Traditional business plan or the lean startup methodology… which is the right choice for your brand new business? In this article, we’ll be comparing and contrasting the two and helping you decide which option is best for your startup.
In the past, if you wanted to start a new business, you had to do a lot of planning first. Before you even considered launching your product or service, it was essential to do weeks, months… even years of comprehensive business research. This is known as a traditional business model or plan.
In 2010 though, this all changed with Eric Ries and the launch of his book: The lean startup. The focus was now on businesses to launch as quickly as they possibly could, learning and gathering feedback as they went.
If you own a startup, you will naturally want to do all you can to give it the best chances of survival. You will want to know if going slow and steady will win the race, or whether it is best to get your business to market as quickly as you can.
In this blog, we’ll be taking a look at both types of business plans and seeing which is the best choice for startups to take.
What is a traditional business plan?
The traditional business plan is often known as a formal business plan. This plan goes into a lot of detail about a business and can often be forty or fifty pages long!
The content a traditional business plan includes can vary depending on the type of business and the specific industry. However, the plans typically stick to this structure:
- An executive summary. This is a concise description that summarises the entire document and explains what the business plan includes
- A description of your startup and the goals you have. What do you want to achieve, and how will you measure your success?
- An explanation of your product or service. You may not have created or designed it just yet, but go into as much detail as you can.
- Market research. This identifies your target audience, your competitors and the price you should sell your product or service at.
- Biographies of the people involved in your business, as well as an organisational structure. What skills will they bring to your startup?
- Detailed financial projections, including cash flow, profits and losses. If you are looking for financing, either from an investor or a bank, you will want to mention how much money you are looking for, and what you will do with the capital you receive
- Finally, include any relevant documents in your appendix, including legal documents and certificates
Think of a traditional business plan like a thorough blueprint for your startup. It not only details your current position but where you see yourself and the company in several years’ time.
What is lean startup methodology?
Although the term ‘lean startup’ was devised by Eric Ries over a decade ago, the concept of lean startup methodology has been used long since then! One of the first entrepreneurs to use a similar concept was Henry Ford back at the start of the 20th century.
Lean startup methodology is simple. It is focused on getting a product or service to market as quickly as possible.
Many successful businesses like Dropbox, Zappos, and Buffer all used lean startup planning. They launched a no-frills version of their product or service and gathered valuable customer feedback as they went along.
You can reduce the lean startup methodology down to three simple steps.
1. Firstly, finding your business idea – something that solves a customer’s pain points. If you can’t do this, then your idea is not a viable one. At this stage, you will create your business plan (more on that in a little while)
2. Secondly, executing your business idea. One of the critical concepts of the lean startup is the creation of a minimal viable product or MVP. This is a simple version of your product that you can quickly build and get to market. By reducing the number of features the product has, you can save a lot of valuable time.
3. Finally, validating your business idea. Feedback is critical to lean startup methodology and can be used to either make amends to your MVP or abandon it and start again.
With the lean startup methodology, you create a business plan to identify your business needs and see if your idea is feasible. However, unlike a traditional business plan, a lean startup plan is only one or two pages long.
Many of the clients we have worked with have likened a lean startup business plan to the equivalent of the executive summary in a traditional business plan!
A lean startup business plan includes the following:
- The problem your startup solves
- Your target audience
- How your product or service makes things easier for your target audience
- What makes your product or service different from your competitors
- How much you will charge for your product or service, and what your costs will be
As you can see, it covers less than the traditional business plan, but still focuses on your product or service’s salient points.
What are the advantages of a traditional business plan?
A traditional business plan allows you to be thorough and meticulous. In fact, an Australian study found that a more formalized business plan led to higher gross revenues and an increase in sales.
Here are some of the advantages of taking the time to create a detailed business plan.
It can help you eliminate the risk
With lean startup methodology, there is the risk that you could rush your product to market too soon. This could potentially lead to a wide range of issues. At best, you could see your product fail. At worst, you could find yourself in legal trouble or see damage to your brand’s reputation.
As an example of where more thorough planning could have helped, take Clairol. They launched their ‘Touch of Yoghurt’ shampoo in the late 1970s, wanting to launch quickly in order to capitalize on people wanting to use natural beauty products.
