Sustainable Startups – The three way test

Sustainable Startups – The three way test

by Sridhar Rao

Management Consultant and Coach

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After centuries of product and process improvisation, most basic human needs are currently met in an existing, satisfactory way; Or at least, in a way we have got used to and have accepted.

The goal of innovation often, is development of new processes or methods of doing an existing activity in order to provide even greater satisfaction to the user.
In other words, while the need is being met today, there may be a want of a better way. Once the want is addressed and people become accustomed to the new way of meeting the old need, the new way then becomes the need.

For example, the original human need was communication; this got met first by messengers on horses, then by letters, then by landline phones and later by mobile phones and so on. With each stage of evolution the need gets redefined to include the new features we are habituated to.

Startups – Product/Market Fit

In startups, often, while the excitement is all about the new idea and the technology being brought in and the product or process change being introduced, is that a good enough reason for the startup to succeed, become profitable and have a long term business?

The target customer must see a noticeable improvement or change in the net value addition delivered by the innovation, for the product to get acceptance.

Key questions to ask

The large number of failures we hear about are mainly because, in the excitement of introducing the product, the entrepreneur may have missed out on answering more fundamental questions about sustainability of the business model.

Some core questions which the entrepreneur and the investors must ask are –

➢ Is the business solving a large consumer or business problem?
➢ Is there a reliable revenue model?
➢ Is the revenue potential large enough to enable breakeven and profits for the business

To find an answer to these questions, one simple question that must get answered to see if the model will survive, is

The three way test

 

Does the new idea deliver a significant change to the customer in any one of these three factors?

• A reduction in the amount of Effort a user puts in
• A reduction in the Time taken for a particular process
• A reduction in the Cost incurred by the intended customer

It is only then that the user has a reason to drop old ways and come to the new method; and only this can lead to a sustainable business proposition.

Conditionality

There are also some conditions that need to be applicable-

First- this improvement in any one of the three factors must happen while maintaining or improving the other two. That is, there should be no worsening of any one factor while another is improving.

Second- the improvement must be significant and not marginal; large enough to swing user opinion.

Third- the seller should be able to make a net profit for each unit sold, each time.

Example – Online Groceries or Local Merchant

So, for example, when we order groceries for home delivery from an online seller instead of the neighborhood merchant, we will compare the following

1. How easy was it to order online vis-à-vis with the merchant? That is, ordering on an app versus speaking out on the phone.
2. How much time did the online grocer take to deliver vis-à-vis the local merchant?
3. Was there a noticeable cost saving by ordering online?

If any one of these three questions has a strong positive answer with no difference between both suppliers for the other two questions, only then will we continue to buy online.

However, if the only difference is the cost of buying online and that too, because the online merchant is subsidizing the price as a promotion, the chances are, the online seller will continue to bleed and never get profitable.
The customers will also switch back to the local merchant the moment the promotion is over.

Hence, eventually killing the online startup business.

Please do leave your comments at the bottom and do share with others if you like this article.

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