A prominent tech entrepreneur once wrote, “The only thing that matters is getting to product market fit.”
That billionaire entrepreneur, Marc Andreesen, may know a thing or two about creating successful business ventures. Andreesen, who began his career as a software engineer, co-created Mosaic, one of the internet’s first web browsers. From there he went on to co-found Netscape and later sold it to AOL for $4.2 billion. His expertise has landed him on the board of many notable tech companies including Applied Intuition, Carta, Dialpad, Hewlett-Packard, Honor, OpenGov, Samsara, and Facebook. Decades later, he still cites the same advice to all founders: find product market fit before anything else.
Product market fit is a concept developed by Andy Rachleff, CEO of Wealthfront and adjunct Stanford lecturer. Product market fit is the point at which a product meets the market’s needs. This translates to more than one single point. For a startup to maintain success there needs to be a continuum of points where a product meets market need, otherwise known as TRACTION. A startup must continuously monitor its customers’ needs to meet or exceed expectations for their product or service. This practice ensures that the business does not lose product market fit and continues to sustain strong traction.
To understand the importance of product market fit, we need to first break down product and market:
A product is anything produced that people are willing to trade.
A market contains customers who:
In addition, acquiring sales from different customers should cause little to no loss in productivity for salespeople, and there is a measurable word of mouth between customers.
As you may have noticed from this list of characteristics, a market is entirely defined by its customers. While there have been rare cases of startups or products “creating a new market”, most markets exist because customers seek products that offer a solution to the problem they are trying to solve.
According to Rachleff’s Law of Startup Success,
“The #1 company-killer is lack of market. When a great team meets a lousy market, market wins. When a lousy team meets a great market, market wins. When a great team meets a great market, something special happens.”
A startup can have everything going for it, but the market still dictates whether or not the venture will become a success. When entrepreneurs believe they will create the market themselves, or the market is too small or shrinking, the company is more likely to fail. The core elements of building a successful startup are market, team, and product. A product can be improved and team members can be changed, but a market needs to exist for a startup to thrive. Market is the one element that startups have very little control over, and yet it is arguably the most important element of the three.
Chances are if you are reading this article, you are an early-stage entrepreneur. The earlier your company starts thinking about ways to reach product market fit, the better. It can be especially challenging for startups who have less than one hundred customers, but rest assured this strategy can still work. No one knows this better than Rahul Vohra, CEO of email platform Superhuman.
Vohra wanted to simplify the product market fit process while his company was still in the pre-launch phase. The simplified process he developed is a model example for other young startups, increasing the likelihood of success and minimizing the chances of your company ending up in the startup graveyard.
To get started, Vohra consulted with some of the best experts he could find. Everything changed when he spoke to Sean Ellis, who was responsible for the early growth strategy at Dropbox and Eventbrite. His advice was to focus on leading indicators instead of lagging indicators. Leading indicators help a company predict the future, such as an increase in customer satisfaction scores predicting repeat revenue from these customers in the future. Lagging indicators, by contrast, are straightforward figures like annual revenue or profit and help startups understand their past performance.
Of all the indicators that could be analyzed, he found one to be most helpful: asking customers how they would feel if they could no longer use the product, and measuring the percentage who answered, “very disappointed”. His proven metrics would show that the number of “very disappointed” customers indicating a company had reached product market fit was 40%. Out of the hundreds of startups he tested, companies that exceeded the 40% benchmark always had STRONG traction.
Vohra emailed a simple survey to his customers that looked like this:
This survey can be easily modified to fit your startup. For Superhuman, Vohra learned that only 22% of his users would be “very disappointed” should his email platform shut down. Well below the 40% benchmark he needed to demonstrate product market fit. This became a starting point for Vohra to apply his newly developed process based on high-expectation customers, a framework developed by Julie Supan. A high-expectation customer is the most perceptive of all your customers, finding the highest value from your product, and being most likely to help spread the word.
Courtesy of First Round Review
It is perfectly fine to IGNORE a certain segment of your customers. After all, not everyone is going to be disappointed if they never use your product again, and that is okay. The most important group to listen to is your high-expectation customer. When looking at the survey data from your high-expectation customers try to think about a persona for each one. Ask yourself these six questions:
When you prioritize your most ardent followers you may find new insights and areas that were once overlooked.
Vohra designed the survey to include questions that would point Superhuman in the right direction. The second question in the survey would provide leads as to who his happiest customers are. Instead of listing other types of users he noticed that his most satisfied customers would describe THEMSELVES. The words they used mattered most because they were describing their favorite features from his product. Now using their words, you can create a persona for each one of your high-expectation customers. Vohra was able to create four different personas that represented each of the most common occupations in this segment.
Courtesy of First Round Review.
The third and fourth questions in the survey focus on why customers love the product and what they are not currently getting out of it. The most important segment to look at is the high-expectation customer. Try to understand what they love about the product and create a word cloud using their statements so you can identify themes. Repeat the same process for what they would like to see improved for the same segment. Since high-expectation customers are usually not enough to get most early stage startups over the 40 percent benchmark, most founders will need to look at the next segment.
Word clouds come in handy for segmenting the next group of customers. When looking at customers who were “somewhat disappointed”, you will want to divide them into a smaller subset of users. In Vohra’s case, his high-expectation customers loved his email platform for its speed. With this bit of information, he looked at his “somewhat disappointed” customers who listed speed as the main reason they loved the product. Then he looked at what they felt they were not getting out of the product and made a word cloud out of those responses.
It is important to improve what customers already love, but it likely will not convince customers that are on the fence. Founders need to address the improvements high-expectation customers would like to see to reach product market fit. After generating a list of proposed improvements, your startup should rank the list of features from low cost to high cost, and low impact to high impact. This is also where the personas created earlier factor in. As a founder you must empathize with your customers and use your instincts to determine what you can realistically implement. Choose low cost and high impact improvements first to deliver results quickly.
Then repeat the process all over again. This time however, you will want to email the survey to an entirely new batch of customers. Over time, if you are really listening to your customers, you will edge closer to the product market fit benchmark and eventually surpass it as you gain traction. Vohra was able to increase his “very disappointed” high-expectation customer segment to 58 percent at the end of three quarters. His company Superhuman was finally at product market fit in less than a year. Since then, he has implemented an automated process to survey his customers and still uses these metrics to continuously monitor product market fit.
Apart from the above benchmark, most entrepreneurs who have achieved product market fit will tell you that it will become apparent when it happens. In general product market fit happens when you make something people want in large quantities. Marc Andreesen went into further specifics on what it feels like when a company does not have product market fit,
“You can always feel when product/market fit is not happening. The customers aren’t quite 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, and lots of deals never close.”
By contrast he explains what it feels like when it is occurring,
“And you can always feel product/market fit when it is happening. The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can. Reporters are calling because they’ve heard about your hot new thing and they want to talk to you about it. You start getting entrepreneur of the year awards from Harvard Business School. Investment bankers are staking out your house.”
While the above can be very exciting, it is important to remember that the product market fit process never ends. As a founder you must continuously reassess the value being offered by your products to your customers. In doing so, this iterative process will help your business find product market fit time and time again.
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