How Entrepreneurs Can Benefit From Frugal Experiments
One of the most important lessons I have tried to each my 29 "Foundations of Entrepreneurial Management" students at Babson College is the importance of doing frugal experiments.
While some people might simply label this idea as failing fast, I don't see it that way. Instead, I think it is crucial for entrepreneurs to learn faster than their rivals. And in order to learn, they should make a guess about the state of the world, then design and execute a fast, inexpensive experiment to test that hypothesis and analyze the results and feedback, which could include a mixture of cheers and jeers.
The point is that entrepreneurs have an advantage over big companies because of their scarce resources. This counterintuitive observation flows from the belief of managers at big companies that they have time to carefully plan their strategic moves and be sure all the resources are lined up to put their plans in action.
Yet in the time it takes a big company to draft and execute a new strategy, a startup could be doing six or seven experiments to try out different business models. And the result is that by the last experiment, the startup is more likely than the big company to be on the road to an exciting growth opportunity.
The reason is that each experiment leads to greater learning about how to match up what people need with what the startup could deliver.
On Monday I saw firsthand a great example of the benefit of frugal experiments. The previous week, a five-person team of students from my class had conducted market research on a business idea they had developed for a personalized local-business review site patterned after Yelp.
After they interviewed about 100 students and six or seven local businesspeople, they learned that none of the companies would pay to advertise on their site. I even told the students I wouldn't invest in that particular business and suggested that they should rethink their approach.
That's just what they did -- and their new idea won applause from dozens of potential customers. The fresh concept involved developing an app like Tinder. Instead of relying on photos of individuals, the service would include photos of food and other retail items sold by local retailers.
The app would be free to most users but would include a paid premium version. In exchange for people paying to use the app, local retailers would give students discounts on items at their restaurants and shops.
The students interviewed representatives of a dozen local restaurants and about 65 students and found that a large portion of the students would pay for the premium service and the local restaurateurs would be happy to offer the discounts in order to fill their seats during slower times.
The students followed the principle of frugal experimentation. Without spending a lot of money, they interviewed potential customers the first time to test out their initial business idea. They discovered that the idea would not work.
Five days later they had developed a new idea, designed a market research program to test it, did the research and collected compelling evidence that their new idea had real potential.
These experiments cost the students nothing but time. And I am hoping that the lesson they learned is that running a startup works better if entrepreneurs are willing to get feedback on their ideas and respond constructively to the input of potential customers.