Revenue doesn’t equal market fit
There’s a common theme across many of the startups that I work with, and it’s the blinkers of success. Startup founders have so much passion and love towards their products and company that more often than not, they are blind to the obvious that is the understanding of product-market fit.
Startups are essentially like a human going through the motions of growing up. They start with the messy infant years where they are understanding the problems they wish to solve with their product. Next comes the school years where they’re experimenting with ideas, learning about the market and what direction they will take with their product, this is usually the product development stage. Then, before they know it, they hit adolescence. A period of hormonal changes, confusion and arguing with their parents. This is the stage of understanding their user's behaviors, and most importantly identifying and finding product-market fit. Along with acne and losing their voice, the adolescent period also creates an inflated ego. This is when many startups confuse revenue alone for market fit.
As a growth practitioner, many companies bring me in to help develop their growth models so they are able to better understand their opportunities and in turn achieve huge growth. To make this work successfully, it’s important that a product already has achieved a level of market fit. Growth is driven through data, and to be data-driven you need clean data to start with. If your current user growth, for example, is only driven by running Facebook ads, you’re bringing in users who maybe aren’t your correct audience, and therefore churn early and result in lower lifetime value (LTV). This also drives up customer acquisition costs (CAC). Healthy unit economics is one of the signs of market fit in an early-stage startup (these will change when you’re then going for hyper-growth, for example, after raising an A round then using the capital to push into new markets and grow your users in a shorter period of time). Artificially inflating your revenues by pumping more money into advertising at an early stage isn’t a way to prove market fit. It only proves you’re good at running an ad campaign.
I’ve found that the definition of market fit changes between products, companies, and industries quite a bit, but there are a few constants that can be used to quickly understand if a product is heading in the right direction, and this is something founders should continuously question and compare on a monthly, or even weekly, basis.
Are your active users referring other users and driving organic growth?
One of the greatest ways to determine the market fit and understand your users is to set up referral systems within your product so that you can attribute new users to current users. If your product has really solved a problem and offers value that just can’t be beaten, your users will want to tell the world. If your users aren’t willing to become an advocate of your product, find out why and understand the value of the product compared to the value they are receiving.
Are engagement and retention growing within your product?
Knowing how are your users interacting with your product, from how long they stay, to how many times they return gives a good indication of the success of your product. Achieving ‘the sale’ then having a user never return isn’t a success. Like in the referral system, understand the value of your product vs the value your users are seeing.
How many visitors turn into paying customers?
If you’re killing it with your ad campaigns and bringing in thousands of users a day but only a small percentage of those are converting to paying users, you’re doing something wrong. You’re either targeting the wrong audience, or your product just isn’t bringing any value.
What is your churn rate?
Getting the sale is only the beginning, retaining your users and having them actively engaging in your product is critical. If your churn rate is too high there is clearly something wrong with your product. It could be that you have the wrong price points, the value is lost on the users or just that the product doesn’t satisfy the market need.
How healthy are the LTV/CAC Ratios?
At this stage, you should be keeping an eye on your unit economics, and you can use this to your advantage. The LTV/CAC ratio gives you an understanding of how well your product is growing organically vs the value, usage, and price of your product. The calculation is simply dividing your LTV by your CAC, and if the ratio is 3 or more, you’ve got a healthy-looking number that can be used to determine market fit.
I often refer back to these basic questions with companies I talk to as it’s far too easy to ignore them when you’re working on a thousand other things, but I can’t stress enough how important it is to really identify and find your product-market fit. If you start to push for growth before this stage you’re essentially trying to sail a sinking ship. You may get so far, but you’ll eventually go under. Your users won’t find the value, they will jump ship and you’ll be left stranded. Even once you’ve successfully found product-market fit, it’s also critical to keep questioning yourself and understanding the market. Markets evolve, users evolve, and you want to ensure your product stays relevant. When was the last time you sat down and measured your product's market fit?
