Wanting to start a new business? Use discovery driven planning.

[GPG]

I just finished a course in Entrepreneurial Start-up in which I learned an interesting method for creating and developing new businesses: Discovery Driven Planning (DDP). Some aspects can be linked to concepts which are mentioned in TMF . Since the articles are somewhat long and technical, I will give a brief summary with an example.

1. The first step is to define your level of ambition. How much profit do you want to make and with what kind of product or service? After defining that, you start calculating backwards. If you want to make a profit of 100$ by selling coffee mugs, how many coffee mugs do you need to sell at what price? How much does purchasing a coffee mug cost? How many overhead costs do you make? How many clients can you reach? Can you sell anyhow? Of course, there are many variables, but lets keep it simple for the example, purchasing and selling coffee mugs:

Required profit: 100$
Selling price per mug: 10$ (Assumption)
Purchasing cost per mug: 5$ (Assumption)
Profit margin per mug: 5$ (Assumption)

So, if I want to make a profit of 100$, I will need to sell 20 coffee mugs at a selling price of 10$, since the cost for purchasing the mug is 5$. I just divide the profit I desire by the profit margin per product. The prices and costs are estimates, they are assumptions. It is important to keep that in mind.

2. The second thing I need to, is define what I need to and have in order to sell the mugs. The reason I do so is to determine if I am able to perform the activities that are required to make the business work.

Can I sell the mugs?: Yes. (Assumption)
Can I store the mugs? Yes. (Assumption)

3. As we see in the first and second step, we have a number of assumptions under which this model works. For example, I assume that I can sell each coffee mug at a price of 10$. And I assume that I can purchase each mug at 5$ cost. But, is this true? Is it reality? This is where DDP becomes interesting. In the process of creating a new business, I will need to create a list with assumptions which are important for my business to work. When I have this list with assumptions, I can start testing them in reality. When my assumptions are incorrect, I just change them, which gives me knowledge on how my business works. For example, the selling price of 10$ was too expensive when approaching new clients. They would pay a maximum of 7,50$. The other assumption regarding cost turned out to be correct. This means I have to change my assumptions regarding my coffee mug selling business:

Required profit: 100$
Selling price per mug: 7,50$ (Tested in reality, therefore knowledge)
Purchasing cost per mug: 5$ (Tested in reality, therefore knowledge)
Profit margin per mug: 2,50$ (Tested in reality, therefore knowledge)
Can I sell the mugs?: Yes. (Assumption)
Can I store the mugs? Yes. (Assumption)

It also means, that I will have to sell more coffee mugs to hit my profit target. Instead of selling 20 coffee mugs, I need to sell 40 coffee mugs. Can I sell 40 coffee mugs? And can I store twice as much coffee mugs? Once again, I will have to test my assumptions. It turns out that I can sell 40 mugs, but I can only store 30 at one moment. Which means, I will need to find a way to store those extra mugs, or by using a different method for delivery. This gives me, once again, more knowledge on how my business works.

4. The final step is somewhat similar to step 3, as it states that entrepreneurs should test their assumptions at key milestones. In case of my coffee mug selling example, a key milestone could be purchasing the first badge of coffee mugs. Does the purchasing price I assumed, hold up at that point? The knowledge I gain at every step will help me in improving my business and should eventually lead to success.

The essence of DDP is that entrepreneurs should never project further than the knowledge they have, so they can stay realistic and adapt to new situations. Also, it helps entrepreneurs in specifying what is actually needed for their business to work.

 

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