We’ve all been there. We have come up with an idea for a new product or service that we think we can sell to our customers. We have written what we think is a bullet-proof business plan. We’ve gone ahead and built the new product, or purchased new inventory, or expanded our store assuming that, “if we build it, they will come.” Yet somehow, no matter how good we think the new product or service is, the customers just don’t buy. They’re not interested. And now we’ve wasted time and money building something people don’t want.
How could this have happened? Our business plan showed that there was a solid target market with a rosy sales forecast. We followed our business plan exactly and executed on-time and on-budget. So why didn’t the customers show up?
The reality is that many companies fall into this trap: they build something nobody wants and fail because of that. So, how can we avoid this trap with our next innovation? How can we write better business plans that help us steer clear of failure and guide us to success?
We have to start out by acknowledging that all business plans are wrong. It doesn’t matter how much time and effort we put into our business plan, it will be wrong the day after we finish writing it. As the investor and startup advisor Steve Blank has said, “No business plan survives its first contact with a customer.”
Does this mean that we shouldn’t plan at all? We should all just shoot from the hip, trust our instincts, and hope for the best? No. Far from it. We should plan, but with the right kind of planning that guides us towards success and helps us identify potential pitfalls, speed bumps and other roadblocks, before we hit them.
“Unfortunately, too many startup business plans look more like they are planning to launch a rocket ship than drive a car. They prescribe the steps to take and the results to expect in excruciating detail, and as in planning to launch a rocket, they are set up in such a way that even tiny errors in assumptions can lead to catastrophic outcomes” – Eric Ries, The Lean Startup
Instead of creating “rocket ship” business plans, our modern business plans should look more like driving a car. When you drive, you are constantly making minor course corrections, adjusting your speed, and most importantly, paying attention to road signs and other signals that may cause you to change course.
To create this modern “driving” business plan instead of the “rocket ship” business plan, we need to focus on the one critical component that is missing from nearly every business plan I read: assumptions. Too many business plans fail to identify the core assumptions that are the foundation of a new business venture. By assumptions, I mean the core underlying metrics that drive the sales forecast and expense budget. For example, a core assumption could be the conversion rate for your online store, the number of customers that you expect to bring in through the front door, assumptions about strategy, customer color preferences, customer needs, required features, etc., etc.
To fix our business plans and create modern business plans that help us steer our startups to success, we need to not only identify assumptions clearly in our business plans, but also create plans for testing and validating those assumptions. Listing out assumptions and test plans in a business plan can seem like a fairly negative exercise: you are essentially listing all of the reasons why you might fail and why your sales may not be as fantastic as you hope. But, by identifying your assumptions and coming up with a plan to test and validate those assumptions, you are ensuring that your business has a chance at survival. By validating (or invalidating) an assumption early on, you get the chance to change course and try a different strategy. You get to react to early customer feedback and change plans before you over commit to the spending plan in your original business plan.
A key component of identifying and testing assumptions is developing what Eric Ries calls a Minimum Viable Product. This “minimum” product is just big enough to validate an assumption you have about your product or your market. The key is to keep it as simple as possible so that you can gather feedback from potential customers and then adjust your plans as necessary.
Minimum Viable Products can come in many forms, but the fundamental idea is that they are never a full implementation of your dream for your company or product. They are just enough to test your assumptions. If your assumptions prove correct, then you have the opportunity to circle back and turn your Minimum Viable Product into the full product that you wanted to sell originally.
In many cases, the Minimum Viable Product doesn’t even have to be a product at all. It could be a drawing or rendering of the product you would like to build (KickStarter.com is full of examples of these). If you are thinking about opening a restaurant, your Minimum Viable Product could be a few catering engagements or a stand at local farmers market so you can test to see if people really like your food and will pay for it. For more details on Minimum Viable Products, I encourage you to read The Lean Startup.
Defining assumptions, test plans, and minimum viable products in your business plan does not mean that your business plan should not sell your grand vision for what you want your business to be. Describing your ambitions and vision for your company, products and services is still part of what your business plan should sell. Adding in the often times missing component of “underlying assumptions” will just add a dose of reality to the plan and, more often than not, steer your company towards success.