Lean Business Scorecard: Viability
#2 Will people pay for your business idea?
This is Part 2 of the 4-part guide where we focus on Viability.
- Overview
- Part 1 — How Desirable is your idea?
- Part 2 — How Viable is your idea?
- Part 3 — How Feasible is your idea?
- Part 4 — How Responsible is your idea?
- Download the Lean Business Scorecard (download link)
The Case for Viability
Once you have sufficient evidence that you’ve found the right opportunity to address AND you have a solution that helps your target audience do something they couldn’t before, you then need to prove you can get paid enough for this product or service to have a commercially viable business that can sustain itself over time.
Note: If you haven’t scored a total of 12–13 or higher on the Desirability Section, I suggest you go back and find more evidence before spending too much time on Commercial Viability. Your confirmation bias is trying to convince you that you have all the answers for Desirability.
Market size & Break Even
There are 2 areas of focus that I look for evidence of when assessing the Viability of a business idea.
The first area is the Size of the Prize — ie. how big is the Addressable Market for this product or service and how much is it worth? What are customers willing to pay and what do they get in return? How much of it can we realistically capture and address?
The second area of focus relates to what I call the Burning Question — At what point do we stop burning through cash and hit the Breakeven point? The point at which we make more than we spend.
What risks and assumptions will we have to test and understand to get to a point when we can be reasonably confident about this?
Let’s look first at the evidence around the Size of the Prize.
The Size of the Prize
If we’re going to do the hard work to realise the full value of a business, I like to know that it’s worth putting the time, energy and potentially money into the venture. It’s good to set your sights on a prize worth winning at the end.
Much like Desirability, I like to start with Customer and ask myself…
Have we got a large enough group of people we can do business with?
A group that has the same job to be done and challenges that we identified in the previous section. A group that may be served by existing competitors that we may need to entice away.
How much value will that group of people provide to us?
When starting out, it’s often useful to validate a business idea by seeing if someone is willing to give you something small like their email address in exchange for something they want before asking them for money.
Does this idea have any evidence that someone has exchanged something of value from them in return for a product or service?
By definition, something has the potential for Viability if a value exchange takes place, but whether it’s profitable or sustainable for a business is a whole other question.
What does the customer get in exchange?
Another way to do something relatively simple to test the Viability of your business idea is to set up a website landing page that promises some sort of valuable product or service in the future, in return for an email address now.
This is a good way to test viability on a small scale, as the value exchange is small for everyone. But as the perceived value of a product or service increases, so should the willingness to pay and the willingness to work harder to get that value.
I like to understand what is being asked for and exchanged in this Value Swap.
What does a customer have to do and provide in order to get the value of a product or service?
For example, if I’m using an app like Instagram, I swipe down and I see something cool. In return for my engagement, Instagram gets to understand my preferences and is able to connect my attention to advertisements from relevant brands amongst the content. It’s a small Atomic Value Swap. Simple.
Contrast this with an Enterprise Software Platform that might cost £100k per license per year and requires 6 months of training to get a single person up to speed with using it and getting significant value out of it.
That is a big commitment for both sides.
There are a long series of steps to navigate as part of that value exchange to prove that a value exchange can happen where customers can easily drop out.
That assessment can seriously affect any estimate of how big a market is.
Using our 3 statements, we can look at an example to see how we can filter out the noise and find signals of evidence.
Viability example
We’ll move on from the Airbnb example we used in the Desirability section and use an early reproduction of an Uber Investor deck, or as they were known back then, UberCabs.
Before we assess the cores for Viability for Ubercabs, for your reference, this is how I assessed them for Desirability.
Scanning through the slides I can pick out the following slides as having relevant information around the problem, the solution and the total addressable market which helps me understand the Size of the Prize.
Using the 3 statements I fill in the Section on the Size of the Prize as follows -
Scoring the Size of the Prize
You’ll notice the scoring system we use for Viability is different to the Ladder of Evidence we used for the Desirability section.
Rather than examine how much evidence we have around our customers and their responses and actions towards a product or service, we’re really interested in the aggregation of all those actions and how that translates into customer value and then into business value.
