Lean startup guru Eric Ries recommends that start-ups refine their business models through small tweaks—or pivots.
These days, Chegg, a Santa Clara, California, company, bears little resemblance to its original form. In 2003, its site—then Cheggpost.com—offered free classified listings for college students.
In 2006, Aayush Phumbhra, one of Chegg's co-founders, began rethinking the company's business model. He noticed that the site's traffic was heavy only at the beginning of each semester and that many visitors were buying and selling mostly textbooks.
Instead of buying these textbooks and selling them after the semester ended, students might prefer to rent the books, Phumbhra figured. He began testing his hypothesis. The company purchased 2,000 textbooks from sellers on Amazon.com; launched a textbook rental site, Textbookflix.com; and e-mailed its customers to announce the new service. Within a few months, it was clear that the textbook rentals were a big hit, and Phumbhra began switching the focus of the company. Chegg now rents more than one million books a year and has 150 employees.
This sort of business model shift, called a pivot, has become common among start-ups. Like the basketball maneuver of the same name, in which a player keeps one foot planted while changing direction with the other foot, a pivot occurs when a start-up tests a new direction while still keeping one metaphorical foot in the original business.
Although pivoting is something that smart entrepreneurs have been doing for ages, Eric Ries, a tech entrepreneur and blogger, recently coined the term and honed the concept. Pivots are an important part of creating what Ries calls the lean start-up, a methodology for launching businesses quickly while controlling spending. "Through pivots," says Ries, "we can build companies where the failure of the initial idea isn't the failure of the company."
In Ries's model scenario, a start-up creates a basic product or service with just enough features to be tested by customers. By talking to customers and tracking their purchasing behavior, the company determines whether the business is viable or whether it needs to make a pivot, by adjusting some component of the business model.
The idea of the pivot first gained popularity in Web-centric industries, in which decreasing development costs and cheap online tools make it easier than ever before to make rapid changes. Now, even nontech businesses have begun adopting the strategy.
Bilingual Birdies is one example. The New York City-based company, founded by former teacher Sarah Farzam, hosts bilingual music classes for toddlers and preschoolers. For the first year of the company's existence, Farzam, who is fluent in English, Spanish, and Farsi, taught many of the classes herself. She rented space in schools and community centers and then pitched moms wherever she could find them: in parks, on neighborhood blogs, and in online Yahoo Groups. Farzam gave parents the option of paying in advance for an entire semester, but most paid on a class-by-class basis. "Some semesters, the classes were full, and others, not," Farzam says. "It was superstressful." And the business wasn't profitable.
Then, a local community center approached Farzam with a proposition. It wanted to pay Bilingual Birdies a flat rate to teach classes there. The community center would provide the students. Farzam wasn't sold at first—a flat rate would cap the amount she could earn per class—but she recognized that her current business model wasn't working. "If I wanted scalability," Farzam says, "I couldn't be handing out fliers forever."
She agreed to the arrangement and was amazed at the results. "There was no drama at all," says Farzam. "I sent an invoice, and a check came in the mail every month. It allowed me to focus on sales in the right way."
Over time, Farzam phased out the old model and focused on flat-rate classes. The small pivot has had big results. These days, Bilingual Birdies, which is now profitable, employs a stable of teachers to run classes in more than 25 schools and community centers in New York and New Jersey.
In an ideal pivot, says Ries, a company will be able to test a new business model while keeping the old model intact. But some companies don't have that luxury. Take the case of Stylous, an online shopping start-up based in San Francisco. It recently made a pivot out of desperation. The company was founded by Steve Dekorte and the husband-and-wife team of Rich and Meg Collins with the ambitious goal of revolutionizing the experience of shopping for clothes online. The founders wanted to aggregate every fashion accessory and high-end article of clothing on the Web onto one site. Users would be able to search for items visually, browsing through photos of products on streamlined webpages that weren't cluttered with product descriptions or other text. When shoppers clicked on a product, they would be taken to the site of the retailer that sold the item, to complete the purchase. Stylous would earn a commission on the resulting sales.
The founders spent four months creating a site with the technology to handle millions of visitors and load pages more quickly than most other e-commerce sites. But eight months after the site's launch, traffic and sales were dismal, and the company was running out of cash.
Around that time, Rich Collins started reading Ries's blog, Startup Lessons Learned. Collins realized that Stylous was not a lean start-up. "We made assumptions about what people would like without ever really getting out there and talking to customers," Collins says. "We were building the perfect solution for a problem that didn't appear to exist."
He began meeting with users to get feedback and observe how they navigated through Stylous.com. Collins discovered that the vast majority of them were searching for brand names and for items that were on sale.
With that in mind, the founders tried a new concept. They began creating Twitter accounts to announce time-sensitive deals from designer brands. For example, LouboutinSales, one of Stylous's Twitter handles, recently tweeted about a sale on a Christian Louboutin handbag. Stylous earns a commission when someone clicks on the link in the tweet and buys the item. (Stylous has different commission arrangements with each retailer.) The day after Stylous launched its first 10 Twitter accounts, sales increased tenfold. Since the pivot a year and a half ago, the company has amassed 80,000 followers across its 160 Twitter accounts.
Still, the founders have mixed feelings. "We were hoping to do something that would change the shopping experience for the entire world," Collins says. "But sometimes you have to be realistic and go in the direction that allows your company to continue to exist."
For some entrepreneurs, the toughest part of a pivot may be setting aside their personal convictions—and egos. "It's very hard as an entrepreneur to move away from your core idea," says Phumbhra, of Chegg. "But if your customers are telling you to, you have to learn to be flexible."
Read more recent articles by Jason Del Rey: