By Fernando Berrocal
The “mythical stage” of a startup's development is mainly referred to as product-market fit. This specific stage refers to a situation in which an organization's target consumers are purchasing, utilizing, and recommending the organization´s products (and/or services) in significant numbers to support the firm's expansion and profitability. There are very few startups that accomplish this stage, and those that do are unable to articulate how they got there.
Additionally, business experts define it differently, claiming that each startup is a distinct entity on its own. However, we can all agree on one thing: once you get there, you'll just know you’re there. So how can you locate anything when you have no idea how it appears and nobody seems to be able to provide you a specific roadmap? The journey from a broad concept to product-market fit is quite challenging; there are many deviations along the way, and many never reach their final intended goal. Due to this, we want to shed some light on the topic in this blog article and provide some assistance to information technology (IT) entrepreneurs who are having difficulty at this particular stage. By outlining what you're searching for and the path to get there, we'll be able to accomplish the goal mentioned.
Main Definition: Andy Rachleff, who is a seasoned Venture Capitalist (VC) originally proposed the idea of product-market fit. He mainly described it as occurring when a business using a certain technology can locate the appropriate market for its products and/or services. In that case, consumers who require the product and/or service "tear it out" of the startup's hands. Marc Andeerssen was next in line to share his perspective on the matter. He stated that when the clients are "buying the product just as quickly as you can build it, or consumption is rising just as fast as you can add additional servers," you have reached the product-market fit stage.
Sean Ellis, well known as the creator of "growth hacking", also claimed in an article that he was able to determine product-market fit with the use of a research survey. He inquires as to whether customers of a product would be dissatisfied if it were to become unavailable. You most likely have a product-market fit if at least 40% of users indicate they would be some kind of disappointment. Brian Balfour, who made an addition to this topic recently, describes it more in terms of engagement metrics. He began by explaining that a retention curve that flattens out rather than declining to zero indicates likely that there is a product-market fit. Secondly, he stated that the Keep Performance Indicators (KPIs) must also demonstrate that you have top-line growth, such as an increase in revenue or active users. Finally, Balfour searches for a statistic that demonstrates significant utilization, given that consumers do the pertinent job on a monthly basis.
Measure: After the main idea is clearer, the following consideration to make is: How exactly will you know if you've succeeded or failed? In this case, you should try to measure a mix of 2 to 3 metrics to determine how you've attained it or to know exactly how far away you are to make the notion of product-market fit an achievable objective. It should be in one of these three categories, however, which one depends on your business and its main strategy.
- The first indicator is Sean Ellis' survey (mentioned beforehand in this article), which applies to all types of businesses. The main question to have in consideration is the following one: How would you feel if you could no longer utilize the product and/or service? should be the precise question to make to your interviewed customers. The main choices should be the following ones:
- I no longer use this product.
- I am very disappointed.
- I am somewhat disappointed.
- I am not disappointed at all.
You should try to email your consumers the day after they have used the product a second time (if you have a product where you anticipate users to be active at least twice in their first month). If you don't anticipate such a high frequency of use, ask this question following their initial usage. It is simple to begin doing this as soon as your product has been already released. You may link certain Customer Relationship Management softwares (CRMs), such as Zoho, Hubspot, and Intercom, using an Application Programming Interface (API) or a code snippet to automate these emails
- The second indicator, further down the road, is that you will be able to track engagement metrics, which are even more accurate indicators of product-market fit since they only reflect people who are passionate about your product. The definition of gauging engagement varies greatly depending on the type of startup. Consider the ideal user's behavior when using the product and set benchmarks against that. For instance, you should ask the following questions:
- How frequently should they log in?
- How many of your suggestions should they implement each month?
However, retention is typically the most crucial statistic in this particular situation. You should ensure that the new users you add stick around for a long time with you.
- Consider your “Lifetime Value” (LTV) and your “Customer Acquisition Cost” (CAC) ratio alternatively if you sell a product that isn't commonly used, like travel services or even e-commerce. If you want to be certain, you can utilize that ratio to support your product-market fit. It is computed by dividing the cost of gaining a user by their lifetime worth. These two numbers can be calculated in a variety of ways, but attempt to follow this guideline:
- LTV is calculated by multiplying the anticipated lifespan in months by the average monthly revenue per user less direct expenditures.
- CAC stands for cost of advertising and sales hours/new customer count.
LTV/CAC should be divided by at least 3 to demonstrate a product-market fit. If you hit that threshold, it indicates that there is a need for your product since people are willing to pay less than what you would otherwise make from them. You shouldn't use this measure as conclusive evidence of Product-Market Fit if you don't spend any money on marketing or sales, or if you only do so occasionally. As you can see, indicators that demonstrate product-market fit do not involve growth or new consumers. If you have a lot of new users, it might not mean that you are meeting a significant demand, but rather that there is a great need for your service.