In particular, I’m interested in how many parts of their theoretical number-based business model have been tested out in practice.
Typically, investor slide packs don’t go into these kinds of detail and you would need to look in more detail at a spreadsheet or other numerical forecast, but it’s good to see how much of this thinking they can articulate so you know what to look out for when you dive into the maths.
Size of the Prize / Level 1
When we test for Viability, you have to be able to offer a customer something of value in order to see if they will give you something of value — or anything for that matter — in return.
Size of the Prize / Level 1 / Evidence to look for
Evidence that even just one customer has actually provided something of value in exchange for something you offered to them.
It doesn’t have to be money, although it’s better if it is. If a customer has given you their email address to find out more, for example, this would be an early indicator of value exchange that would show you signs that there might be value to be realised for this business idea.
Size of the Prize / Level 2
To get to the next rung of the ladder, you need to have set up and tested at least some part of your operations that help you find, attract, acquire and convert users into paying customers. Ideally, you would retain them as a loyal customer in the process.
The journey your customer takes from first seeing your product or service to the point at which they buy it is often described as a funnel. So we need to see evidence of at least one funnel.
Size of the Prize / Level 2 / Evidence to look for
Look for signs that a business has tried to find and successfully managed to attract and convert one of their users into a paying customer via one of their funnels.
Typically this will have involved testing a variety of customer channels to attract potential customers and then measured the success rate of each funnel at attracting and converting customers at some level of scale.
Note that when I refer to a paying customer, it may still be that an email is a good enough form of payment, provided your business model can make money out of emails. However, Cash is always king here, getting paid is always the strongest signal of Viability.
The data you have around sales conversion rates helps you start to understand the proportion of a hypothetical market you are likely to be able to attract and address given your capabilities. It’s also vital in stress-testing your business model calculations in the next step.
Size of the Prize / Level 3
if you have tested enough funnels, understood what it takes to attract and convert customers through each one and worked out which ones attract and convert customers most sucessfully and at the cheapest cost, you should be able to model your addressable market with a much higher degree of confidence.
Size of the Prize / Level 3 / Evidence to look for
Any mention or evidence of the average cost to acquire a paying customer — or Customer Acquisition Cost (CAC) as it is known — is usually a good sign that multiple channels have been tested and the most effective ones have been found.
Note here that it doesn’t matter how cheap or effective a funnel is at acquiring customers, it’s the rate you can convert them at that ultimately dictates how effective a funnel is.
Here are my scores for the Uber example.
Because Uber had “recruited 15 clients”, this indicates they have tried and succeeded to acquire and convert customers. It’s pretty clear they would have taken a ride, so they have scored a point each for these.
But it’s not clear what customers have paid or how the maths for their Business model stacks up, so on this front, I have scored a zero.
[Yes. it is possible to get a big fat zero].
Note on recommendations: unlike Desirability where it is vital to establish evidence of the problem before the solution, for Viability and the remaining sections, we will look into recommendations for focus areas and experiments to run based on the total score for all questions at the end of the section.
So we will move straight onto the Breakeven evaluation and come back to the total scores and focus areas to improve Viability at the end.
The Burning Question & Breakeven
Once I’ve assessed the size of the addressable market that a business idea represents, I like to understand the business model in more detail to understand the risks in capturing that market.
The key concern here — especially where anyone’s money is concerned — is when will an investor get their money back?
The scoring for this section is really intended to stress-test the assumptions around the key elements of the Business Model and those elements are Cost and Profit.
What’s crucial to see evidence of in these forecasts are any assumptions that have been made and how these numbers play out over time at varying levels of scale and investment.
Without these, it’s very hard to reliably calculate the potential return on investment and it’s very difficult to see where risk exists, all crucial pieces of information in assessing the viability of a business idea.
In the end, all forecasts are made up until you put them to the test.
So let’s do just that and put them to the test with the Scorecard.
Scoring for Breakeven
Breakeven / Level 1
Just like the Size of the Prize, the first rung of the Breakeven ladder of evidence is a bit higher up than the one for Desirability as you need to prove you have something of value that a customer wants in order to reach it. You need evidence that a customer is willing to exchange something of value for your product or service.
