A common problem most aspiring or new entrepreneurs face is narrowing down and being able to validate business ideas. In fact, based on a recent survey I conducted, over 73% of people in this group feel this way, so you are not alone. I faced this problem in the past, and I want to share how to solve it.
You may have one business idea or a bunch, and not know where to start.
Using the Lean Business Model Canvas, I am going to show to narrow down your idea from that list.
I’ll also teach you how to validate business ideas so you know if you should move forward with them
Let’s dive in!
Table of Contents
The Lean Business Model Canvas
Learning how to use the Lean Business Model Canvas will help you save a lot of time and energy when it comes to choosing that one idea.
It also can be used to test different business models with your idea to find the right fit, and validate the business idea.
It is free and an amazing tool that all aspiring entrepreneurs should use in their idea discovery and validation process. Both low cost and large scale business ideas can be evaluated using this tool.
Why it is Important and Useful
The Lean Business Model Canvas is valuable for a lot of different reasons.
When it comes to your list of business ideas, this can be a tool used to narrow down your list to the one idea that fits you and is a viable idea.
Once you have that one idea chosen, this tool can help you validate business ideas so you know it is one that will be successful, if executed properly.
Going through these steps also helps you develop the mindset of an entrepreneur.
I’ll be teaching you both of these techniques.
Who is the Lean Canvas for?
This tool is built for aspiring and established entrepreneurs.
For an aspiring entrepreneur, it is a great way to begin stepping into entrepreneurship by testing potential ideas you have, and seeing if they will work. It will also get you thinking about important aspects that make an idea viable and successful.
This is not really built for investors or consultants to evaluate investment opportunities or areas for improvement. It is meant to give the entrepreneur an aerial view of the idea and validate it.
Note: Before I had my first successful business idea, I probably evaluated about 25 different ideas using this tool from a list of over 100 business ideas.
Let’s break down what the Lean Business Model Canvas is:
If you have a business idea in mind, or a couple you want to flesh out and choose, I recommend printing off the canvas, or using an online version, and following along.
Any business idea solves a problem for the potential customer. What are those problems that relate to your idea?
List the top 3 highest pains that they have related to the problem you are wanting to solve. Don’t know? You’ll want to go find out from a couple potential people before filling this in completely.
What are the top three problems related to your idea?
You may not have this fully flushed out yet, but this section is where you solve the problem at hand. Where you have the great business idea!
If you have a general idea, you can write the top three features and benefits to your solution and what it solves. These can always (and usually do) change over time.
What are the top three features or benefits to your solution?
What does the customer segment want as the solution?
The key metrics are used to measure your progress and success. These are not vanity metrics like Facebook likes or how many people answer a survey.
For example, this could be how many monthly subscribers you have to your service, or sold leads vs incoming and new for your cleaning service. These examples are related to the success and income of the business, so keep that in mind.
What will drive the success of the idea?
What are the most important things to measure in the business idea?
In this section, you’ll break down the largest costs that your business idea will incur in both the startup phase as well as to run.
For example, when Space X started, they required a large amount of initial investment capital to do the research and development, and they also needed a lot of money to do launches after they have done the R&D. If you can, estimate the possible amount of money it will take until you reach profitability.
What are the largest costs to your idea?
What costs are essential costs to the business?
Unique Value Proposition
This section goes hand-in-hand with your solution. The unique value proposition is what is going to attract your ideal customer, and deliver the value that they are looking for.
Why are you different from your competitors? What is it that your service or product does/ has that will make it superior in solving the problem at hand?
What makes you different from your competition?
How will you deliver value in a way that stands out?
This one is the fun one. It can make or break business ideas. Where will you make your money? If you have multiple that is great. If you only have one or two and they don’t seem very steady, then it may be time to kill that idea or change the business model behind it.
This section also explores how you will price it and what your margins will be. Will your income be coming in monthly? After 90 days of purchase? Immediately after the sale? These are also things to consider, as a delay in cash flow can cause havoc on potential operations.
What areas will you receive money in? Can these areas grow over time?
Will there be delays in receiving the money?
What will your profit margins be?
The unfair advantage is known for being a really hard section of the Lean Business Model Canvas. This is how you will have an unfair advantage over your competition. Keep in mind, this is different from your unique value proposition.
For example, Walmart had an unfair advantage back in the day of operational excellence by using technology, in line with a distribution and supply chain system that could not be replicated. It is supposed to be something that your competition cannot copy or bought.
