A startup pivoting – what it is and what is the connection with a business model?
In the business, a pivot is when a startup changes its strategy, without changing its vision. All to earn more and achieve a better product-to-market-fit. Despite its short definition, pivoting in practice can be tricky for entrepreneurs. A pivot might be risky when a company wrestles with a lack of clear strategy or isn’t sure about the vision.
Pivoting and a business model – what’s the dependency?
Most startups that succeeded pivoted. It’s rather a rare situation that, from the beginning, a startup has a profitable business model. Sometimes, despite owners thinking there will be a demand, the real market quickly verifies it. What are the attributes of a good business model?
- it helps to provide its client with value (e.g. solves client’s problem),
- it targets the right segment of clients (e.g. the target group is young adults),
- it has effective sales channels (e.g. online),
- it’s profitable for the company.
A startup’s path to success is often long and bumpy. Many innovative companies might look for the right and scalable business model for a long time. But those who succeeded often did a pivot beforehand.
Characteristics of different pivot types
- Channel pivot – When a company changes its sales channels, it’s called a channel pivot. For example, a company that sold its goods in offline stores closed its business and turned to an online business,
- Technology pivot – It happens when the product’s technology changes. E.g. a platform that changed its tech engine, started to aggregate data differently. It gives different, new possibilities,
- Zoom-in pivot – A company focuses only on one functionality of the whole platform – it’s a zoom-in pivot. E.g. a startup built around cybersecurity focuses on safe online payments. More about this real-life example later in the article,
- Zoom-out pivot – A company diversifies its product. A good example is adding a new product. E.g. a company that produces road motorcycles also starts to produce cross motors. It’s an example of how Honda pivoted,
- Customer segment pivot – When your product is dedicated to young adults but it turns out that those who buy it are teenagers – the company should do a customer segment pivot. A good example is Snapchat – the platform turned out to be a better solution for teens rather than students.
When to pivot so it doesn’t turn bad?
There is never a certainty and the right moment to pivot. Although, startups should consider pivoting:
1. When the product doesn’t satisfy clients
Launching a product is great but the pressure to sell it arises. If clients don’t focus on the core functionalities or they don’t find the product useful, the churn rate will rise. This is a moment for pivot – the business without clients would go bankrupt.
2. When the startup has a runway that allows for making strategic changes
Most startups count their solvency using a burn rate. This indicator shows how much money a startup spends (burns) in one month. Startup gains are divided by money burnt. A result is the number of months left to burn all the money in the bank. E.g. the company that earned in one month 10k, and burned 2k has 5 months of a burn rate. When the rate goes down it means the business doesn’t get any new clients. The company should pivot, lingering may lead to bankruptcy.
3. When a startup still has the budget and can plan strategic changes
When it turns out that the strategy and the hypotheses are wrong, a startup should pivot. Pivot doesn’t guarantee profits but works as an attempt to get on track. A pivot has to be well-planned and even better executed. Meetings should be regular. Also, owners should ask themselves questions about the success of the planned strategy. They should forecast how it will look like in 2, 4 or 6 months from today. If startup owners cannot answer such questions, it may indicate a weak or inaccurate vision. It’s also important to meet with teams, business partners, clients and ask them strategic questions about the planned pivot.
It is worth mentioning that sometimes the product does not allow to quickly monetize the traffic. Then what? This was the case in the Hop Bunny startup.
The startup launched the Hurry Heroes mobile game, the premise of which was to develop your virtual character based on physical activity. The idea had a lot of retention and users used it, but from the business point – micropayments in the game were caused by the laziness of the user who was not physically active and wanted to go a step further in the game. However, most of the players, meticulously performed activities to gain a higher and higher level in the game, which unfortunately resulted in the lack of monetization.
“In the meantime, we’ve noticed that most of the people in the app who are conscientiously active are not – as we assumed – people between the ages of 14 and 18, and people between the ages of 24 and 30.” – says Mikołaj Kania, CEO of Bunny Hop
“Then an idea came up to turn this enthusiasm for exercise into something useful for gamers, which we can also monetize. The concept of a marketplace with clothing and nutrients aimed at athletes was created, in which discounts on the assortment are gained by the user, just like the levels in the game. In this way, the player could, through his efforts, reduce the price of a sports jacket from PLN 300 to PLN 240, which motivated the users very much.” – adds Kania.
This way, after the beta marketplace was released, we managed to monetize the first client after 4 days, compared to the game where we had to wait almost 2 months for it.
Does a startup pivot guarantee success?
Pivot always means risk. To minimize it, read about the main reasons standing behind a bad pivot:
- impulsive decision e.g. made under the pressure of one of the startup’s owners,
- pivot made despite there was a lack of a market research,
- lack of knowledge on the competitors’ selling points,
- change in technology that leads to a technical debt,
- change of the distribution channels based on short-term, sampled data.
The popular startup – how the companies pivoted
- YouTube started as a dating platform, but the company noticed low traffic on their website. They did a pivot and opened a platform to different types of videos. It turned out great. Recently, YouTube is developing and pivoted again – they introduced a new subscription model,
- Netflix was a DVD rental company that sent people’s movies via post. The company wasn’t doing well. After unsuccessful talks with Blockbuster, Netflix decided to pivot – now it’s one of the leaders among video streaming platform.,
- Slack – In the beginning, Slack was a communicator in a game named Glitch. With a small group of fans, the company was on the verge of bankruptcy. The startup decided to pivot and transformed into a business communicator. Still, Slack’s vision is communication and cooperation – today it’s just for companies. Slack’s revenue speaks about its success,
- PayPal is the company that changed from cybersecurity to focus on safety of cyber transactions. Their pivot was successful – in 2019 their revenue got to 17,8 billiard dollars.
Do startups pivot during COVID-19?
The COVID-19 pandemic influenced many businesses and caused another global crisis. Companies are careful – rather than pivoting they try adjusting their offer to the market demand. E.g. a cosmetic company that’s selling protective masks still follows its vision but slightly changed its strategy.
A pivot is not an easy way to succeed – it’s an ability to change and adjust to clients’ needs. It has to be well-calculated or else it won’t bring any return on “investment”.