Leaps of Faith

 

When a company starts up, or when an existing company makes a significant change to its operations, or products or services, it makes a couple of leap-of-faith assumptions.  Firstly, is the new product or service something that people want to buy? – this is the value assumption – will people find value in the new product?  Secondly, can the company retain the  customers it gets, and can it acquire more? – this is the growth assumption.  The assumptions are tested by a series of minimum viable products or MVPs which should serve to understand the risks and enable controls to be put in place, before too much is invested.

A host of new companies have popped up recently with the value proposition of making cooking easier for customers.  Blue Apron and HelloFresh are two of the larger ones.  They deliver boxes of ingredients to fit specific recipes for $60 a week.  The model is subscription-based, and customers sign up to a weekly menu of meals. The market is world-wide, and despite being new, is valued at $2bn per annum and growing.

Last June, Blue Apron went public and was valued at $1.9bn.  Since then, its share price has fallen by 80%.  HelloFresh has only recently listed in Frankfurt.  The biggest problem for these new companies, it seems is retention and acquisition.  Last year, HelloFresh doubled its number of customers to 890,000, delivering 20m meals. However, one year after joining, 89% of its U.S. customers had stopped using the service.  Cost is an issue, but having to stick to a specific dinner schedule that they had signed up to some days before, is turning people off.  And now supermarkets have gotten in on the act, at a lower price (given their buying power) with meal-kits you can just buy day-to-day.

Blue Apron now says it is planning to sell its kits through a number of American retailers, giving up on the idea of a subscription-only service.  It really looks like the growth assumption was not sufficiently tested, nor the risks in the assumption assessed.

 

Story source: The Lean Startup – Eric Ries, The Economist magazine.

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