Testing a Business Model: Three Startup Stories

When entrepreneurs think about experimentation, it’s often around their products. Will customers be interested in a brand new offering or an additional feature? But just as important is experimenting with your business model: the mechanism by which you actually make money.

Here’s how three startups — PayrollHero, Munchery, and Tough Mudder — have experimented with their business models and found the sweet spot for their customers.

PayrollHero

A cloud-based time, attendance and payroll app in the cloud built for web and mobile — you clock in and out by taking a picture of yourself — PayrollHero launched in the Philippines and now has customers in Singapore, Thailand, Indonesia, Malaysia, Canada and the United States.

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While setting up an outsourcing company in the Philippines, founders Stephen Jagger and Michael Stephenson couldn’t find any software to run their local payroll and other human resources functions. Because the major players in the west didn’t work in the Philippines, in 2012 Jagger and Stephenson built a small app themselves to do the work. The few businesses they happened to show it to were immediately excited, and when the Philippines branch of The Coffee Bean & Tea Leaf signed up, Jagger and Stephenson knew they were onto something bigger.

But it wasn’t immediately obvious how to charge for the service. First, they tried a freemium model — common among U.S. startups — offering limited services free, and expanded or premium services for a fee. After experimenting with many freemium options, they concluded that the model wouldn’t work like it often does in western countries, and they switched to annual subscriptions, which is now their only option.

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“Payroll admins get bogged down with their existing payroll systems every two weeks,” Jagger explained, “And we learned we needed to get the client engaged in the onboarding process so that we could get them live and off their legacy platform.”

For sales, they do live demos, and then make customers sign up for a year. Even though their customers’ cash flow takes a hit doing it this way, it was ultimately the best decision, Jagger said. “Once we moved to annual payments and implemented a strict onboarding process with a Gantt chart we shared with the client daily, we found that helped us move them from step to step to get the process completed.”

Munchery

Munchery is a food delivery startup — except the food that arrives at your door doesn’t come from a restaurant. It’s made by a chef, and it’s healthier than the pizza you ordered last week.

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The service began in 2013 as a two­-sided market, like eBay or Airbnb, where chefs were like eBay sellers: They were responsible for everything, and Munchery took a cut of the meals they sold. They supplied their own kitchen for cooking, took pictures and wrote descriptions of their food, set prices and even delivered meals to people. After repeated testing, Munchery learned that, because food is a visually driven product, when chefs took bad pictures, it was actually worse than when they put up no pictures at all.

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And they weren’t just bad at photos. Munchery chefs made terrible grammatical errors, failed at delivery, and were the worst at customer support (if no one liked their food, they took it personally). Pretty quickly, Munchery caught on, hired other people to do most of that work, and let chefs just do what they do best: design menus and make food. That went well enough for a while, but as customer demand grew, the startup realized it needed to move the chefs in­house in order to be able to do more volume, have more menu items, and to maintain quality. Once they had that insight, they brought in four or five chefs right away and began selling directly to customers.

“We wanted chefs to have a more structured approach to R&D, and to have the proper facility and staff and support to scale,” co­founder Tri Tran explained. When independent chefs experimented, they risked lower quality products. Also, Tran said, independent chefs would sell out too quickly. Bringing the chefs in­house became the obvious answer to both problems.

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Today, pretty much everything is vertically integrated. Customers haven’t noticed any changes during the process, and the company is growing. Munchery still has some independent chefs for pastries and beverages, and their next move is to bring on partners to produce specific components — like chicken stock or béchamel sauce — made to their chefs’ specifications. The marketplace idea has been 86’d.

Tough Mudder

Tough Mudder is a series of obstacle events designed to resemble military training courses. Seeing similar events gain popularity and profitability in Europe, Will Dean founded the company and tailored its approach to the American market. Having himself become disillusioned by the time factor of traditional competitive events like marathons and triathlons, he felt a personal conviction for his vision.

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Spending $8,000 or so in Facebook advertising, Dean set the attendance goal for Tough Mudder’s first event at 500 people. Nearly five thousand signed up. After that first event, the team focused on how to hone their skills as an events delivery company in the nascent obstacle event industry. They tested their physical products, learning how to innovate obstacles and to figure out the right length of training time. From there, they focused energy on scaling, reaching out to sponsors and partners that could help them grow the brand to reach larger audiences.

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While that business model hasn’t actually changed — a pretty rare feat — Tough Mudder has rigorously tested the audience for their events and has correspondingly introduced different kinds of events to appeal to wider audiences. By the end of 2015, they will have had at least two million participants in eight countries. With more than five million followers on their social channels, their community is a core part of the business, and one day, it may the source for a new business model.

This week, the Lean Startup is taking over the blog on Intuit Labs with original stories and a fresh perspective. Centered around experimentation and investigating all parts of a business or product idea, this week’s posts include case studies, tips, Q&As, startup stories and more.  If you want to learn more about Lean Startup and how it’s applied at Intuit, visit the Intuit Innovation Institute. This piece was written by Mercedes Kraus.

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