Problem, Revenue, Channel: The 3 Critical Startup Questions

Summary:  There is so much good information and advice available to startups, but deciding what to do today can be overwhelming.  For Web and Mobile startups, first answer 3 critical questions about your business: (1) What Problem am I solving, (2) How will I make Revenue, and (3) do Channels exist to acquire customers?  Problem, Revenue, Channel: these are the 3 biggest risks to your startup. 

I Want to Be Lean – But Where Should I Start?

Entrepreneurs today are blessed with fabulous offline and online resources about how to build our products and run our companies. Unfortunately the availability of so much free information has created a dilemma for us: it is easy to get overwhelmed.

In my startup help calls a frequent problem I hear is, “I want to be a Lean Startup but where should I start?”  It is a good question.

The Challenge of 1-Page Model Canvases

As I’ve written previously, 1-Page Canvases like Ash Maurya’s Lean Canvas and Alexander Osterwalder’s Business Model Canvas are huge improvements over traditional business plans.

These canvases greatly simplify the presentation of information, but discovering what information goes in each box takes months and years of work. The key is starting with the areas of biggest risk first.

All Web & Mobile Startups Have Similar Risk Profiles

LeanCanvas_risk

All businesses have risks, but drug discovery obviously has very different risks than a mobile dating app. Over time I’ve realized that all web and mobile startup risks are very similar. Using Ash Maurya’s Lean Canvas we can see the key risks in the Problem, Revenue, and Channel Boxes.

Risk 1: Does Your Product Solve a Real Problem?

Most startups never get past this seemingly simple question. I use the term “seemingly” because identifying a real problem is extremely hard. The Problem block should be the very first block you fill out and you should start testing problem assumptions on day 1 though unstructured interviews with potential users and customers.

Until you find a problem to solve, working on the rest of the canvas is an academic exercise.

Risk 2: Can You Get Paid (Revenue) to Solve the Problem?

It would be wonderful if every problem lead to a business opportunity, but the world is rife with problems that are not cost effective to solve. For often seemingly irrational reasons, people simply won’t pay for a solution to their problems so Revenue Streams is the second block you should complete.  Charging for a solution before it is built is the best way to answer initial questions about revenue but this isn’t always practical. You can test revenue by asking potential customers for Letters of Intent, offering Free trials with pricing sheets, or generating landing pages with payment calls-to-action.

Pricing is a dynamic, complex attribute to model, but in the initial stages we’re just looking for indications that people will pay us. If nobody wants to pay for a solution you can ignore the rest of the canvas unless you want to think of your startup as a hobby.

Risk 3: Is there A Cost-Effective Way (Channel) to Acquire Customers?

For some reason web and mobile startups don’t like thinking about the cost of acquiring questions, but many a startup has died when it discovered that the paying customers are too expensive to acquire. Face-to-face customer development is critical for getting problem insights but few web and mobile startups can charge enough to support the costs of a direct sale.

The best way to identify Channel risks is to model and test them. Most web and mobile startups do this by running Google Adwords or content marketing campaigns.

Problem THEN Revenue THEN Channel

Theoretically could solve all at once, and a business needs to solve all of these problems. Practically speaking, I tackle these risks in order because each one takes an intense amount of time and focus.  If you can’t find a way to earn Revenue from solving a Problem then you need to find a different Problem to Solve.  Similarly, you’ll have to rethink Problem and Revenue if you can’t find a scalable Channel to customers.

Next Comes Solution, Competition, and Everything Else

Are Solution, Customer Segments, Unfair Advantage, and Cost Structure important? Of course.

However, most of these boxes will be easier to complete once you answer the key questions about Problem, Revenue, and Channel.

Most web and mobile startups are not developing innovative technology, so the Solution is a matter of getting the right resources and executing and the Cost Structure is mostly people. Similarly, Customer Segments become clear once you know the Problem – the customers are the people who have it.

What Matters TODAY: The Biggest Risks

Most entrepreneurs – and unfortunately too many startup advisers – focus on risks but not the most critical risks.

It is easier to talk about Solution (i.e. product features) and Unfair Advantage (i.e. competition) because these parts of the business are plainly in front of us – we can see them.

Save yourself (and the startups you help) a lot of time and heartache by focusing instead on the most critical risks that will make-or-break the company.

