Achieving product market fit (PMF) is the single most important aspect of any early stage company. What is it and how do you know when you’ve got it?
- As an early stage startup coming up with a great new idea, have you found product market fit when you’ve landed your first 2–3 initial customers and made them successful?
- Or do you need to make this success repeatable with a clear target market segment and predictable selling motion?
- Or do you not have product market fit until you encounter that proverbial “hair on fire” problem where the product has such a strong tailwind that you can barely keep up with demand?
Product market fit applies to all of these situations. But more importantly, each marks an important stage that your company will need to address. At Costanoa, we like to think of product market fit as akin to a journey. Successful companies understand this and apply the right approaches to address these myriad challenges at each stage. Below I will lay out the different PMF stages and dig deeper into each transition.
Stages of Product Market Fit
Stage 0: Initial concept
- An idea for a problem to solve and perhaps an approach to solve it
- No customers yet, but lots of discussions
- No PMF yet. Just the starting point.
Stage 1: Getting to your first initial set of successful customers
- You have a clear definition of the problem and solution (with well-defined use cases).
- You’ve created a minimal viable product — the smallest solution needed to land customers.
- You have a core group of happy and referenceable customers (6–8 for enterprise, 20–30 for mid-market, 50+ for SMBs).
Stage 2: Scaling with a predictable selling motion
- A clear definition of your target customer, both organization (by size, sector, existing systems, etc.) and persona (role, title).
- A core group of happy and referenceable customers in your target market segment.
- Validation that if you find a prospect with the right characteristics and role, that a non founder sales person (in the case of a direct sales role) can close them consistently and efficiently.
Stage 3: Strong tailwind that makes it hard to keep up with demand
- Customers become passionate advocates that not only drive high retention rate (well over 100% including upsell/growth), but are so successful that your reputation spreads.
- Customers now find their way to your door (using organic search), and are directly referred by others. Sales has enough references with similar characteristics that sales cycles actually shrink.
- It’s a bit like Geoffrey Moore’s notion about finding yourself “Inside the Tornado.” But note that many great companies never have their “inside the tornado” moment, where the intersection of multiple adjacent segments leads to a conflagration that makes it nearly impossible to keep up with demand.
Getting to Stage 1: Concept to first initial customers
The challenge: Solving a meaningful problem in a differentiated way
- How to discover the archetype customer with a problem they are willing to pay to solve.
- How to understand their minimum need to get started on solving this problem.
- How to begin a sales and marketing process and learn how to do this repeatedly.
The approach: Product discovery with a focus on discovering the right problem to solve
- Be very customer-centric and close to customers to make them happy.
- Not just product discovery, but discovering the right problem to solve. This means talking to every customer you can get your hands on. See “The Importance of Honest Customer Discovery.”
- Fully understand alternatives and why they should pay for you.
Getting to Stage 2: Scaling from your first customers to a repeatable selling motion
The challenge: How to scale with a broad set of opportunities and requirements
- You have a diverse set of customers that all fit in your longer-term vision (fit the problem and solution), but have a wide range of requirements (too many to keep them all happy).
- You can’t deliver a solution that is compelling enough to satisfy the needs of more cautious buyers because you are spread thin.
- Only the CEO and a few key sales people can sell the offering because each prospect seems to have unique needs and requirements.
The approach: Focus on an initial target segment of customers
- Focus on a subset of customers (a target market segment) where you can be overwhelmingly compelling to appeal to more cautious buyers (needs to be clearly better than alternatives — 10x).
- Not chasing every opportunity, but prioritized based on strong lead qualification aligned with your ideal customer profile and use cases where you can demonstrate strong value.
- Making the sales motion repeatable by developing a customer playbook that leverages reference customers that are aligned with your ideal customer profile of your target market segment.
- Moving beyond CEO selling to hiring and training new salespeople (using your playbook) to grow and scale the business.
Getting to Stage 3: From repeatable selling motion to struggling to keep up with demand
The challenge: How to get to enough critical mass to generate a tail wind
- Winning one market segment is typically not enough to get critical mass and generate the broad appeal to get a real tailwind.
- There are lots of additional segments to chase with lots of strong reasons (and constituents) to chase each of them: new verticals, new geographies, extensions of use cases, new buyers, etc.
- It’s easy to get pulled into doing part of many new market segments at once. But that leads to spreading yourself too thin as each is always a bigger investment than expected.
The approach: Expanding by strategically winning one segment at a time
- For each new segment go back to PMF stage 1 with additional functions (for same users) or similar functions for different user groups. You need PMF in every intersection of use case and customer type.
- Each time you grow your PMF footprint you increase how much of your available market is accessible market. In many cases, it opens up new avenues for customer acquisition (marketing and lead gen) and often increases close rates as fewer leads get disqualified.
- These choices are as much business strategy as product strategy which requires strong alignment as an executive team. These are not just product decisions.
- Evaluate segments up front and make clear, intentional decisions as to which ones you will take on and in what order. Evaluate based on clear goals in terms of impact to your business, but also consider risk, reversibility, and strategic alignment. Bigger bets need to be well thought through.
Apply the right approach at each stage
Finding product market fit takes time and hard work, but most importantly requires a different approach at different stages of PMF. To be successful with PMF you will need to change your approach at each stage to successfully address the next stage of challenges.