Eminem once said, “I had to go to that place to get to this one.” I love this saying. It refers to the fact that there are stepping stones in our lives, little things that happen along the way, and it’s hard to make the connections that lead to success when you are looking forward. Looking backwards it all becomes crystal clear why things happened the way they did.
In the startup world the “stepping stones” are usually valuable life lessons delivered in the form of uncomfortable moments; being fired from a job, failure in your venture, rejection in many forms.
I won’t bore you with the plethora of surprising parallels between Eminem and the startup world but I’ll dig into this particular quote to help ventures avoid making one of the most critical mistakes which is to scale before they’ve achieved product market fit (P/MF).
I’ve seen companies raise and spend millions 💸 quickly to achieve ridiculous metrics that aren’t indicative of real traction, organic growth or retention. Once the spending stops so to do the customers.
To give you some background on my experience I’ve helped about 50+ companies with their go-to-market and growth strategies as well as the ongoing execution of these strategies over the past 15 years in New York, LA and Sydney.
I’ve also helped existing companies and innovation labs (Idealab, BCG DV and Josephmark to name a few) develop, validate, build and launch successful startups and create frameworks for their validation process.
And, there’s one MASSIVE error that I see startups make over and over and over again…..
….Attempting to scale before P/MF. 👎
What are the biggest indicators that someone is about to make this error? These quotes, from actual meetings, were a dead giveaway.
“We have the entire product roadmap laid out for the next 12 months.” 🙅🏻♀️
- When you focus on understanding your users and how they discover, adopt and continuously use your product, you can build features that help you acquire and retain more of the types of avid users that you want, rather than just making assumptions about what features they want. Using data to understand the user intimately is a good way to decide on your future product feature set. Avoid sitting in a meeting room with a white board “brainstorming” what your users want.
“We have PR, online ads and everything lined up to go live on day one.” 🤔
- Oh dear. Really? Why? You don’t know what messages / channels / tone of voice / audience, visuals, etc will work or convert at the best rate. Your most inefficient use of capital will be in those first few weeks.
“We are going to launch globally and in four different verticals.” 😬
- It’s best to start small so you can learn from that micro market before scaling. You will make a ton of mistakes, and most likely annoy a lot of your first users with a clumsy MVP experience, so why not make these mistakes and aggravations on the smallest possible market?
“We want 100,000 downloads in the first month.” 🤦🏼
- Someone actually said this to me. They will probably pay $20 for a download in the first month before working out how to get it down to $1 per download by rigorous testing, product iterations and determining the right channels and messages. (These are arbitrary numbers but just serve to illustrate my point.) Plus, your cost to acquire a customer, retention, conversion, etc will most likely be the highest it will ever be in those first few months.
“We want to sell 30,000 units in three months.” 🤪
- Same as above. The cost to acquire a customer (CAC) will probably be around $200 for a $100 product until they reach P/MF and nail their marketing, audience targeting etc. (These are arbitrary dollar figures but just serve to illustrate my point.) Obviously, it’s best to wait until the CAC is sitting at a number that is below the price of the product and you have seen early indicators of P/MF.
When I hear people say these things a little marching band goes around and around in my head viciously waving red flags 🚩and I sit there debating if I should talk the founder through everything I’m about to tell you now. So here’s what I usually try to convey.
My guiding principle(s):
When I “look backwards” (as I mentioned in the beginning) I can see that most of the companies I have worked with were successful because of the stepping stones AKA steps they took to getting to P/MF first before scaling.
PM/F is a huge goal. You need to create small “stepping stone” goals in order to get to PM/F. Try and set the goal and then work backwards, working out what “stepping stones” you need in order to achieve said goal.
And here are some principles that will help.
Stepping stone 1 — A startup should focus on very specific learning outcomes (see below) when they first launch before they even think about acquisition goals or high impact growth initiatives.
Stepping stone 2 — “The life of any startup can be divided into two parts: before product/market fit and after product/market fit. When you are BPM/F, focus obsessively on getting to product/market fit. Do whatever is required to get to product/market fit,” Marc Andreessen.
Stepping stone 3 — Decide what P/MF looks like to you and how to articulate that in a quantifiable goal (e.g. if 50% of our audience does XX actions on our website that will show us we have product love).
Stepping stone 4 — Once a venture has achieved P/MF and the qual learning outcomes then they can scale.
First, let’s go through some of the basics.
Here’s what this might look like visually.
What is PM/F?
Product market fit is when you have determined that your product solves a very real problem in a large addressable market.
“You can always feel product/market fit when it’s 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…” Marc Andreessen.
Essentially it means you are solving a big problem, you are solving the whole problem, and there is a large market of people that have that problem.
Your team should decide what PM/F looks like to the business and what data point would prove to you that you have achieved PM/F. Try not to focus on revenue goals or customer acquisition goals but something that indicates customer adoration.
For e.g. with Slack the app grew from 15,000 daily active users when launched in February 2014 to 1.1 million by June 2015 to 4 million in October of 2016. All of this without a multi-million dollar marketing budget or a sales team.
Before you scale, one of your “stepping stones” should be acquiring certain learning outcomes.
