According to a post mortem research of global startups conducted buy the venture capital database CB Insights, the most common reason why new ventures fails is because they build and launch something customers don’t want.
Luckily, there is a way to avoid all this pain right from the start by making sure to achieve product-market fit before you run out of money – which is, unsurprisingly the second most common reason why startup fail.
WHAT IS PRODUCT-MARKET FIT?
As for any relatively new concept, there is not a clear single definition for what product-market fit is.
There is a market point of view, from Netscape founder now venture capitalist Marc Andreessen: “product/market fit means being in a good market with a product that can satisfy that market“.
And when he says good market, he means a market with a large number of potential users, high growth in number of potential users and ease of user acquisition.
There is an operational point of view from innovation author Alex Osterwalder which reads: “you have product-market fit when Value Proposition, Customer Segment, Relationships and Channels are identified without the need of additional pivots”.
And finally, there is a business point of view from the initiator of the whole Lean Startup movement Steve Blank, which reads: “product-market fit means having a product for which enough customers are willing to pay so that your company can stay in business”.
Across all these different points of view, there is a clear conjunction line, telling the story of a product that customers with the capability to pay for it seem to love, need, use and buy. It’s a good starting point.
HOW IS PRODUCT-MARKET FIT MEASURED?
If product-market fit exists, it should be also measurable. Similarly to its definition, there is not a clear way to measure product-market fit, entrepreneurship is not really an exact science.
However, there are again a few options.
You may have product-market fit when you run a survey among your clients and 40% of them say they would be very disappointed if they no longer had access to a product/service.
Another option suggest online services to measure Bounce Rate, Time on site, Pages per Visit, Returning visitors and Customer LifeTime Value, and see if they are consistently above industry average.
A last one focuses on Net Promoter Score, or NPS. If NPS is consistently well above the positive mark, that’s an indication that customers currently using the product are so happy to convince friends and family to use it.
However, probably the most reliable way to measure product-market fit is that you can feel it. As Eric Ries, author of Lean Startup said, “If you have to ask whether you have product-market fit, the answer is: you don’t“.
HOW DOES IT FEEL TO HAVE PRODUCT-MARKET FIT?
First, let’s see how it feels NOT to have product-market fit – from Marc Andreessen again:
– customers aren’t getting value out of the product
– word of mouth isn’t spreading
– usage isn’t growing that fast
– press reviews are kind of ‘blah’
– the sales cycle takes too long
– lots of deals never close
It looks like an awful situation, unfortunately common to most of the startups I get the chance to meet.
On the other hand, what happens when you HAVE product-market fit?
– customers are buying the product just as fast as you can make it
– usage is growing just as fast as you can add more servers
– money from customers is piling up in your company account
– you need to hire sales and customer support staff as fast as you can
– reporters are calling because they’ve heard about your hot new thing
So, even if it’s measurable, and there is not a clear definition of what it is, product-market fit looks like a desirable situation to be in for a company.
HOW DO I ACHIEVE PRODUCT-MARKET FIT?
In January 2016, five planets have been visible for a month all together in the same portion of the sky.
Anyone being up in a clear blue sky night could see Jupiter, Mars, Saturn, Venus and Mercury aligned, one after the other.
This is called planet alignment, and it’s quite rare, the last it had happened was back in 2005.
Well, achieving product-market fit is like planet alignment.
You have to be able to align at least three big planets, namely a valuable customer segment, their undeserved needs, and your value proposition.
This is not an easy fit, it’s as rare as perfect planet alignment happens in the real world. And when it really works, magic things happen like downloads in the billions, hundred million active users, billionaire exits and so on.
However, if you manage the align the planets, even not so perfectly, you get in exchange:
– a good close rate
– a decent sales cycle and retention
– sticky end usage
Let’s see how to achieve this, planet after planet.
A VALUABLE CUSTOMER SEGMENT
First of all, as for any big thing we want to achieve, we have to start from somewhere.
I come from the Alps, and the first thing I learnt when I’ve climbed my first peak was: you get to the top one step after the other.
Early adopters are the first step in the quest for product-market fit.
Any successful startup has started focusing on one market at a time, starting from what is called a beach head. By winning domination in that market, they use it as a springboard to expand to the adjacent ones, adjusting at every steps the whole product concept, the positioning of the product, the marketing strategy, and choosing the most appropriate distribution channel and pricing.
Find out more about how to identify early adopters here.
CUSTOMERS UNDERSERVED NEEDS
After having identified the target customer segment, it’s time to investigate their needs. One of the cheapest, fastest and most informative things to do at this stage is to meet with customers through customer discovery interviews (more about that here and here) until we keep hearing the same things from customers.
A WINNING VALUE PROPOSITION
A value proposition is a statement that defines why you are different and worth getting attention. It’s possibly around 300 characters long, and includes:
– the target segment
– the key problem
– the key benefit your customers are going to get
– the special and unique way you will deliver it
A good template is “We help (who?) achieve (what benefit?) by doing (the special and unique way the new business/new product is doing it)”.
I normally work with value proposition made of such a main statement and three key pillars, or the product features that I want customers to understand and remember.
What makes a value proposition a winning one?
– It’s focused on what matters to customers. Any product feature is ideated based on customer needs validated during customer discovery interviews, and ranked based on how big is the pain and the company’s key strength.
– It’s able to solve the main problems in a unique way, better than competitors. In order to check this, I use a customer-centric competitive analysis (find out more here).
ALIGNING THE PLANETS
At this stage, once we have designed a value proposition, the key question is: will customer use and buy this?
Since the uncertainty is so high, it’s crucial to ask ourselves: “what is the cheapest and fastest way we can figure out whether customers would buy our product or not“?
I normally select a test from this library, and seek for commitment from customers in one of this forms: time, reputation or actual money.
The commitment is related to what I can can ask today based on the stage of the product development. If it’s a paper mock-up, I can’t expect any customer to pay for it.
If I’m meeting with customers, which is normally the cheapest thing to do to validate a value proposition, that meeting would be a failure if I don’t know what happens next.
And this would be because:
– the product needs iteration or pivoting (so back to the whiteboard and re-design the value proposition)
– I may not explicitly ask for clear commitment and next steps (a scary thing to do sometimes).
In order to achieve product-market fit, I keep iterating until I don’t get consistent commitment from customers. This means that I keep tweaking the product features and the commercial elements of the proposition.
Depending on the expertise of the team, how much is easy to access customers and the complexity of the product itself, this might take from just a week to months.
But the preparatory work completed before trying to align the planet will be of enormous help to make this time shorter, as we will be proposing to customers something strictly aligned with their pain points and offering a solution much better than competitors do.