The Lean Business Model Explained

Whether you are starting a company or part of a corporate organization, using the right business model is a critical decision. This article will discuss the Lean Business Model concept, its benefits, and how to implement it.

What Is a Lean Business Model?

The Lean Business Model is an approach to implementing and optimizing various business models. It focuses on maximizing value while reducing waste across the whole value stream. The model prioritizes efficiency, agility, and rapid iterations of products or services. It encourages starting small, validating assumptions with real-world data, and continuously improving.

Lean Business Strategy vs Lean Business Model

Business models are focused on day-to-day operational matters, such as creating, managing, and delivering value to customers. On the other hand, business strategies deal with a company's long-term direction. A business strategy might include one or more business models implemented in the company’s portfolio.

Fundamental Principles of a Lean Business Model

Customer-Centric Focus

The main objective of the Lean Business Model is to deliver value to customers. This naturally puts the customer at the center of the model. Nothing that the company does matters if it’s tied directly or indirectly to the customer’s needs.

Delivering value to customers quickly and with less waste usually results in high customer satisfaction, one of the leading indicators for creating engaging and sticky products.

Validated Learning

In the lean business model, learning is one of the company's most valuable assets over time. A mistake is a failure only if no lessons are extracted from it. While more traditional business models focus on reducing the number of mistakes, the lean business model embraces mistakes as part of the learning process. Accumulating assets and learnings over time creates internal wisdom that becomes a strong competitive advantage.

Iterative Development

Agile development practices like Scrum and Kanban have been around for some time. They break complex projects into small deliverables shipped to customers, unlocking the fast learning cycle.

Efficient Resource Use

Another aspect of the lean business model is waste reduction in creating and delivering value. “Waste” here refers to activities, resources, or anything else that prevents customers from receiving value, for example:

• A feature that is implemented stays for months in testing and is not shipped
• Constantly increasing the scope of a deliverable prevents users from using the already-developed functionalities.
• Bugs or product defects that prevent customers from extracting value from the product and take the team’s time to be addressed.

Continuous Improvement

Continuous Improvement is constantly introducing small improvements that, over time, create significant positive effects. The improvement might be in the product, delivery process, or something else.

What are the advantages of a lean business model?

Faster time to market

Time to market is a critical indicator of the product’s team's ability to deliver. The shorter the time to market, the faster the learning feedback cycles are and the less waste there is in the product development process.

Delivering a product to the market is the first moment of truth when customers will ultimately validate all previous assumptions and hypotheses. The more this moment is pushed back, the further the learnings are.

Risk Management

Increasing the time to market increases the product team's risk exposure. Typically, the more time is invested in development, the higher the risk that the produced work will be a waste.

Cost Efficiency

Minimizing waste leads to fewer costs in many ways:

• Fewer defects to be addressed
• Shortening lead times, which reduces follow-up reworks

Challenges of Implementing a Lean Business Model

The lean business model has some clear advantages, but many companies struggle with implementing it. Let’s examine the main reasons and some tactics for overcoming them.

Difficulty in identifying waste

The definition of waste seems pretty clear and straightforward. However, waste might be disguised so well that it flies under the radar.

Especially with companies that have been around for a while and managed to accumulate some legacy in their processes and practices, you will often hear statements like:

• We have always done <something> this way?
• We can’t change the way we are doing <something> due to <reasons>?

There might be perfectly valid reasons for that. At the same time, these statements might cover up waste in processes people are unaware of.

Value stream mapping and process audits are great techniques for reviewing the company’s processes and identifying weak spots that can be optimized.

Balancing lean with innovation

Lean strives to find the shortest path to delivering value to customers. Innovation, on the other hand, might be a long journey that requires long-term investments and strategy. That’s why these two concepts are often seen as conflicting.

In reality, following a lean approach to innovation is a perfectly valid option. Nothing prevents your team from embracing the lean principles of fast learning and reducing waste in its innovative efforts.

How can you implement lean principles in your business?

Embrace Learning

A quick learning process is a strong method for increasing the delivered value to customers. Whether your product is a pre or post-product-market fit, maintaining a solid stream of real-world validation keeps your product relevant and appealing to customers. Some ways to create a feedback steam from your customers to you are:

• Customer interviews
  Depending on the phase your product is in, different types of interviews will be the right tool for the job. Very early in the process, customer problem interviews help you identify unmet customer needs, potential customers' alternatives, and gaps in them. Later on, you might use:

  • Customer Solution Interview to validate your solution to the identified problem
  • Customer Journey Interviews to map out the customer experience and initial awareness and expectations of existing customers
  • Exit Interviews for capturing feedback from customers who decided to unsubscribe from your product

• In-product feedback loops
  Creating easy ways for customers to send back feedback signals. These can come in multiple shapes and forms:

  • “Was this feature useful for you?” with Yes/No buttons
  • Feedback form

• Using behavioral product data as a feedback mechanism Using the actual behavior of users as a feedback signal is a powerful technique because there is no bias or opinion.

Put Customers at the Center

Use a product development process or framework that will help you focus on the customer first. There are multiple theories for different parts of the product development process that can work together and put the customer in the spotlight:

• Design Spring is an excellent process for rapid product discovery
• Agile methodologies help deliver value to customers in a quick and efficient matter
• Lean Startup focuses on building a minimum viable product (MVP) and rapidly iterating based on customer feedback.

Identify and Eliminate Waste

Conducting a waste audit helps identify bottlenecks in your processes like:

• Overproduction
• Waiting times
• Defects
• Underutilized talent

Examples

Spotify

If you haven’t checked Spotify’s has R&D blogs focused on research and engineering, it’s a great source of inside information about how Spotify has embraced continuous improvement, customer-centric development, and product innovation.

Figma

Being close to the customers may sound intuitive when starting a new product. Still, many companies quickly shift focus post MVP to other things like revenue, stock price, and other high-level business metrics.

Figma is an outlier. It remains grounded in its customers, which has become a distinctive product characteristic. To learn more about Figma’s customer-centric approach, check out the Lenny’s Newsletter issue with Sho Kuwamoto, VP of Product at Figma.

FAQ