How to Make Build vs Buy Decisions at a Start Up
In a Full-Stack Start Up like Local Kitchens, there are a large number of activities you must execute in order to deliver your value proposition to the end customer. Most, or all of these activities are fulfilled or coordinated by software products that your product/engineering organization may or may not choose to build themselves. Making this decision is challenging! If you choose to build too many things, then the team will accrue large maintenance and support costs and never be able to do more than tread water. On the other hand, choosing not to build is often insufficient - you must at least find a suitable alternative to buy, or identify a no-code solution with the ops team.
Your approach to making these decisions will likely be philosophical in part. It is helpful to frame these decisions by tying them to your company culture and values. For example, one of our core values is "Guest Love". We start with “what would the guest want?” and work backwards. The guest experience and quality are the biggest predictors of retention. Being able to own the customer relationship is key to driving retention, so we've elected to always build the end-to-end guest experience rather than relying solely on third party digital ordering platforms.
How you make these decisions should be unique to your business, but here are some frameworks and questions that we've applied at Local Kitchens, that should be helpful to you:
Will building improve the customer relationship?
Will you directly control your relationship and experience with the customer? Or will you be relying on an intermediary to interact with them?
Do off the shelf solutions allow you to deliver your value prop to your standards? Are you able to differentiate?
Is there strategic value in building?
Is there a novelty about your business or operations that can best be addressed with a purpose built solution vs contorting to an off the shelf workflow? What value does that unlock for you?
Does building help you achieve your long term vision more than buying?
Do you unlock integration with other built solutions that become more valuable than the sum of their parts
Does building unlock more favorable unit economics than buying?
Does building help overcome cultural resistance to technology or change the nature of your labor force in an important way?
Near term focus: Does the strategic value unlocked by building align with current company priorities and goals?
Although there may be strategic value, you need to compare that against current company priorities and goals
Does the sequencing of work make sense? Would buying an off the shelf product allow you to prioritize building something with a more urgent need and higher impact?
While there may be many reasons to build, at the end of the exercise you should be able to articulate a single reason that by itself is strong enough or you should have a measurable articulation for why the multitude of reasons equates to enough value to justify building. It should clearly make sense to your organization why building should be prioritized now over the other possible things you could build.
It may seem surprising that cost is not a more important metric. Firstly, in start ups, you’ll achieve higher gains through focusing on new value creation, as opposed to cost optimization. Furthermore, it is challenging to save money by building when considering the lifecycle costs holistically. B2B SaaS often has zero marginal cost to sell. This gives vendors the ability to price products lower than what you could build for yourself. It also typically means you will have a lot of room to negotiate the price, and telling the vendor you're making a build vs buy decision will likely give you leverage in the negotiation. Perhaps the most important cost in the lifecycle is the opportunity cost - what is the "cost" associated with everything you choose not to do in order to support building and maintaining. When considered holistically, the cost differential between build vs buy is usually small enough that factors like strategic value and impact on customer experience weigh more heavily on the decision.
Let’s look at some examples where we chose to build. We decided early on we would build all of our digital ordering technology so that we could build a direct relationship with our guests, reward their loyalty, and convey our multi-brand ordering value proposition in the most coherent way possible for first time guests.
Will building improve your customer relationship?
We determined that by controlling digital ordering our guests would become Local Kitchens account holders and we’d be able to market to them directly by offering rewards and loyalty
Is there strategic value in building?
Multi-brand ordering is core to the Local Kitchens value prop and we could best convey that in a consumer experience we control
Rewards, customized menu discovery, and activation marketing would allow us to drive better retention
Having a direct relationship would drive contribution margin by reducing the commissions we pay to 3rd party digital ordering platforms - often as high as 30%
Building allowed us to also develop an in store ordering kiosk and seamlessly recognize the guest across channels
Near term focus: Does the strategic value unlocked by building align with current company priorities and goals?
Acquisition, retention, and direct order % were 3 of our most important company metrics at the time and still are.
As a result, we were able to increase direct sales % and we have best in class retention and NPS for a food tech business. Since building would deepen our relationship with the customer, create strategic value, and was aligned with our immediate priorities - building was a no brainer.
Our kitchens have ~10x menu items of a traditional fast casual restaurant like chipotle and have a rotating assortment, where a new brand may be added every other month. This novelty about our business equates to more knowledge for cooks to memorize and continuous retraining of cooks. We decided to build our own Kitchen Display System (KDS) to ensure cooks are cooking the right dishes to specification.
Will building improve your customer relationship?
A better trained staff following prescribed workflows specific to our business would allow them to perform with higher order accuracy on a larger number of SKUs - this would improve our customer satisfaction
We could integrate an off the shelf solution like Square/Toast, but since those solutions don’t have open APIs and the product is a simple web app, we determined we could build a better solution, faster than integrating. Since we were a pre-series A company with a small engineering team, velocity was critical
Is there strategic value in building?
In our long term vision, we’ll be able to cook and deliver a high quality rotating assortment of menu items and cross reference customer feedback with the analytics from the exact cook station that made the order. We determined that building would advance us further towards our vision than integrating a bought solution
Near term focus: Does the strategic value unlocked by building align with current company priorities and goals?
At the time, we had no KDS and we were operating with paper tickets. The current state of operations was the biggest bottleneck to growth. This was the most important problem in the company at the time and there was not a higher priority product we would have rather worked on first.
Working backwards from the guest, we concluded that driving high quality execution was one of the most important factors to retaining our guests and through building our own software we could encode our own specific kitchen work flows in ways we couldn’t with off the shelf software.
Asking the above questions is a great general purpose decision framework for identifying when to build, but you should also reflect on what other factors are important to your organization and customers. Finally once you’ve aligned on how your organization makes these decisions you should also align on which stakeholders are involved in making them. Starting with a built solution, and then transitioning it to a bought solution later is usually more painful than buying first, and comes with morale costs. So when in doubt, there is less organizational cost and more de-risking potential that can come from starting with off the shelf tools and building later, after learning more about the problem.
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