Turn-by-turn directions to a measurable product-market fit
Are you an early stage startup founder, with zero sales or just the first few sales?
And are you wondering how to achieve product-market fit, in order to get your startup ready for growth?
If the answer is “yes”, then you’re in the right place. In this article, I give you turn-by-turn directions on how to achieve and prove product-market fit for your startup.
Product-market fit has always been a mysterious thing.
As the founder or founding team member of 13 startups, mostly in B2B SaaS, I’ve been through the cycle of zero to product-market fit quite a few times by now. We grew one company to over 200 employees and we just sold my last startup, Teleport.
During this period, whenever I asked my mentors, investors or VCs to explain product-market fit in tangible terms, they’d always reply along the lines of: “It’s really hard to define – you’ll know it when you see it.”
If I described the situation of my startup and asked whether I had reached product-market fit, the answer was usually: “If you have to ask, you probably haven’t.”
As for how to reach product-market fit, the most common advice I got was to just ask my customers and build what they want.
But that doesn’t always work, does it?
More or better products don’t always mean greater growth. We can all name at least a few examples of not-so-great products that made big companies – and vice-versa. David Bland, one of the gurus in San Francisco for product-market fit, calls it the product death cycle – aka death by feature.
Other definitions of achieving a product-market fit that doesn’t really work either:
When you have more customers than you can handle.
When you ask your customers how they’d feel if your product didn’t exist tomorrow, and the majority of them say “very unhappy”.
These are pretty vague (not to mention inaccurate) explanations.
At my core, I’m an engineer – and such approaches don’t really resonate with me. I see things in terms of processes and systems, which should be predictable and repeatable.
In this article, I’ll provide a concrete, recognizable, measurable definition of product-market fit – based on my experience with 13 different startups. Then, I introduce an easy-to-understand framework that you can use to achieve product-market fit. Not only that, you’ll also be able to tangibly prove that your startup has achieved this goal and is ready to be in growth mode.
All kinds of startups will find value in this article, but it’s most relevant for B2B companies since my experience lies mainly in that area.
So first, we’ll get to a measurable definition of product-market fit. Then, we’ll go through the step-by-step process for you to achieve it.
3.1 Offer Testing
Defining Product-Market fit
What is product-market fit? And how do you know when you’ve achieved it?
To start with, take a look at this “valley of death”. Where do you think product-market fit happens?
Product-market fit is around point 4 in this graph. When you achieve it, you’re ready to grow.
Basically, the real product-market fit is between product, market and business model. That means your product is a fit with the market you’re trying to serve, and at the same time, your business model resonates with your target customers.
Based on this understanding, we can say: Product-market fit is having [predictable sales] of [a product] with [positive Return on Investment (RoI)].
Let’s look at each variable in the sentence above:
Product is [a solution] that helps your [target customer] achieve [success] by solving [a problem] they have.
In the most fundamental sense, gross positive RoI = Average Annual Revenue Per User (AARPU) or Life Time Value (LTV) > Cost of Acquiring a Customer (CAC).
And predictable sales are achieved when you know that if today you reach out to [x target customers] with [a message], you’ll have [y sales] in [z days], with [a, b and c steps] in your sales funnel.
P.S. – I will use AARPU instead of LTV for rest of this article for simplicity.
P.P.S. – I am not including the Cost of Serving a customer in the RoI, also for simplicity. If you have considerable high Cost of Serving for your customers – one simple way is to use Gross Profit instead of AARPU.
That leads us to the full definition:
Product-market fit is knowing that if today you reach out to [x number] of [target customers] with [a message], you’ll have [y sales] in [z days] with [a, b and c steps] in your sales funnel, for [a solution] that helps them achieve [success] by solving [a problem] they have, while having your [AARPU] more than [CAC].
Once you have the values for all these variables, you’ll be able to know and prove that you have a product-market fit and that you’re ready to scale.
P.S. – Obviously, this is based on the assumption that your product works well and helps your customers achieve success.
Guaranteed P-M Fit Method
Now, let’s see how you can find the values for these variables for your company, using my Guaranteed P-M fit method.
Here is a quick overview of my Guaranteed P-M Fit Method:
Map the problem
1. Target Customer - Problem
2. Customer Success
Identify the value
3. Your Solution
4. Product Pricing
Reach the market
5. Customer Outreach
6. Calculating Sales
Let’s take a look at each level of the pyramid, starting from the bottom:
The target customer and problem are the fundamental building blocks of the entire structure. They’re closely connected together.
Then comes success. Think of it as a before-and-after scenario: problem = life before using your product, and success = life after using your product.
The solution is your product. Essentially, it’s how your customer goes from problem to success.
Then there’s pricing, based on how big the difference is in your before-and-after scenario, and what other solutions are out there.
Next up, customer outreach. This is how you get your customer’s attention.
