CS is like.
Channels
Your channels are the ways in which you will reach your customer segments in order to communicate your value proposition. It gives you exposure and allows your consumer to evaluate the UVP offered. There is a distinction between inbound and outbound channels: the former is a ‘pull’ channel that favors organic growth while the latter is a ‘push’ channel which actively reaches out to customers to push them towards your product. Channels typically lead your customer through 5 different phases: awareness, evaluation, purchase, delivery and after-sales.
There are two channel meta-strategies: B2B(2C) and B2C, also known as indirect and direct channels. While you may be familiar with the difference between B2B and B2C when applied to marketing, in this context, it refers to the way you've chosen to reach your end consumer. A key difference to keep in mind is that while a customer is a buyer of goods, a consumer is a user of goods. In a traditional B2B model, your customer is your consumer, as the buyer of goods also uses them. With B2B2C, you choose to reach your consumers through channels other than your own, notably by providing services to another company who will in turn interact with your customer segment. On the other hand, B2C means you’re communicating through your own channels.
Awareness
The awareness phase is the best known: it’s marketing and advertising, how you educate customers about your VP and the services behind it, in addition to presenting yourself as a potential solution to their problem.
Evaluation
Evaluation is how you allow your potential customers to evaluate your product, test it, and compare it to other existing solutions. You should present enough information to naturally cull your CS from prospective clients. They key to a healthy business-CS transaction is mutuality; the more you fit with your CS the easier customers are to retain.
Purchase
How do your customers purchase the product or service? Where and how do you realize your sales?
Delivery
Delivery is how the product is delivered to the customer and value proposition fulfilled.
After Sales
This the customer support phase. Where will your customers go for help? It’s also where you create support for your product as well as another channel: old customers.
Filling in the Lean Canvas
Think of it in terms of the journey the customer will take in order to hear about and eventually use your product. How do you make it the easiest, most accessible and engaging experience ever? You want channels that are efficient in getting word around but also agile. This means that they can adapt to future changes you’ll make when refining your business strategy.
Here are questions you should use as guides when filling in the Lean Canvas:
- What channels combine efficiency with the best learning experience?
- Can you easily measure data and determine your key metrics?
- How does your CS want to be reached?
- How do you want to reach them?
- What channels fit best into the context of the use of your product and your customer segment’s overall lifestyle?
- What channels are both cost and learning efficient?
Real World Example: Netflix
Let’s analyze Netflix’s channel strategies.
Awareness
Web, Word of mouth, posters, trailers
Evaluation
Review page on app store, review/FAQ section on web-page, surveys, free trial to test the service before subscribing
Purchase
Included in the platform, on the website and in its app
Delivery
Website and mobile apps, computer extensions, integration with TVs
After Sales
Surveys, email address, call centers, social media
Cost Structure
The cost structure of your venture largely determines your startup's long-term viability. It is a thorough evaluation of the costs that go into creating your MVP. You should determine both the fixed and variable costs. Fixed costs remain the same regardless of the scale at which you are producing your product while variable costs vary in correlation with production. A key part of your cost structuring process should be cost allocation. First, you should identify and assign overhead costs to specific cost objects which will then be grouped into larger cost pools. Your costs should be allocated in a quantifiable manner in terms of a cost allocation base. This base will then help you articulate all costs in terms of multiples of your cost allocation base.
Though it sounds redundant, what this means is: if we take a Cost object X (product or service), define it as part of the Marketing cost pool (overhead Marketing cost) and decide to measure it by the number of clients gained. And if ‘Number of clients gained’ is priced at Y EUR per Z amount of clients, X will cost YZ' with Z' representing the number of clients gained with X.
Filling in the Lean Canvas
Technical jargon aside, defining your cost structure and appropriately mapping out the organization and division of your costs form the get-go saves precious time in the future. Actionable Key Metrics are great cost allocation bases as most of the time they drive cost. While you don't need to rigorously structure your cost while filling in the Lean Canvas it should always be in the back of your mind. As a new business, most if not all of your costs are fixed: rent, research, salaries, marketing and equipment are not expenses that will vary.
Here are questions you should use as guides when filling in the Lean Canvas:
- Are your costs adaptable, scalable and sustainable?
- Will the eventual growth of your customer and/or user base be accompanied by an overwhelming growth of cost?
- Is your cost structure in cohesion with the Build, Measure, Learn cycle?
- How can you create a product that is fully streamlined?
