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Product Market Fit · Customer Validation

What does product/market fit really look like?

A. L. Entrepreneurial

November 2nd, 2016

Many experts have chimed in to provide some context of what product/market fit really means for early stage startups. They all have different point of views and don't necessarily align. What does product/market fit really look like? Is it just a bunch of customers telling you how good your product is? Is there a specific number? What is the real math equation or validation that tells an entrepreneur they have reached the promised land? If any of you has some thoughts and perhaps personal experience with this I would love to hear it.

Shel Horowitz I help organizations thrive by building social transformation into your products, your services, and your marketing

November 2nd, 2016

One thing I've noticed is that many startups don't understand the full potential of their market. They think they have one sector, but really they might have three or four. Some quick tweaks can open up vast new markets. Imagine how limited the profits would have been if Velcro had positioned itself as only useful in zero gravity (it was developed for the space program) and had never thought about (for instance) kids who have trouble tying their shoes. I was one such kid, and Velcro would have saved me much suffering.

One of the things I do for my clients, BTW is to help them think about where their markets might be, and what products, services, and marketing they can harness to open those markets.

Jorge Lopez CFO & Chief Strategy Officer, Cofounder at ConquerX - MassChallenge Finalist | altMBA | Mentor @MIT Global Entrepreneurs

November 3rd, 2016

To consider a marker a market it must have the following three characteristics:

  1. 1.     Will buy same product
  2. 2.     Similar sales process (persona, value prop, DMU, DMP)
  3. 3.     Word of Mouth (WOM) exists

These are few main aspects of a market you must take into consideration when defining which market  the startup is going to pursue. 

Economically Attractive:  Is the target end user well-funded or someone who wants access to her well-funded and would pay for access to that target end user?  There has to be some willingness to pay by someone to start.  If this is true then you should prioritize based on the quality of the funding.  Is the funding readily accessible?  What is the risk of getting it?  How well funded is the economic buyer?  Is the economic buyer have a complicated purchasing process?  Is the economic buyer part of a cyclic industry (like oil and gas) where the purchasing can vary greatly based in the price of their product?  Other factors you deem appropriate with regard to the funding.  When we win this market we would like to be cash flow positive from this market so we can much more control our own destiny.  

Accessible to Our Sales Force:  You want to deal directly with the end user and economic buyer in general but especially when you first start because you will be learning enormous amounts in these interactions which will dictate how you refine your product and everything associated with it.  You want to avoid going through third parties as there will be significant information loss.  No one will be nearly as motivated as you to honestly understand the customer’s experience with this problem and you need to obtain this information unfiltered and control your own destiny by selling directly.

Strong Value Proposition: How compelling a reason to buy is there for your product as opposed to the current state or other alternatives.  Is you solution really substantially better than how they are operating today because it needs to be.  No one likes change and there has to be a real good reason to change.

 

Complete Product:  Can you, with the help of partners that you can control or count on, deliver the full solution to your customer?  The kind of customer we want are focus on value and benefits and not features and functions.  These value customers don’t want to buy pieces of technology or modules of a solution and then assemble it themselves.

 

Competition:  Is there real or perceived competition, from the perspective of the customer and not your view) that could will make it difficult for you to convert the market segment to your product?  This could be in the form of a similar product but it might also be from another vendor to your target customer who will be threatened by your product.

 

Strategic Value:  if you win this beachhead market segment, will it give you capabilities and/or assets that will give you significant competitive advantage when entering adjacent markets? 

 

Personal Alignment with Team:  The passions and assets of the team. You must do something you can be excited about and that plays off your strengths.  


Scott McGregor Advisor, co-founder, consultant and part time executive to Tech Start-ups. Based in Silicon Valley.

November 3rd, 2016

I have a very clear measure of when product/market for has been proven.  It is proven once a company is regularly generating sufficient sales to exceed operating costs and therefore has achieved sustainability.

Prior to that point there remains uncertainty as to whether sustainability is achievable, because one of the following possibilities may prevent it:
  1. The product is good enough for the market you are reaching and you are converting a lot of sales from the prospect contacts you make, but the over all size of the market you are reaching is too small to achieve sustainability. (Market Saturation without sustainability => Right product, wrong market(s)). Try expanding into other nearby markets
  2. The market you are reaching is large enough to sustain the company, if you converted a higher percentage of customer prospects you make into sales, but your conversion rate is too low to achieve sustainability. (Low penetration rate => Right market, wrong product). Try a different product in the market you are reaching well, or seek a different large market where the product may be better appreciated.
Note that product/market fit is not about whether people SAY the like your product, that is merely predictive evidence for whether you may be on the right track for the people you surveyed. Instead this measure is about what your customer prospects and you actually DO.  

Enthusiastic praise in a two small market is still not proof of a good  product to market fit. And a low conversion rate in a sufficiently large market may still achieve sustainability even without praise (commodities often fit in this category).

Also, note that YOUR market is not the demographic you declare is your target,  YOUR market is the people you actually reach using the outreach methods you are using.  

For instance, maybe you declare that your target audience is teenagers worldwide. You get a sweet deal on an email list of college bound high school juniors in the US who have applied to the Ivy Leagues. You email them and you get a super high conversion rate. But you have a near zero penetration rate on all other teenagers and you are still nowhere near break even.  Your product to market fit for the people you reach is proven too small and to the declared market still unproven.

One last thing, you also have to have a company to market fit and a business model to fit.  

If your need to convert 100s of millions of customers to achieve sustainability your company may not be right for that task unless you already have millions of dollars in financing and existing channels to reach your audience.
If you are one college student in a dorm room look for a business that can be self sustainable at a far smaller size like 10 large or 1000 small customers.

Check your business model for fit too. Let's say you have a sure fire way to get most college applicants to visit your web site once to get one key piece of info they will need to apply. That's a lot of visitors. But it is only one visit in a lifetime. And you only get one crop of new people each year. And they will only be on your site just long enough to get that info.  If your business model is Pay Per Mille banner ads your income will be vanishingly small. Even Google CPC ads would be low revenue. You may need to collect Opt-in email addresses to sell them repeatedly to maximize their value since they won't be returning.  

With the wrong business model you may fail to achieve sustainability even with a large market and high penetration, if your unit revenue is too low or unit cost too high.