The calculating sales the journey from your customer giving you attention to giving you money. Based on this, you know how much it’s going to cost you (CAC). With all the above information, you can easily calculate x, y and z: how many people become your customers (y sales) out of the people you contacted (x customers) and how long it takes to complete the process (z days).
Just by looking at this pyramid, you can see that:
Whenever you change anything at one level, you’ll need to adjust and recheck everything above that level. For example, if you change the solution, you need to re-verify and redesign everything above it, starting with pricing.
Product-market fit is a spiral model, not a one-time exercise. As a company, you’ll never achieve it once and for all. You’ll always be improving your product, tweaking your messaging, expanding to another customer segment and so on.
On the other hand, if you start really niche, you can reach product-market fit quite early. Then, you’ll always have it for a specific segment and a specific use case. And if you expand one step at a time – e.g. widen your target segment, increase the level of success your product provides, provide a better solution – then you’ll continue to reach quick product-market fit for each mini-expansion as shown in the spiral below.
Simply by changing the variables, you can speed up or slow down the spiral. Basically, the narrower the target segment you start with, the faster it’ll be to achieve product-market fit for doing just one thing that helps this particular niche.
If you look back at the histories of today’s successful companies, every major company started with a very small market. Amazon began with books that you couldn’t find in bookstores. Facebook focused on Ivy League schools. PayPal started with eBay users. Zenefits focused on Californian tech companies with 100-300 employees. Zappos took off with shoes. AirBnB began with one city – San Francisco, and Google with indexing a single topic – Linux.
In a way, most successful companies have been in a state of continuous product-market fit from early on – while simultaneously discovering new avenues to expand and reach new product-market fit at each step.
Now that you know the definition and overall framework, I’m going to take you through the different steps to help you achieve product-market fit quickly and efficiently. This will put your startup on the path to growth, taking it out of the valley of death.
MAP THE PROBLEM
1. Target Customer – Problem
If you know what problem you want to solve but have no idea how you’re going to solve it, that’s fine – just write down the problem and who has it.
But if you’re like most of us, who simply have an idea – well, now you have work to do.
Step 1: Split your idea into problem and solution.
Are you unable to write down the problem you’re solving? Do you just have a solution idea right now? If yes, you’ve got to invest some serious time and effort into getting the fundamentals in place.
Right now, forget about the solution and just focus on the problem.
You need to think of the problem in its purest possible form. The risk here is that when you’re thinking about the problem, you might slip the solution into it.
When NASA was sending astronauts into space, they knew they wouldn’t be able to use ballpoint pens out there because of zero gravity. So, one of their subcontractors, Paul C. Fisher of Fisher Pen Company said: I think we can create a pen that writes in space.
This is a classic example of a solution polluting the problem space. Can you guess what the solution is?
It’s the pen. The pen is a solution. The pure problem would be: I think we can create something that astronauts can use to write in space.
It would be even better for you to ask: Why do astronauts need to write in space at all?
Let’s say the answer was: Astronauts need to take notes while working on xyz in space.
Then the problem statement would be: I think we can create something that helps astronauts take notes while working on xyz in space.
This last statement is purely in the problem space, whereas the first statement was corrupted by a solution (I think we can create a pen that writes in space.).
After determining the problem, you need to split it into as many independent pieces as you can. If multiple customer segments face the same problem, list all the segments you can think of and see if there are some minor differences in the exact hypotheses of their problem.
You may even have multiple ideas or an idea/product that solves multiple problems. You’ll need to break this down further and write down each problem – as well as who has that problem.
Step 2: Choose a niche.
You might not have the resources to go after and test every segment and every detail of the problem you hypothesized, so you’ll need to prioritize.
At this stage, you can do a quick prioritization based on the knowledge and assumptions you already have. As a startup, you probably can’t do months of research to figure out which market you should even “test” first.
Chances are that whatever target customer you came up with in Step 1, you can further sub-segment them in more than one way.
Here’s an example to make the process clear.
Let’s say this is the problem you want to focus on: independent professionals spend too much time every day on filing bills and doing taxes. You can easily think of different professional segments that face this issue – doctors, lawyers, business consultants, etc.
Write down these segments in the table below, give values to different parameters. Don’t worry about getting it exactly right – the values at this stage are simply based on what you already know or your gut feeling.
Then multiply the values in all columns in each row to get a total value. The highest number is your first priority segment.
Now take the segment with the highest priority and break it down further.
Say, doctors, emerge at the top in your segmentation. This can be narrowed down into smaller sub-segments.
For example: doctors who are fully independent, doctors who have a private clinic with 2-5 other doctors, doctors running super-small hospitals with a staff of 5-20 people – or even groups like psychiatrists who receive money directly from patients and might have different billing problems than surgeons who are independent but mainly work with on-demand calls from hospitals.
By this point, hopefully, you have one niche-enough target segment with which you can go ahead and test the problem hypothesis.
P.S. – The above are templates that have worked well for me in the past. Feel free to add and delete columns as suits your own unique case.