What do you have that cannot be replicated or bought?
How does that make you have an advantage over others?
The channels section is where you choose how to reach the customer segments. Will it be through online communications and advertising? TV ads? Maybe through word of mouth or direct mail?
There are lots of ways to connect with potential audiences, but you need to make sure you choose one that fits your business idea. Ask yourself, what channels do my customer segments hangout in the most.
How will you reach your customer segments?
What methods will you use in those pursuits?
This section of the canvas will outline who your target customer group is. You can have a few, and that is better, as it shows there is room for growth down the road. Who are they? What do they do? What do they like? What do they hate? These are all good things to know.
To get an idea for time, it can take around 20 to 25 minutes to complete the Lean Business Model Canvas for your first time. After that, it is pretty easy to do within 10 minutes. Once you are at that stage, you’ll be validating business ideas in no time.
Now that we have a basic understanding of what each part of the Lean Business Model Canvas does, I am going to show you how to use it to the best of its abilities.
What groups are you solving this problem for?
Who are they?
Here is an example of a finished one.
[image source: StartitUp]
How to Narrow Down and Validate Your Business Ideas
Choosing the right business idea
The canvas is amazing for narrowing down your business ideas.
Sometimes you may be overwhelmed with all the amazing opportunities you could pursue, but you need to focus your energies on one.
That is where this tool comes into play.
You’ll want to narrow down your ideas into a smaller list of 3 to 5 ideas. For each idea, you will fill out a sheet of the Lean Canvas.
Step 1 – Completing each idea
Use the Lean Business Model Canvas to evaluate each business idea you have. Fill in each box to the fullest.
Step 2 – Idea Elimination
Beginning with the cost structures section, evaluate the potential that you could execute on this idea. For instance, if you have a business idea that will take a lot of startup capital, and you don’t have access to this kind of money or connections to raise the money, you should think about scrapping that idea. Can you cover all necessary costs?
If the idea passed the cost structure analysis, a second section to review is the revenue stream section. If you cannot identify a reliable revenue source, or multiple, then it may be worth killing the idea. Trying to execute on an idea that does not have potential to make a profit is an uphill battle.
Unique Value Proposition
Next, the unique value proposition should be evaluated. Does the idea have a strong unique value proposition? This is really important to note, as this will help you stand out from the competitors, and differentiate you in the minds of your potential customers.
If there is no way to stand out from the competition, you could be entering a saturated market. You don’t want to start a business in a saturated market as it is hard to gain market share. What idea has the least potential to be different in the sector or industry respective to that idea?
If your idea is still standing after these evaluations, then it is time to dive into customer segments. For each idea, what one has the smallest or lowest customer base? If you have a very small potential audience, or only one audience segment to target, this could be a deciding factor for moving forward or not. An idea should serve multiple audiences, so you have room to grow.
The fifth section to look at for narrowing down your business ideas is the channels section. Are there any channels you anticipate to cost a lot to manage? Do you have enough channels to reach the customer? Are the channels you are planning to use filled with a lot of other noise (i.e., social media)? All these questions should be looked at for each idea that has lasted to this point.
Lastly, look at which ideas you were able to create unfair advantages for. This is one of the hardest sections to fill out in the canvas, and if you have the ability to do this, it can make your idea much more powerful and viable over the rest.
Step 3 – Choosing One Business Idea
Choose the one idea that has lasted through all of these.
However, don’t just choose the idea that had the least problems with it.
If by the end have no ideas to move forward with, that is a positive result too. It is ok if none of the ideas passed step 2 assessments. It means you won’t be wasting precious time and resources executing on an idea that would not be viable.
Also, you are one step closer to finding that right idea for you.
Rinse and repeat this until you are confident in the idea you will be executing on. This is imperative if you want to move to the next step.
Assumption Creation & Business Idea Validation
Once you have narrowed down your business ideas into one idea you want to execute on, it is time to test the assumptions that are holding up your lean business model canvas.
The assumptions that you create for each section of the business model canvas is going to be tested for validation. If changes need to be made, that is when you pivot or kill the business idea. This phase can also lead you to execution if the assumptions are confirmed, then you are ready to launch!
Your assumptions are based on what you think will make that section successful. I am going to break down each section with what you should consider when setting the assumptions.
As an example, I am going to use the classic business idea of a lemonade stand for simplicity.