The problem was that many people got confused and thought the shampoo was food. They then tried to eat it, becoming extremely ill in the process. It also didn’t help that the shampoo was promoted alongside a yogurt cookery book!
Although all-natural, food-based shampoos are the rage nowadays, the product bombed back then. Taking the time to research the market and see what customers really wanted would have helped the product to thrive.
It can help you get financing
A traditional business plan can be helpful if you are trying to get a loan from your bank, especially if they have very strict lending criteria.
Your bank will want to see through financial planning over the next few years, so they can determine how likely you are to pay them back.
It’s ideal for larger products
The lean startup methodology may not be the best option when you have larger, more ambitious products to consider. For example, you may struggle with a minimum viable product for expensive products like cars and smartphones as you won’t be able to release several iterations over time.
Take, for example, Elon Musk. With products like SpaceX and Tesla electric vehicles, a lot of work needs to be done behind the scenes to change customer mindsets, something which can’t really be done with lean methodologies.
With a traditional business plan, you can thoroughly analyze your product and the market, making sure that when you launch, everything is accounted for.
What are the advantages of lean startup methodology?
Many businesses use the lean startup methodology to determine product viability and gather customer feedback. According to Vector, it’s estimated that one in two businesses use the lean startup method.
Here are some of the ways that using lean startup methodology and business plans can help your company to grow.
It can get you to market quicker
The key benefit of the lean startup methodology is that you can launch your product or service quickly. This can be a great advantage when you are in a very competitive industry or have an idea that is highly time-sensitive.
You can pivot more quickly if you need to as well. Many companies did this during the pandemic. As bars and pubs closed during the lockdown, breweries and distilleries started to use the alcohol they had on-site to produce hand sanitizer instead.
You can walk away if your product or service doesn’t work
When you have spent weeks, perhaps even months, working on a thorough business plan, you’re going to be incredibly frustrated if your idea falls flat with customers.
Lean startup methodology has a lot less risk attached. As less time has been spent on planning and creating a basic MVP, if customer feedback determines that your idea is not a viable one, you can wrap things up. As you have spent less time and money on your concept, you can quickly move on to the next idea.
You’re more likely to attract investors
Investors have a lot of money, but not a lot of time. As a result, they’re more likely to react positively to a one-page plan or a pitch deck than a fifty-page document.
This means that you’re more likely to attract funding from angel investors or venture capitalists if you need it.
Many investors like to see a tangible product, which means a brief business plan and an MVP can be a winning combination when it comes to achieving investment.
SWOT analysis may help you with this. Here you are able to find a list of SWOT templates.
Traditional business plan vs the lean startup: Which is best for my business?
In the world of business, there seems to be an automatic assumption that the traditional business model is outdated and bad, and that the lean startup methodology is modern and good.
In the modern-day world, anything that can save us time or money is often seen as a bonus. However, sometimes taking the time to do thorough research and analysis can have its benefits.
So, which type of business plan should you use? The honest answer is… you need to choose the model that is the right match for your business and its specific needs.
If you have a lot of competitors or a time-sensitive product, it makes sense to get your product or service to market as quickly as possible. However, if you have a unique product that you don’t mind waiting to launch, creating a traditional business plan can work to your advantage.
You’re not restricted to one type of business plan either. You may choose to start with a one-page lean model and decide to expand on it later on. Alternatively, you may decide to pare your traditional business plan down to a one-page summary.
Your business has a 30% higher chance of growth with a business plan, regardless of what type you choose to use! So, whether your business plan is 100,000 or 1,000 words long, spending time creating one will definitely give your startup the edge.
Need a little extra support getting your lean startup off the ground? You Are Launched is here to help
Using the lean startup methodology to accelerate your new startup can be challenging, but extremely rewarding.
If you need additional support and assistance to guide you through the process and help you create a lean business plan, You Are Launched has the experience you need.
Our team of experts has been working alongside a wide range of lean startups since 2016, helping them to quickly scale and gain an advantage in the marketplace.
Contact us today, and let’s see how we can work together to apply lean startup techniques to your new business.