P.P.S. – It’s also possible to simply have all the columns in one template, list all the segments from lawyers to surgeons, and prioritize in a single step. But I’ve found that splitting the process into two (like above) helps you focus and dig out more niches.
Step 3: Validate your assumptions.
The problem you identify could be something you’ve personally faced. Maybe you even know a bunch of people just like you who have the same problem.
But if you’re like most founders, you probably have a problem and target market “hypothesis”. You think the problem exists, but you haven’t yet validated it. You might assume that the problem is so obvious that it doesn’t really need validation.
That would be a mistake.
In Paul Graham’s words, “by far the most common mistake startups make is to solve problems no one has.”
So, it’s crucial for you to make sure that your problem really exists. Even if you’ve faced it yourself, you’ve got to see how other people explain it to you and understand their experiences.
Pick the group that came out on top in your second segmentation above – you now need to check if your assumptions about them are correct. Do they really have the problem you think they have? Do they consider it a serious issue? Are they interested in solving it? And so on.
You can validate the problem by interviewing potential customers from your chosen segment. To get the most out of these conversations, you’ll need to prep.
Entrepreneurship expert Steve Blank recommends coming up with at least 100 potential customers to interview. This may sound overwhelming, but it isn’t really that difficult. Remember, you can draw on social networks like LinkedIn and Facebook.
You also have to find the right people to talk to. When it comes to B2B sales, you may want to go straight to the CEO of a company, thinking that you’ve already got everything in perfect shape. That could be a disaster! Especially in big companies and when you don’t have years of personal experience with the problem you’re trying to solve. In Blank’s words: “You don’t want to start with the highest-ranking person in the company. You want to start in the middle of the company, so you can learn exactly how wrong you are.”
In addition, aim for face-to-face or video conversations – online surveys and emails simply aren’t good enough. You need to watch the person’s face to read their emotions properly. Are they excited by what you’re saying? Are their pupils dilating? Is their breathing getting faster? You want to be able to see these signs.
This is also why you, as the founder, need to conduct customer interviews personally. Plus, if your hypothesis is proved wrong, only you have the authority to decide whether to iterate or pivot. Don’t outsource this critical task to consultants or junior employees.
Remember, these conversations are not for talking about or selling your solution – keep your focus on understanding the potential customer’s challenges.
This might be a little uncomfortable at first. At large companies, they sometimes can’t believe you aren’t pitching a product! So, it’s helpful to explain that you’re not trying to get them to buy anything right now. That you’re there to listen and understand how their business works – and how you can make it better.
Blank advises setting the scene in phone calls and emails before the interview, otherwise “you might end up with 15 people in a boardroom expecting a major presentation”. Giving them a heads-up will help to keep things relaxed and casual.
As for the interview itself, your ultimate goal is to find out the challenges your potential customer is facing – but in a B2B context, that can be an awkward question to start with. In the world of business, people aren’t used to a stranger asking about their company’s problems.
Instead, begin the conversation by focusing on the person’s job: how they define it and what success looks like for them. This helps you understand how their role differs from another individual’s role at a different company. For example, an HR manager’s role at company A might be very different from an HR manager’s role at company B.
You need to grasp how your potential customer sees their role and responsibilities. As they respond, make a note of the key words and jargon they use. Refer to these over and over during the rest of the conversation. This will also help you to create a mental framework of what their job is like.
Finally, you can maneuver the conversation towards the challenges the person faces in achieving their version of success.
You can use the cheat sheet below as a rough guide for your conversations.
Keep in mind that all the people you contact won’t become interviewees. Some won’t be available, others won’t be available in the period you want, and some will book meetings but postpone at the last minute or fail to show up. So, if you want to set up 5 interviews, contact at least 30 people to reach your goal quickly.
Finally, don’t rely on interviews via introduction. While these are low hanging fruit and easy to get, it’s very rare that the person you’re being introduced to is actually in your segment. In other words, it’s unlikely that they’re a decision maker for the problem you’ve hypothesized.
Let’s say you want to sell something to P&G, and you have a friend who could introduce you to a friend who works at P&G. What are the chances that the person they’re introducing you to also just happens to be the person with the problem you’re trying to solve? Very, very slim.
An interview with someone who’s not in your segment is worse than no interview at all, because it’s likely to lead you down the wrong path.
The second reason not to ask for an introduction is this: a person’s willingness to have a discussion with you about the problem is a very good sign of whether this is a real problem for them or not. If someone is giving you an interview as a favor to someone else, you’ll end up talking to a person who isn’t “paying” to solve the problem – which isn’t a great use of your time.
Basically, although it might be easier to get interviews through introductions, you won’t be able to rely on these conversations to collect data on the weight of the problem or gauge how eager your potential customers are to solve it.
One exception to this rule: if you can get an introduction to a person who’s “paying” to solve the problem, go for it. Just be honest with yourself.
P.S. – While prepping for interviews, you might find it helpful to watch this series of short videos by Steve Blank.