Finding and Maintaining Product-Market Fit

AlphaLab Executive Director, Jim Jen recently typed up some thoughts on product-market fit to share with the founders in the current AlphaLab cohort as they move through the program. We realized that this information is relevant to a broad range of startups so we’re sharing it here:

What is product-market fit?

I believe that early product-market fit occurs when you have a group of customers who are actively using your product and are getting great value from using it. Simply speaking, you have a product that your customers love (which is why we have labeled that as one of the key themes in AlphaLab.) Product-market fit is DEFINITELY NOT positive survey/focus group results, prospects reacting positively to your screenshots/demo, customers signing up for a trial or even necessarily customers paying you for the product. (I will discuss the latter point below.)

Don’t view “product-market fit” lightly or think you’ve moved past it as you build your company. It is probably the most important thing you can focus on and the foundation from which all the other things emanate (e.g. customer acquisition, fundraising, growth). And it’s an ongoing mindset — you have to create a culture around delivering a product that your customers truly love. You can’t just declare you’ve got “product-market fit,” check the box and then move on. You have to continually maintain product-market fit as your product and your customer needs evolve.

I often hear companies declare P-M fit when they’re not even close so I will spend the rest of this post sharing my thoughts and top articles I have found on the topic.

Here are some questions to consider when evaluating early product-market fit. They may not apply to all products but you should ask yourself:

Are your customers actively using your product?

  • This ties in to your measurement of engagement –whether it’s daily, weekly, monthly usage or some other measurement that demonstrates that the product is being used in a repeatable manner.
  • Too often, I hear the quantity number (# of users, # of customers) as the sole measure of product success. I always evaluate product success on at least 2 dimensions — quantity and quality (as measured by engagement) with a greater emphasis on the latter.
  • Also, is there some consistency in who my customers are (do they represent an identifiable, target segment) and how they use/derive value from the product?

What would your customers’ reaction be if you took away the product?

  • This is especially relevant when you are doing a limited beta test with customers. The customers come into the beta test knowing it’s a finite trial — how do they react when the trial is over?
  • Do the customers beg you to keep using the current product, even as you explain the beta test is over and that you are going to incorporate their feedback into the release version? Do they say “I don’t care if it crashes every now and then…I can put up with it.”

Do they put up with your product’s limitations (because it adds so much value anyway)?

  • In many cases, I’ve seen signs of early product-market fit when the product doesn’t have full functionality but there’s something the product does that solves a problem for the customer that they can’t get anywhere else.
  • I’ve seen products with hideous user interfaces still get early traction because it did something so unique that customers would put up with the flaws. Obviously this doesn’t apply to all products, but don’t automatically assume that if only you improved the user interface, that would get you to P-M fit.
  • Similarly, another trap is thinking that integration with other systems will get you to P-M fit. I don’t doubt that integration with other systems is often valuable for a product — but I believe that if your target customer won’t try your product because it doesn’t integrate with one of their systems, then your product isn’t adding enough value for them. You should strive to add enough value on the key use case such that they will put up with the lack of integration. One of the companies I worked for in CA grew to almost $100m in revenues based on a product that initially didn’t have integration with the systems upstream/downstream and only had limited manual integration when it went public.

Are they paying for it?

  • This is obviously an important indicator of P-M fit but be careful to not put all your eggs here. It is possible to have paying customers and not have P-M fit. I’ve seen companies get to even millions in revenues because its sales team was so awesome (and the demo looked so good) but ultimately not scale because they actually didn’t have P-M fit and the customers didn’t renew over time, leading to increased churn.
  • Here’s a good article from RRE Ventures about this dynamic:

https://medium.com/rre-ventures/when-revenue-isn-t-the-answer-be769349d426#.1sipysdxj

In the Medium post above, the author makes a good point about product-market fit being about repeatability, which includes additional elements sometimes associated with product-market fit — e.g. delivering product that adds value at a price point that can be profitably sold through a channel to an identifiable customer. These are all important considerations and things you have to do in the process of testing your product and business models.

I’d argue that the elements around pricing/channels/sales process, etc. are more around business model fit — but they are obviously inter-related. You do need to figure all of these things out but if you try to test/solve for all of these variables at once, you risk coming up with suboptimal product-market results since you are also trying to allow for pricing/distribution channels, etc.

One of the traps I’ve seen founders fall into is to spec a product feature because it enables monetization (or even worse because an investor suggested it.) To be clear, I’m not talking about if you identify a feature that customers say they really value/would pay for. I am referring to situations when you add a feature (e.g. for example payments) primarily because it naturally suggests a revenue model and you haven’t really vetted whether it adds unique value to your customer.

I could go on about this— so I will conclude by linking to a few additional articles on product-market fit that I have found spot-on.

http://www.startup-marketing.com/the-startup-pyramid/

https://www.fastcompany.com/3014841/why-you-should-find-product-market-fit-before-sniffing-around-for-venture-money

http://www.feld.com/archives/2015/01/illusion-product-market-fit-saas-companies.html

http://blog.ycombinator.com/the-real-product-market-fit/


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