These assumptions relate to what you think the problem actually is. For example, I assume that people are thirsty. I also assume that they want to pay for a drink.
A question to test this assumption would be to ask if they are thirsty when they are out for a walk, and if they would like lemonade to quench that thirst.
People are thirsty
People want lemonade
With my solution, which is a lemonade stand, I assume that they want lemonade and only this drink to quench their thirst. I also assume they trust to buy it from me from the side of the road.
The question here to ask would be if people trust to buy lemonade from a stranger on the side of the road. I’d also ask them their favourite drink to make sure they wanted lemonade.
People will buy it from a stranger
People prefer lemonade
The key metrics assumptions would relate to how many lemonades an hour I could sell. Assuming I could sell 5 cups an hour. I chose this as it relates directly to the success of the stand.
To test this assumption, I may stand on the road where I want to set up my stand and see how many people walk by. I’ll also see if I can ask people if they would consider buying a drink from a stand as they go by to see sentiment for this kind of idea.
There is enough foot traffic to get sales
People buy drinks when out and about
The lemonade stands cost structure assumptions is that it would cost 30 cents per sale to buy the ingredients for the drinks, as well as the supplies, and overhead of my stand. I would also need to assume I would buy this in some bulk amount, as ingredients aren’t that cheap alone. The last cost to consider would be a mobile credit/ debit tool as no one carries cash these days.
To test what I think about the costs, simply researching this in the local grocery store for the ingredients and supplies would suffice. For the stand, I would need to go to the hardware store to price that out.
Finally, I would take the total costs, and divide it by the number of customers I thought I would be able to serve with my available resources, and arrive at a cost per sale number to compare to my assumption.
Cost 30 cents per cup to make
I can buy ingredients in bulk
Unique Value Proposition
For this example, I am going to assume that people will want lemonade that comes in a light-up flashing cup, as that is my unique value proposition against the regular competition of lemonade stands. With this stand, you receive a flashy cup that you’ll be proud to take home and not throw out. As a test, I would include this in my survey, along with the other questions from above.
People want a light-up cup
They would see this as added-value
The revenue stream here is selling the cups of lemonade. I assume that people will want to buy the cup of lemonade for $1.00. This would yield a 70% profit margin.
To test this I would ask people about their willingness to pay for such a lemonade. I would also want to inquire if they think they would purchase again if they thought it was good. For instance, if it turned out people would only want to buy lemonade once a month, it would be hard to have a consistent customer base to serve the business.
People will pay $1.00 per cup
People will buy lemonade once a week
The unfair advantage I would bring to the table would be a unique recipe that uses a patented distillation process and special recipe. I would want to know from potential customers that if this process added value and would be a worthwhile unfair advantage. Remember, the customer is king and they will ultimately determine if your unfair advantage is worth it compared to the competition.
People will appreciate the distillation process
People will come back because of this process and unique recipe
The channel assumption for the stand would be direct foot traffic passing by. I assume that they would not want it delivered and to be reached using a website.
To test this I can ask questions if people like to purchase small items like this at the last minute, without previous exposure to ads.
I can target people who walk by
People out walking want to purchase things
Last, but not least, setting the assumptions of the customer segment. I would assume that the customer segments are the healthy people who want exercise and go for an evening or afternoon walk. The demographic description would fit the exact layout from a postal code marketing information finder tool.
The test for this would be to simply see what the people are like as they go about there walks and runs.
My target market is healthy walkers
These people will live in the immediate area
One key thing to note is to make sure you are testing your potential market with these assumptions. You do not want to waste your time on people that would never buy. In this example, I would not want to survey people in one location, and set up my stand in another, as the audience I would be targeting could be different.
Pivot, Kill, or Continue with the Business Idea
After you have tested all your assumptions, you should come to the conclusion if you will need to change any assumptions and pivot with the idea, kill the idea because too many main assumptions were killed, or become an entrepreneur and execute since all or almost all of the assumptions passed the test.
No longer will you need to become frustrated by not knowing if your idea will be successful.
By narrowing down your business idea, creating assumptions, and testing them against your target audiences actually wants and needs, you’ll have a validated business idea in no time.
When you try this out, be sure to keep an open mind so you can pivot your idea, or go back to the drawing board. The last thing you want to do is become stubborn when you hear answers you don’t like and execute anyways.
Wondering how to set assumptions for your specific idea? Let me know if the comments