Qual learning outcomes to aim for;
- Which messages, value props, visuals, tone of voice convert and resonate
- Channel / market fit — which marketing channels convert the most at the best price
- Channel / market fit — which marketing channels drive the most engaged users
- Value proposition effectiveness — we think we know what value we deliver to our audience but have you tested it? What’s the best way to describe that value? Try some light A/B tests on facebook
Quant learning outcomes to aim for
- CAC — Cost to acquire a customer
- CPL — Cost per lead
- CPC — cost per click
- LTV — lifetime value — you probably won’t be able to determine this in the first few months but you will see some indicators that will allow you to do some future modelling on what the LTV of a customer might be. This will help you know how much you can spend to acquire a customer. For e.g. if you know a customer will stick around for a year and will most likely spend $268 on your company then it is fine to spend $50 to acquire that customer.
Once you’ve determined the learning outcomes you hope to acquire then you need to work out what tech stack / analytics platform will help you measure these learning outcomes. Seems obvious, right? 🤓
How can you measure the CAC and CPL or which marketing channel is the most effective if you don’t have the proper analytics in place?
How do you determine what PM/F looks like to you (especially if you have only just launched?)
Sean Ellis, the godfather of growth, states that you might have PM/F if more than 40 percent of your customer base would be “very disappointed” if your company no longer exists.
He has created a terrific template for a survey which is ready for you to use and you can find here.
But it’s hard to nail a magic, definite number that represents PM/F. You can’t calculate it the same way as CAC or LTV. But you should draw a line in the sand as a company to attempt to determine a milestone at which point you will make an assumption that you have it.
Try not to think of revenue goals as a PM/F goal as it doesn’t take into account the size of the market, how well you are solving the problem, customer churn, organic traffic, CAC etc.
Example PM/F goal
While it might be tough to come together as a team to work out what your PM/F goal should be here’s an example.
I worked on a SaaS platform to help people that have investment properties become self managed landlords, i.e. they didn’t want a property manager to manage their tenants - they wanted to do it themselves.
During user research we noticed that people were MOST excited about the auto-debit feature enabling rent to automatically hit their bank from the tenant. We realised this was their biggest problem.
We made an assumption that we will have achieved PM/F, finding our audience and solving one of their biggest problems, once 40 percent of our customers had signed up for auto-debit within the first 3 months.
Think about the moment your customer will experience true love for your product because you solved the problem you have set out to solve as a business, and develop some goals around getting people to experience that moment as quickly as possible in the user journey.
How can you get them to that moment in 3 steps instead of 5? Are you communicating this hero feature in your email onboarding sequence? On Intercom? In messages above the fold and next to the CTA button?
For example, I recently discovered Lime Bikes. Upon completing my first ride to the train station I got a little message on my phone saying the ride had taken 7 minutes.
It usually takes me 30 minutes on the bus (as the bus never comes!) When I worked out I could get 23 minutes of my time back in the morning, and 23 on the way home, I fell truly, madly, deeply in love with the product.
If Lime hadn’t sent me the trip summary I wouldn’t have worked it out.
Lime could focus all it’s energy, and alter it’s product, to get people to that moment of product love more quickly. They could advertise one of the biggest benefits to customers is “getting an hour back in your day” and they could communicate this on their website, in their advertising, through their use of testimonials, etc.
They could make sure that people get push notifications and emails post ride to tell them how long their ride was.
They should then create company goals around it and once they’ve achieved those goals they can pretty safely say they have achieved PM/F.
Why can’t I scale before PM/F?
Achieving PM/F is a great indicator (but not the only indicator) that your business will succeed. It means you’ve found a great market, and that market loves your product because it solves a problem for them.
Secondly, your use of capital will be inefficient if you haven’t achieved PM/F. It’s likely that organic growth isn’t what it should be and you’ll have to pay for all of your customer acquisition rather than relying on word of mouth and referrals from people who genuinely love your product.
Lastly, your retention rates, i.e. the amount of times your customers return, will be poor before PM/F. Considering retention is the king of growth, and has a compounding impact on growth, it’s obvious why it’s critical to growth that you have stellar retention rates.
Retained customers have a higher lifetime value, they refer more customers and referred customers have better retention than new customers! As Brian Balfour, VP of Growth, Hubspot, states in the worlds best video;
“Every improvement that you make to retention also improves all of these other things — virality, LTV, payback period. It is literally the foundation to all of growth, and that’s really why retention is the king.”
Also reinforced by the Andrew Chen, former head of growth at Uber, “Focusing on retention has a much larger effect than topline growth. Strong retention of users over time is a good indicator of product-market fit,” Andrew Chen.
Focus every resource, dollar, talent, time and tears on getting to PM/F before you scale. You should have an unwavering, dictatorial like focus on this. Pivot, re-hire, move into a different market, do whatever you need to do to get to PM/F.
Finding PM/F isn’t a one time event. The market changes, competitors enter the space, tech changes. You’ll probably have to go through this again which is why it’s so important to put a framework in place at the beginning for determining what it looks like, how you’ll achieve it, measure it, etc.
Lastly, finding PM/F doesn’t mean you’ve “won” it just means it’s time to hit the accelerator and that you’ve more than likely found a market ripe with opportunities.
Once you feel like your business has it, then you can start your high growth initiatives, start spending money, hiring PR, and setting in motion some of the high stake partnerships that will really help you accelerate growth.
Alright, let’s go!