  1. Am I solving a real problem?
  2. Will people pay me to solve the problem?
  3. Can I acquire customers cost effectively?

Problem. Revenue. Channel.  These are the 3 key risks to web and mobile startups.

7 Comments

  1. Scott Barlow May 28, 2013 at 11:21 am #

    I’m 32 years old and have been launching ideas/businesses for 10 years now.

    This post is so refreshing and long overdue. After reading the Lean Startup last year i was paralysed with data and forms and clever statement that i did agree with.

    This post puts it simply:

    Am I solving a real problem?
    Will people pay me to solve the problem?
    Can I acquire customers cost effectively?

    Problem. Revenue. Channel. – this is my new mantra!

    Thank you Kevin, keep writing! More wisdom!

  2. Matthieu Garde May 30, 2013 at 6:36 am #

    You can also start by writing down your (riskiest) assumptions on a validation board.
    With the canvas, it will help you tracking your validation work, and optimising your learning path to success.
    Validation board is here : http://leanstartupmachine.com/validationboard/

  3. Trevor Owens (@to2) June 9, 2013 at 8:19 pm #

    Love the VBoard shout-out, Matthieu.

    Kevin, I don’t agree with this unless you mean it in a pedagogical sense. It’s just not true that new product or business success follows the same discrete number of questions or category of items.

    • kevindewalt June 9, 2013 at 10:11 pm #

      “new product or business success follows the same discrete number of questions or category of items”…

      I don’t think that is true either. 🙂

      So it looks like I haven’t been totally clear. For a segment of startups – web and mobile apps – I’ve consistently seen 3 major areas of risks. Are there exceptions? Of course. Are the risks for drug discovery startups completely different? Obviously.

      But people are smart enough to figure this out.

      To put it differently: if you were starting a web or mobile app and using the Lean Canvas to document your assumptions, which blocks would get the majority of your attention?

      Of course I could answer every question like this with “…. well …. ‘it depends’ ….” but that doesn’t make for very helpful advice (or interesting reading). The vast majority of people are overwhelmed with the complexity of Lean Startup – it doesn’t have to be this way.

  4. Rami Gazit June 17, 2013 at 12:00 pm #

    I do not think this is the correct order.

    The first items are usually problem and customer – what problem do I solve and for who.

    Then it may be the solution and value prop – do I really respond to the problem with the correct value and solution.

    Then it’s the channels and only then comes the cost and revenue streams, which is just indicating the revenue model and specific pricing. Of course it’s important, but not as the one mentioned before.

    If I’ve found a big enough problem (must have) and I’m providing a differentiated and appreciated solution, I’ll find the way to make money out of it later on. I can start with model X and price Y and change it later on, it’s less critical at first.

    Take Waze for example: they managed to verify they are solving a big problem (and “itch” for sharing, community etc.), in a unique way, and didn’t find the revenue model yet. But they have proven engagement with many many users. An exit of more than $1B is not so bad…

    In this case the users “paid with their on-going engagement.
    In some other cases, charging from day 1 is an indication for the level of the problem and solution strength, though.

    • kevindewalt June 17, 2013 at 5:02 pm #

      “If I’ve found a big enough problem (must have) and I’m providing a differentiated and appreciated solution, I’ll find the way to make money out of it later on.”

      I’ve found this to be most true in advertising-based models – obviously ads sell to big audiences, the problem is getting a big audience. To some degree gaming as well because the payment models are so mature.

      As far as “for who(m)”, I’ve personally found this to be less of a risk because it falls out of figuring out the problem. But this is probably just a matter of semantics, and to your point I’m doing both at the same time.

      “An exit of more than $1B is not so bad…”

      Yeah. No kidding. 🙂

  5. Andreas August 25, 2013 at 12:48 am #

    Kevin, thx for this post. Basically I agree that a certain “order” for going through the Canvas is a great help. Though I do not agree with making a “Mantra” out of this. Some thoughts / notes from my own experience and working with a couple of founders:

    1. The canvas makes only sense when filled out completely. If you have not any answers on certain blocks in the canvas one can leave them out. But you should have an idea of the whole business model not just a few segments.
    2. I think also that channels follow in most cases the customer
    3. When it comes down to attacking the risks I think that one should tackle the most riskiest parts first. That can be an hypothesis about your customer / segments, you channels etc.

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