- What are the useless costs you can get rid of?
You will constantly be asking yourself these questions during your growth process and should adapt your structure to take future changes into account.
Use SEMRush to find out how much you’ll have to pay to outbid your competitors for Search Engine Advertising and create a more accurate cost evaluation of your future marketing expenses.
Real World Examples: Netflix and Spotify
Netflix and Spotify are two streaming services using a similar business model: provide entertainment at a fixed subscription price. This is to be taken with a grain of salt as Spotify is more of a freemium model than a subscription model. Where they differ is in their cost structure. While Netflix's main production costs come from buying licenses for tv shows in order to stream them, they also have an in-house production company that creates content. On the other hand, Spotify is purely a streaming platform and thus only pays license fees to the record labels and music production companies that own the songs. While Netflix is a hugely profitable company, Spotify's costs are higher than its revenue. Why? A central difference is that Netflix only has to pay a one-time distribution fee for a license to a tv show or movie whereas Spotify must pay per stream.
This example is largely inspired by Polymatter's video about the subscription economy.
Key Metrics
Lean Methodology is articulated around a principle of continuous growth through continuous improvement. This happens first and foremostly through accountability and surefire ways and tools through which progress is measured. That’s where the key metrics come in. Key Metrics are the numbers that tell you how your business is doing. You should view them as preliminary monitors of performance. By seeing the rate at which your key metrics have been fulfilled you should be able to evaluate the strength and viability of your product or service. Your Key Metrics are your definition of success. This should be reflected through your Lean Canvas.
You should always focus on actionable metrics instead of vanity metrics. Actionable metrics are metrics that can provide information which contributes to the evolution of your MVP and growth of your lean startup. They drive business. Vanity metrics are metrics that look good without being meaningful. What is a vanity metric for your business could be the actionable metric of another.
Filling in the Lean Canvas
First focus on qualitative and comparative metrics. You should not only report what users do but be able to compare different types of user behaviour. If possible, map out A/B testing. It’s the best way to further segment your audience while collecting valuable data about their behaviour. A successful metric combines high performance, low cost and large volume. Your key metrics should take into account the 5 stages of customer development but don’t focus on having metrics for all 5. Prioritise on the stages you want to place to most emphasis on and try to optimize those. The narrower your focus is, the more efficiently you'll be able to adapt.
Acquisition
How customers find you through your various channels: Which channel is the cheapest? Which of your channels is the most popular? Which channels lead to a purchase?
Activation
What is the first user experience? An actionable metric could be the rate of first visitor purchases for an online store.
Retention
Whether you have a recurring user experience: What percentage of your customers are recurring? Why do they come back (another purchase, for their first purchase, to use the platform?)
Revenue
Monetized user experience: Do customers generate minimum revenue? Does their purchasing habit break cost (cost here refers to the operation and marketing costs you've spent to attract them)? What is your revenue per consumer? Do you have a small high paying minority and a low to average paying majority?
In general, you should follow the Pareto principle, commonly known as the 80/20 rule. Elaborated by an Italian economist, the Pareto principle was a simple observation about distribution: 80% of the land in Italy was owned by 20% of the population. Applied to business, that means that 80% of your revenue is most likely generated by 20% of your customers. Perry Marshall has touched on the exponential nature of the principle, stating that the 20% of your top 20% (4%) therefore represents 64% of your revenue. This means that less than 5% of your customers generate over half of your revenue. The key is then to determine which metrics will help you identify that top 20% and facilitate growth.
Referral
Users refer product to others: Do referrals generate purchases? Which channels are the best for referrals? How many referrals become regular paying customers?
Real World Example: Spotify
Don’t limit your metric definition to the customer development cycle. Sample key metrics for a website like Netflix would be: amount of new members per day/week/month (activation rate), switches to higher plans (retention and activation), percentage of highest paying customers (revenue distribution) and evolution of that population.
An actionable metric for Spotify would be the rate of conversions from Spotify Free to Spotify Premium. A vanity metric is the overall amount of users using their app. As Spotify is a music streaming service, they pay a licensing fee that is determined per listen. A higher user base equals a growth in listeners. The growth of said user base is therefore accompanied by a growth in cost.
