Pivoting is a term introduced by Eric Ries in The Lean Startup to describe the controlled process that entrepreneurs execute when they determine that their current business assumptions are incorrect and they must change course.
Let’s look at an example. Say I have conceived of a smart-phone based product that greatly enhances the playing experience for a golfer (See https://www.iwanamaker.com/ for an example of such a company, although the following scenario doesn’t describe this company).
I develop a plan that (a) spends $D to develop the product over 6 months, and then (b) sells it to golf tournament organizers for a price of $P per tournament.
I expect to sell U1 and U2 units of the product during the first and second years using marketing and sales techniques that will cost $M1 and $M2 per year respectively, starting immediately after product development completes.
After analysis, these assumptions seem to indicate that, if proven valid, we will have a financial win for all stakeholders.
My next step is to raise money to support the development effort. During the next 8 months, we build a series of iterative products. After each is deployed, we learn valuable information from golfers and tournament organizers.
As a result, we adapt product features to accommodate our newly gained knowledge of their needs.
After 8 months, we discover that everybody likes the product, but they are adopting it at a far slower rate than we had anticipated. We are quickly running out of cash. Our original assumptions have proven false in at least two ways:
- Development took 8, not 6, months
- Product adoption is not going as well as planned.
When we enter these new realities into our financial plan, we see we are no longer headed in the direction of financial success. What do we do? We have a number of strategic alternatives:
Fold We could abandon the company. This is likely a bad, or at least premature, choice.
Pivot Strategy #1 We could try again to adapt the features.
Pivot Strategy #2 We could lower the price $P hoping to increase sales. When we lower the price and increase volumes in our assumptions, the company once again returns to the direction of a financial success (at least on paper).
This is what Wal-Mart has done for years; by lowering its prices, it has increased its market share, and thus increased its total profit in dollars. To read about the strategy Wal-Mart uses to keep its prices so low, click here.
Pivot Strategy #3 We could raise the price $P hoping to increase margins on sales, without significantly decreasing volume. When we raise the price and slightly decrease volumes in our assumptions, the company once again returns to the direction of a financial success.
This is what GoGo did in 2013 by raising its prices. It decreased its market share, but provided better quality service to its remaining customers, and increased its total revenues and total profit in percent and total dollars. To read more about what happened when GoGo raised its prices, click here.
Pivot Strategy #4 Instead of selling to golf tournament organizers, we could sell to golf courses, or to retail sporting goods stores, or using television spot ads or via 30-minute infomercials to reach golfers directly.
Pivot Strategy #5 Instead of selling the product, we can give it away for free. We accrue revenue by selling advertisements to companies wanting to target golfers.
Pivot Strategy #6 We could raise more money via loans or investments so we will have sufficient cash to see us through to the time when sales are great enough to generate enough cash. That might be necessary in combination with pivot strategies 1, 4, or 5.
Ignore the facts We could simply decide the original assumptions must be true, and if we just wait long enough, they will become true. This is probably a bad choice.
In summary, pivoting makes sense when you:
- State your business assumptions upfront
- Validate the business could succeed financially if the assumptions are correct
- Spend as few resources as possible to determine if key assumptions are valid
- Change surrounding assumptions to accommodate a disproven assumption
- Compare alternative pivoting directions
Changing course is inevitable. Use this methodology to stay away from the rocks.
This article is an edited excerpt from the book Will Your New Startup Make Money? by Al Davis. Davis is a serial entrepreneur currently in his fifth startup. He is also an angel investor and the author of six books.
‘Map and Compass’ photo courtesy of Jamie Dobson (Creative Commons)