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Entrepreneurs

How to Find the Holy Grail of Product-Market Fit

Even if you have the greatest product in the world, if it doesn't sell or scale, it is worthless.
How to Find the Holy Grail of Product-Market Fit
Image credit: Paramount Pictures
Guest Writer
Managing Partner at Red Rocket Ventures
9 min read
Opinions expressed by Entrepreneur contributors are their own.

Every entrepreneur believes they have the product that is going to revolutionalize the world, worthy of venture capitalists bathing them in piles of cash to achieve their dream. But, venture capitalists don’t back products; they back winning business models. And, winning business models are anchored by companies that have the potential to generate lots of revenue with easily scalable, repeatable and profitable sales and marketing strategies. And none of that will be truly determined until you successfully test and optimize your product-market fit with potential customers. This post will help you learn exactly how to do that.

What is product-market fit?

Product-market fit is the point at which you have identified the best target industries, buyers and use cases for your product. Sales become repeatable and scalable, and your product is flying off the shelves. It is the holy grail for most startups -- one that dictates whether they are on the path to being the next 1-in-10 “10x” investment return companies for their investors or the next 3-in-10 flameout that crashes and burns out of business. 

Related: The Top 4 Reasons Startups Fail, According to 14 International Accelerators

How to identify product-market fit.

To me, there are several distinct phases in the search for product-market fit. You need to:

  1. Have a basic understanding of the market landscape and the key pain points being solved by your products
  2. Research the various industry verticals and potential buyers where your product may sell 
  3. Take your product to market to validate your hypotheses, and begin to optimize your target clients, use cases, messaging, price points and go-to-market strategy
  4. Close your first clients, and learn your conversion funnel metrics and marketing economics (e.g., CAC and LTV)
  5. Learn user behaviors like product engagement levels, utilization rates and lost customer churn rates
  6. Optimize the above to make your sales process repeatable and scalable in a large market vertical, including optimizing your hiring, employee training, customer onboarding and sales-to-operations handoff
  7. Validate your ability to scale is profitable and that your churn rates are low and will result in a material size business

The right way of gathering market intelligence.

The best way of doing market research is actually talking to your potential customers -- dozens of them. And, no, not in some online survey; in an actual face-to-face or phone meeting that is more interactive so you can see how the conversation evolves in real time. Ask them what their current pain points are around your industry, products or competition, or how much they would be willing to pay for a solution. You would be amazed what great insights come out of their mouths. They’ll tell you exactly what you need to build to make their lives materially better.

Related: Want to Know What Your Customers Really Think? Try Working Side by Side With Them to Solve Problems.

In addition, seek insights from your employees, especially your sales and operations team. Your sales people are in the market everyday talking to customers, and your operations team typically sees all the problems with the product and hears complaints from your customers. Have a process to get those insights to senior management. Any customer-facing complaints need to bubble up to management and the product team so they can quickly fix them. But, worth mentioning, make sure you have a large enough data sample here. The opinion of one person, is just that, an opinion. But, hearing the same points over and over again from multiple stakeholders is something you most likely need to jump on fixing.

Test, test, and test again.

There is not just one correct answer for determining product-market fit. You need to be tinkering and testing all the inputs along the way. For example, try three different price points, and see how far you can push it before the customers start complaining or your conversion rates fall. Or, as another example, A/B test various sales pitches, emphasizing different aspects of your product, to figure out which specific feature is the one that gets your customers the most excited. Then double down on the winners after each iteration along the way.

Focus on one vertical at a time.

It is very easy to say your product appeals to many different industries and many different use cases, so let’s go out and sell our products to them all. That is a recipe for disaster. When startup budgets are limited, it is always better to have a much more narrow focus to start, and go really deep in that one narrow vertical. That will make you the clear industry expert in that domain, which will help spread the viral word-of-mouth and stimulate growth materially faster. In this case, it is much better being the master of one domain than being a Jack of all trades.

After you have built scale and profitability in your first vertical, you take those “bullets” and fire them away in the second and third tangential verticals. But, before doing do, make sure you have documented your process, learnings and framework from the first vertical, so you can apply to the next verticals. You don't want to make the same mistakes twice. And, at all times, make sure you stay focused on the long term vision. Don’t get swept up in the whims of the market that can having you chasing rabbits into unprofitable holes.

Related: Why Startup Founders Must Go Slow to Go Fast

Create buyer personas, and customize accordingly.

As you will learn, the behaviors of one industry, buyer role or use case, may have a materially different rhythm than another. You can't assume what worked in one vertical will work exactly the same way in the next vertical. Everything could be different. From your go-to-market strategy, to your sales cycle, to your sales funnel metrics. For example, let’s say you are selling marketing technology. The needs of an enterprise level chief marketing officer (more strategic), will be different from the needs of lower level enterprise marketing manager (more tactical), will be different from the needs of a marketing agency serving that same enterprise client (more service oriented). So, customize your pitch accordingly, depending on who you are pitching.

Important business considerations to maximize product-market fit.

First of all, you need to calculate your total addressable market size to make sure you have a realistic chance of materially scaling your revenues. Second, you need to make sure you have a product that can withstand the onslaught of competition that will follow you into this market, if you are successful. That typically means having some clear competitive moat or customers who are not sensitive to price. For example, products related to “wisdom” typically come at premium and defensible pricing to “widgets”. And, third, think through your lifetime value of your revenue stream. You want products that are consumed frequently, to drive high repeat purchases, and solve major pain points for your customers. As I have said many times in the past, you need to be building painkillers for your customers, not vitamins to have any chance of materially scaling your business.

How to measure product-market fit.

You can’t manage what you can’t measure, and the same holds true for your product-market fit. So, you need to figure out what key data points will help you track your success here. Some of those data points are pre-transaction, like sales cycle, unit-level economics and conversion rates. And, some of those data points are post-transaction, like repeat buyer percentage, lost customer churn rates and average daily usage of your product by your customers (e.g., how sticky and engaging is the product). So, figure out what makes your business tick, in terms of product-market fit, and track and manage against those datapoints.

David Skok, the venture capitalist at Matrix Partners, wrote a terrific blog post on this product-market fit topic. It included a great list of the key questions you need to be asking yourself along each step of the product-market fit process. And, it included a great calculator template to see how you can score your product-market fit. Create a similar calculator for your own business, and you will quickly learn if you are heading in the right direction or need to retreat into a new direction.

Rinse and repeat the process.

Just because you found the holy grail of product-market fit, doesn’t mean you will keep it. You need to constantly be re-learning the market conditions and talking to your customers to learn how their needs may be changing over time. Constantly stay paranoid of losing your customers, to keep your competitive edge at all times. 

Closing thoughts

As you can see, determining and optimizing for product-market fit is a really big deal. It can be the difference between a huge win for you and your investors, or a complete loss of invested capital, even with a really great product. If customers are not lining up to buy your product, or your product isn’t sticky enough to retain them, or your product creates unnecessary strains for you or your customers while fulfilling your services, it is time to go back to the drawing board, and start rethinking your product strategy.

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