Do Pivots Matter?

Do Pivots Matter?

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In late 2013, Cowboy Ventures did an analysis of US-based tech companies started in the last ten years that are now valued at $1 billion. They found 39 of these companies, which they called the ‘Unicorn Club’.

The article summarised ten key lessons from the Unicorn Club. Surprisingly, one of the ‘learnings’ said that, “…the ‘big pivot’ after starting with a different initial product is an outlier. Nearly 90% of companies are working on their original product vision. The four ‘pivots’ after a different initial product were all in consumer companies (Groupon, Instagram, Pinterest and Fab).”

Related: What is The Lean Start-Up Movement?

One of my students sent me the article and asked, “What does this mean?” Good question.

Since the pivot is one of the core concepts of the Lean Start-up, I was puzzled. Could I be wrong? Is it possible pivots really don’t matter if you want to be a Unicorn?

Short answer – almost all the Unicorns pivoted. The authors of the article didn’t understand what a pivot was.

 

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A pivot is a fundamental insight of the Lean Start-up. It says on day one, all you have in your new venture is a series of untested hypotheses. Therefore you need to get outside of your building and rapidly test all your assumptions.

The odds are that one or more of your hypotheses will be wrong. When you discover your error, rather than firing executives and/or creating a crisis, you simply change the hypotheses.

What was lacking in the article was a clear definition of a pivot. A pivot is not just changing the product. A pivot can change any of nine different things in your business model.

A pivot may mean you changed your customer segment, your channel, revenue model/pricing, resources, activities, costs, partners, customer acquisition – lots of things other than just the product.

A pivot is a substantive change to one or more of the nine business model canvas components.

Okay, but what is a business model?

Think of a business model as a drawing that shows all the flows between the different parts of your company’s strategy.

Unlike an organisation chart, which is a diagram of how job positions and functions of a company are related, a business model diagrams how a company makes money – without having to go into the complex details of all its strategy, processes, units, rules, hierarchies, workflows and systems.

Alexander Osterwalder’s business model canvas puts all the complicated strategies of your business in one simple diagram. Each of the below nine points specifies details of your company’s strategy:

1. Key partners

  • Who are our key partners?
  • Who are our key suppliers?
  • Which key resources are we acquiring from our partners?
  • Which key activities do partners perform?

2. Key activities

  • What key activities do our value propositions require?
  • Our distribution channel?
  • Customer relationships?
  • Revenue streams?

3. Key resources

  • What key resources do our value propositions require?
  • Our distribution channel?
  • Customer relationships?
  • Revenue streams?

4. Value propositions

  • What value do we deliver to the customer?
  • Which one of our customers’ problems are we helping to solve?
  • What bundles of products and services are we offering to each segment?
  • Which customer needs are we satisfying?
  • What is the minimum viable product?

5. Customer Relationships

  • How do we get, keep, and grow customers?
  • Which customer relationships have we established?
  • How are they integrated with the rest of our business model?
  • How costly are they?

6. Channels

  • Through which channels do our customer segments want to be reached?
  • How do other companies reach them now?
  • Which ones work best?
  • Which ones are most cost-efficient?
  • How are we integrating them with customer routines?

7. Customer segments

  • For whom are we creating value?
  • Who are our most important customers?
  • What are the customer archetypes?

8. Cost structure

  • What are the most important costs inherent to our business model?
  • Which key resources are most expensive?
  • Which key activities are most expensive?

9. Revenue streams

  • For what value are our customers really willing to pay?
  • For what do they currently pay?
  • What is the revenue model?
  • What are the pricing tactics?

Business Model for Unicorn Club

Read Next: 8 Tips for Coming Up With a Business Idea

All the big players pivot

Being willing (and able) to pivot is a clear success factor.

So to answer my student’s question, I pointed out that the author of the article had too narrow a definition of what a pivot meant. If you went back and analysed how many Unicorns pivoted on any of the nine business model components, you’d probably find that the majority did so.

Take a look at the Unicorn Club and think about the changes in customer segments, revenue, pricing and channels all those companies have made since they began: Facebook, LinkedIn — new customer segments; Meraki — new revenue models and customer segments; Yelp — product pivot. Now you understand the power of the pivot.

Unicorn Club

Lessons learnt:

  • A pivot is not just when you change the product
  • A pivot is a substantive change to one or more of the nine business model canvas components
  • Almost all start-ups pivot on some part of their business model after founding
  • Start-ups focused on just product pivots will be limited in their strategic choices — it’s like bringing a knife to a gunfight.

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To read more from Steve, click here.

Steve Blank
Steve Blank is a professor of entrepreneurship and former serial entrepreneur. His latest book is The Startup Owner's Manual.