Unfair Advantage
Jason Cohen defines an unfair advantage as something that can neither be copied nor bought. Your unfair advantage is the differentiating factor that truly sets your product apart from your competitors. Unlike the MVP, it’s not about what you’re offering to your customer segment. Instead it's about inherent tools, insights and knowledge that competitors cannot buy or copy. If your company is stripped to the bone and all that can be copied or stolen is copied or stolen, what do you have left? It's okay if you don't have this yet. Just be ready to articulate it on the Lean Canvas when you do.
Filling in the Lean Canvas
First mover advantage
This is the most well-known one. Are you an innovator, creating a novel product or solution that no one has ever seen before? Do you plan on disrupting an industry that requires a first-mover advantage?
Insider information
Is your position on the industry such that you master the tools, networks and infrastructures needed to succeed? How well do you understand the problem? How well can you understand it? What is your positioning?
The right “expert” endorsements
Who is backing you? What type of help and expertise are you getting? This could also fall under network: What connections do you or will you have that uniquely help your business?
Community
How’s your engagement? Do you already have a community that will support you and act as a loyal customer base? Is your user base widespread?
A dream team
This speaks for itself. Is your team irreplaceable? What basic thinking, mindset, or assumptions comprise the culture? Is this perfect team a norm in the industry?
Resources
Do you have exclusive access to resources and means? This can be anything from raw materials to contacts.
Real World Examples
First mover advantage: Uber
Uber revolutionized the transportation industry. It had the advantage of choosing an industry where being a first mover advantage was key. Spotify did not have first-mover advantage, but didn't require it as its Value Proposition was far more attractive than that of its existing competitors.
Community: Facebook and Twitter
Facebook or Twitter both offer their communities as products. They have a loyal user base that is continually growing. The same can be said for most social media platforms. When a new medium comes out and becomes popular, different segments adopt it and integrate it differently with their existing platforms. For example, Twitch serves another purpose and has a different audience than that of Youtube even though their product is virtually the same. Youtube's user base remained loyal to the platform despite the arrival of a direct competitor.
Inside knowledge
High tech industries like aeronautics or cryptocurrencies require insider knowledge in order to be competitive. Going in cold is not an option as the products themselves are highly technical and require contextual information that isn't readily available to just anyone.
The right “expert” endorsements: SpaceX
SpaceX was largely aided by the reputation of its founder: Elon Musk, who was one of the cofounders of Paypal. Though you probably won't be your own unfair advantage, the investment bank that funds you or a public figure could.
A dream team
A dream team could be anything from a group of people with startup creation experience to your best friends. It is essentially a group of people that not only works well together but is also able to articulate and realize a common goal.
Resources: Bing
Connections and contacts can be priceless unfair advantages as they are created organically. The same goes for resources. An exclusive partnership with a software company might come in handy for a hardware developer. For example, Window's Cortana only searches on Bing, though that option is modifiable, the fact that it is the default search engine automatically brings with it a considerable amount of traffic.
Business Registration
Congratulations! You’ve finished the Lean Canvas Guide. Now that you’ve finished the conceptualization phase of creating a business it’s time to move on to harder and more concrete steps: finding partners, building a network and most importantly, defining the legal structure of your company.
The legal structure you choose determines the type and taxes you pay and your personal revenue options as an entrepreneur. But it also determines who is liable for the debt of your company.
Sounds pretty daunting right?
Well, it doesn’t have to be.
With Firm 24’s incorporation service, you can quickly and easily incorporate a Dutch BV for your venture in 24 hours. A BV is a Private Limited Company and the Dutch equivalent to the US Ltd or the British LLC. Check out this article about the different legal statuses available for entrepreneurs in the Netherlands. Firm 24’s cost-effective and highly efficient service will enable you to get most of the formal paperwork out of the way and focus on the core mission of your venture: growing your business.
Still feeling stuck? Maybe you have other questions or concerns about something we didn’t cover in this guide. Although we do our best, we know that we can’t possibly account for every unique situation out there when it comes to starting a business. Since you’ve made it this far, we want to make sure that you leave this guide with the resources you need to bring your business ideas to life. That’s why we’ve partnered with Van Ardenne & Crince le Roy Advocaten, a trusted law firm in Rotterdam, Netherlands. They will be able to fill in any blanks you have left and provide the support you need to get your project off the ground at an affordable cost. Contact them and let them know we sent you – they’ll be sure to give you a warm welcome!
With this guide and College Life Venture's toolkit, you are more than ready to fill out the Lean Canvas and test the waters with your new business. Following the Lean Startup method and filling in the Lean Canvas will provide you with the resources you need to launch a successful venture.
