Every entrepreneur believes they have the product that will revolutionize the world and attract venture capitalists who will bath them in piles of cash to achieve their dream. But venture capitalists don’t back products, they back winning business models. Companies with winning business models have the potential to generate lots of revenue with easily scalable, repeatable and profitable sales and marketing strategies. And none of that will be truly determined until you successfully test and optimize your product market fit with potential customers.
What is Product-Market Fit?
Product-market fit is the point at which you have identified the best target industries, buyers, and use cases for your product. At this point, sales become repeatable and scalable, and your product is flying off the shelves. It is the Holy Grail for most startups—one that dictates whether they are on the path to being the next 1-in-10 “10x” investment return companies for their investors or the next 3-in-10 flameout that crashes and burns out of business.
How to Identify Product-Market Fit
There are several distinct phases in the search for product market fit. An entrepreneur needs to:
- Have a basic understanding of the market landscape and the key pain points being solved by your products
- Research the various industry verticals and potential buyers where your product may sell
- Take your product to market to validate your hypotheses, and begin to optimize your target clients, use cases, messaging, price points and go-to-market strategy
- Close your first clients, and learn your conversion funnel metrics and marketing economics (e.g., CAC and LTV)
- Learn user behaviors like product engagement levels, utilization rates, and lost customer churn rates
- Optimize the above to make your sales process repeatable and scalable in a large market vertical, including optimizing your hiring, employee training, customer onboarding, and sales-to-operations handoff
- Validate your ability to scale is profitable and that your churn rates are low and will result in a material size business
The Right Way of Gathering Market Intelligence
The best way of doing market research is actually talking to your potential customers. A few dozen will give you some initial understanding, but seasoned entrepreneur and McCombs Business School professor Rob Adams recommends a minimum 100 phone calls with potential customers. Adams emphasizes that these interviews have to be an actual face-to-face or phone meeting instead of something passive like an email survey.
A phone call or face-to-face meeting is interactive so you can see how the conversation evolves in real time. During these conversations, ask your interviewee what their current pain points are around your industry, products or competition, or how much they would be willing to pay for a solution. You would be amazed what great insights come out of their mouths. They’ll tell you exactly what you need to build to make their lives materially better.
Besides talking to potential customers, seek insights from your employees, especially your sales and operations team. Your sales people are in the market everyday talking to customers, and your operations team typically sees all the problems with the product and hears complaints from your customers. Develop a process to get those insights to senior management. Any customer-facing complaints need to bubble up to management and the product team so they can quickly fix them. But of course, make sure you have a large enough data sample. The opinion of one person, is just that, an opinion. But hearing the same points over and over again from multiple stakeholders is something you most likely need to jump on fixing.
Test, Test, and Test Again
There is no one correct answer for determining product-market fit. You have to tinker and test all the inputs throughout the product lifecycle. For example, try three different price points and see how far you can push it before the customers start complaining or your conversion rates fall. Or, as another example, A/B test various sales pitches, emphasizing different aspects of your product to figure out which specific feature is the one that gets your customers the most excited. Then double down on the winners after each iteration along the way.
Focus on One Vertical at a Time
It is very easy to think your product appeals to many different industries and many different use cases so let’s go out and sell our products to them all. That line of thinking is a recipe for disaster. When startup budgets are limited, it is always better to have a much more narrow focus to start, and go really deep in that one narrow vertical. That will make you the clear industry expert in that domain, which will help spread the viral word-of-mouth and stimulate growth materially faster. In other words, it is much better being the master of one domain than being a Jack of all trades.
After you have built scale and profitability in your first vertical, you can then expand to the second and third tangential verticals. But before doing do, make sure you have documented your process, learnings, and framework from the first vertical so you can apply them to the next verticals. At all times, make sure you stay focused on the long-term vision. Don’t get swept up in the whims of the market that can having you chasing rabbits into unprofitable holes.
Create Buyer Personas, and Customize Accordingly
As you will learn, the behaviors of one industry, buyer role, or use case may have a materially different rhythm than another. You can’t assume what worked in one vertical will work exactly the same way in the next vertical. Everything could be different from your go-to-market strategy to your sales cycle to your sales funnel metrics. For example, let’s say you are selling a new marketing technology platform. The needs of an enterprise level chief marketing officer (more strategic), will be different from the needs of lower level enterprise marketing manager (more tactical), will be different from the needs of a marketing agency serving that same enterprise client (more service oriented). Thus, customize your pitch accordingly, depending on who you are pitching.
Important Business Considerations to Maximize Product-Market Fit
First of all, you need to calculate your total addressable market size (TAM) to make sure you have a realistic chance of materially scaling your revenues. Second, you need to make sure you have a product that can withstand the onslaught of competition that is guaranteed to follow you into this market, if you are successful. Third, think through your lifetime value of your revenue stream. You’d want a product that is consumed frequently, to drive high repeat purchases, and solve major pain points for your customers. You need to be building painkillers for your customers, not vitamins to have any chance of materially scaling your business.
How to Measure Product-Market Fit
You can’t manage what you can’t measure, and the same holds true for your product-market fit. Figure out what key data points will help you track your success. Some of those data points are pre-transaction like sales cycle, unit-level economics, and conversion rates. Other data points are post-transaction like repeat buyer percentage, lost customer churn rates, and average daily usage of your product by your customers (e.g., how much engagement and interaction they have with the product). After you determine those data points, track and manage them continually.
Rinse and Repeat the Process
Even after you find the Holy Grail of product-market fit, it doesn’t mean you will keep it. You need to constantly be re-learning the market conditions and talking to your customers to learn how their needs may be changing over time. Constantly stay paranoid of losing your customers to keep your competitive edge at all times.