TPS Entrepreneurship: Working Out Unit Economics Before Running
It is important to emphasize a tried and true analogy, that of comparing a venture to a car or plane (or flying car). Consider yourself, the founder, as the main driver with your fellow co-founders as the highly caffeinated co-pilots that will join you on a long cross country drive/flight towards the vision you have collectively set in your pitch deck. Now, before the investors can come and fill up your tank with the gas that you will most certainly need to speed towards your vision (or build more carplanes), you must first make sure that the vehicle you have built actually works. In fact, I personally love the car analogy because as any serial (cereal?) entrepreneur or seasoned investor worth their salt would admit, there is often a lot of “wheel spinning” that has to occur before the company finally gets on track. The good news is that formula one cars also spin their wheels on the start line just before they zoom off down the circuit.
Figuring out what type of fuel you need and how far each gallon of fuel will take you are the building blocks or unit economics of any venture. Simply put, these are the direct costs and expected revenues on a per unit basis. In tech that can mean the customer acquisition cost and the life time value of a PMPM (per member per month) user or a SaaS (Software as a Service) enterprise client or the margin you make on reselling a wearable sensor plus associated software.
Remember, your product or service is the base number and growth hacking is only the multiplier. Always start with the customer in mind. Understand who your core customer is, find users like your ideal customer congregate (both in the real world and online) and figure out the best way to get in contact with them. Once you have both your customer and unit economics out, rev up your engines and start your path towards your vision. The faster you fly down that entrepreneurial pathway; the more investors you will attract as proverbial hitchhikers begging you for a ride. Once you have the right investor on board, he or she will make sure you accelerate and shift gears through the multiple rounds of financing needed to continue to scale your business. I find that the best investors take a literal back seat to the founders, but are ever ready to point out dangerous roadblocks or nifty short cuts to ensure a quick and safe journey towards success.
The final use of the car analogy comes by taking the infamous Toyota Production System (TPS) into consideration. TPS is as close to a panacea as one could get when it comes to process development and improvement. An integrated socio-technical system, developed by the world’s largest car manufacturer by volume, Toyota, the TPS combines eastern management philosophy and modern day manufacturing practices that can be easily transmogrified into the digital realm.
Originally called “just-in-time production”, TPS builds on the approach created by the founder of Toyota, Sakichi Toyoda, his son Kiichiro Toyoda, and the engineer Taiichi Ohno. TPS is usually a good place to start because in its most basic form — it reminds entrepreneurs that the earlier you discover a problem, the less likely that problem itself will grow as you scale your business, resulting in a higher chance of success for your startup.
The main objectives of the TPS are to design out overburden (muri) and inconsistency (mura), and to eliminate waste (muda). Therefore, it is easy to see that the most significant effects on delivering value to your end user can be achieved by first designing hardware or software that is capable of delivering the required unit economics smoothly; by designing out all that “mura” (inconsistency). It is also crucial to ensure that your venture is as flexible as necessary without stress or “muri” (overburden) since this will eventually generate “muda” (waste). In the case of tech, this stress should be considered as both the biological stress on the co-founder and the technical stress on the software code or physical stress on the digital devices (hardware). Founders must realize that any tactical improvements in waste reduction or the ideal elimination of muda are very valuable to the venture. And the earlier the better. There are eight kinds of muda documented in the TPS, tech entrepreneurs need only occupy themselves with the top two: Waste of Overproduction and Waste of Time on Hand.
When it comes to Waste of Overproduction, we must consider both waste when it comes to the production of physical hardware or waste when it comes to the deployment of a digital campaigns. Indeed, the beauty of the internet is that the costs of selling more software is negligible and closer to zero than industry could ever get.
When it comes to Waste of Time on Hand, here it’s all about reducing waiting. Annihilating the waiting time for any process is a petrous premise of a great many tech ventures attempting to eliminate the mundane commonplaces of existence. Indeed, it is also important to eliminate waiting time from the U/X or User Experience perspective, meaning that all your digital users should experience the same seamless integration of all software modules — the all illusive intuitive user pathway, but founders must also take into consideration the utilization of their team and digital resources — especially the multiple marketing channels used during a digital campaign. Orchestrating the storm should be seamless as well.
The elimination of waste must come to dominate the thinking of any successful tech entrepreneur, especially given the large amount of waste currently enjoyed by traditional industries like healthcare, where many experts estimate the muda to be close to 30% or two trillion dollars of the global seven trillion dollars spent.