Breakeven / Level 1 / Evidence to look for
At this stage, having some form of a prototype starts to become useful as a way to test if a customer is willing to exchange something of value in exchange for access to the promise of value. For example, evidence of testing of a landing page that invites people to sign up for updates to a business idea could be a great way to test for value. This gives you a way to demonstrate a willingness to part company with an email address without the need to actually build a product or service.
You can also conduct surveys to assess how much money people would pay. Understanding what would seem cheap and what would be too expensive can help assess the pricing window you are working within.
Breakeven / Level 2
To move from early indications of value to more concrete ones, and go from a 1 to a 2, it’s likely you’ll need to show people the most basic version of your idea and have convert them as customer through the kind of customer acquisition funnel you would expect to use as part of your business.
A funnel is a journey that a potential lead for your business would follow to learn about your product or service and from there, convert into a paying customer.
Breakeven / Level 2 / Evidence to look for
Look for indications that a business has tested how to acquire, activate interest in and convert a potential user of their product or service into a paying customer.
I like to set up what I call a Minimum Viability Test to do this. It’s a test that helps you prove that you know where potential leads exist today and how to attract them to your product or service in a way that actually demonstrates that they will give you something of monetary value in exchange for using it.
Look for evidence of conversion rates, volumes of customers, average customer acquisition costs, average revenues per customer. All are essential to bolster a business case. Without them, you’re at risks of guessing, and savvy investors don’t like to take risks on too many guesses.
Breakeven / Level 3
To get to a 3 you need to have operated at some level of scale that gives investors a statistical degree of confidence in the variability of your forecasts. This very much depends on the nature of your business, the sample size will likely be smaller for Business-to-Business concepts and much larger for Consumer ideas.
Breakeven / Level 3 / Evidence to look for
Similar to Level 2, but lots of it. A statistically relevant sample size to be exact. Typically you won’t find this in a pitch deck and you will have to examine a spreadsheet. But if a business is sharing or talking about more details projections, ask to see them and ask to see which numbers are based on assumptions and which have been tested and are reliable and predictable.
Using the scores to review the evidence for the Uber example it appears there is very little to latch onto. One can infer the likelihood of plenty of costs, but the pitch deck itself majors on the hypothetical size of the market and leaves the rest unclear.
Ubercabs scores a zero (but I would be curious to see what their business model was like at this early stage).
What the scores mean for Viability
As we have waited until the end of the section to assess the next steps based on the total score for Viability, note that there are a total of 15 points on offer that you can score for this section.
Viability / Score / 0–9
Recommendation for focus
It’s time to start testing your concept. At first, it just needs to be a simple prototype, something you can get into your customer’s hands to see if it’s a decent solution to their problems. Following Teresa Torres’ advice, I always think it’s best to compare and contrast several options, partly to avoid confirmation bias, but also to get feedback on a range of ideas that could be recombined. Place lots of small bets and double down on the ones that give you the desired return.
Don’t just test the solution, make sure you test out how you’re going to drive traffic to your solution. you’re looking for early indicators of success for a robust business model.
Viability / Score / 10–12
Recommendation for focus
From an investor’s point of view, things are starting to look really interesting. if you’ve made it this far without building the full solution you dreamed of and you’ve managed to acquire potential customers and got them to exchange something of value for your product or service, you’ve done very well.
It’s time to think about how you can scale what you’re doing to validate or bust some of the remaining assumptions around what levers you have under your control to get to the next level.
Viability / Score / 13–15
Recommendation for focus
Your idea is clearly demonstrating commercial value. The case is there to attract investment if you want to accelerate that growth, but equally, if you want to stay in control of your destiny and you have the funds to sustain growth you have the option to keep going till you hit your breakeven point.
Recap
Lack of Product-Market fit is the number one reason products and startups fail. To avoid falling victim to your own Solution Bias and Confirmation Bias, always start by making sure you are addressing the right problem for your target audience before solving that problem with the best solution.
Next up
The next question to tackle is Feasibility.
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