Running a startup consists of many different components. I focus on growth marketing, and establishing solid foundations from which to scale a business and its user base. In this article, I will highlight the product market fit process, with specific focus on the key reasons that startups fail.
Pot of gold: Chasing the product market fit rainbow
Every successful startup has at least one thing in common; they have established product market fit. In this piece, I explore how to achieve this and offer some frameworks for success to funded and bootstrapped startups looking to make their mark.
Introduction to product market fit (PMF)
“Product Market Fit” is a term coined by Andy Rachleff; co-founder of Benchmark Capital. The term was based on his inspection of the investing style of Sequoia founder Don Valentine.
Marc Andreessen defines it as “being in a good market with a product that can satisfy that market.” Sean Ellis went on to popularise the term by declaring it a precondition for effectively scaling marketing for a company in his pyramid of startup marketing.
Put another way, product market fit is the degree to which a product satisfies a strong market demand. It’s the first essential step to building a successful venture and helps to create a minimum viable product that addresses and solves a problem or need that exists.
Andreessen states that “The life of any startup can be divided into two parts – before product market fit and after product market fit.” Basically, figuring out your market and where you fit into it will be the difference between your company sinking or swimming.
Finding your product market fit is a chase to the end of the rainbow. It's not something that happens overnight - or without a lot of time and energy. But it is an essential part of establishing your business and making sure that you have a brand and a product that is going to succeed.
This article will walk you through the importance of establishing product market fit, how it helps you gain steam in order to move onto the next steps of your business, why it's essential for scaling and what to do once you have attained it.
Why establish product market fit?
Source: CB Insights
As you can see - the number one reason startups fail is because they built something no one wants. To be more precise - they burnt through too much money before establishing what people want (to pay or use). In that case it’s important to flip it - and establish that indeed, figuring out a market need and building a product most cost effectively is the way forward. You can see this logic applies to the second reason too.
The bottom line is that you can’t scale a business without product market fit. If you don’t have product market fit, you’re going to be burning more money trying to build something that people just don’t want. The goal is to find a void, or a need, and fill it. That’s what product market fit means.
When people get out of the shower, their hair is wet and they would like it to be dry quickly. Hence, hair dryers are products that fit into a market. If you don’t follow this same formula, you are going to burn through a lot money. You want to focus on trying to build something that is successful and adds value to people’s lives. That’s why product market fit matters.
Ideas are overrated
If you try to rush ahead with a great idea, you'll find that great ideas don't add up to success. The only way you can achieve success is by figuring out why your product needs to exist and who the customers are who need it. You can have the best idea in the world, but without establishing a need for it, it will never get off the ground.
Don’t let the glorification of thinking a good idea will get you there - 99% of success is execution.
"If you go to VC firms with a brilliant idea that you’ll tell them about if they sign a nondisclosure agreement, most will tell you to get lost. That shows how much a mere idea is worth. The market price is less than the inconvenience of signing an NDA."
On the other hand, if there is a need for something that doesn't yet exist, even an unpolished product release will gain some traction because it’s fulfilling an existing need. Ideally, your solution will provide something of great value to customers who have a need for it - so it won't just meet the minimum need, but will actually become indispensable.
What are the steps to establishing product market fit?
There’s a process to establishing product market fit. And it doesn’t always work out like people predict.
Oftentimes, people will come up with an idea. They recognise a need and they build a prototype that meets that need. They are thinking about things in terms of problems and solutions. Once they develop a prototype, they start investing a lot of time and energy into it and then start to look for ways to raise more money build the prototype. The problem with this approach is that people often make the mistake in this stage of rushing into development instead of establishing fit.
The first step should always be to get to a minimum viable product. This means developing something with just enough features to gather further learning about the product and how to continue to improve it.
This could also involve faking parts of the product or testing out acquisition channels before the solution is even in existence.
The two common mistakes are on either extreme but fundamentally the same:
- Building a finished product and trying to get traction - burning too much money on building a product before the product has product market fit.
- Rush to get ahead and get a product to market - burning too much money on acquisition (usually paid) before the product has product market fit.
The above two probably look the same. Doesn’t matter where a start up is burning money, right?
The problem is that on the first the underlying reason is overconfidence (specifically, too small a sample size for validation) and the second is overconfidence that good marketing will compensate for poor product or service.
Sometimes I’ve seen both. Failure is not far behind in those instances.
One startup founder I asked (he chose to remain anonymous) said this:
“Before the pivot, I didn't know how to talk to users. I was not listening but pitching. People said yes great idea. I did door to door with my neighbours. Most of them were polite but it gave 0 result as no one downloaded the app.
My marketing efforts? It was face to face and meeting up with people. No real attempt to try marketing or get validation. It just felt that the solution was relevant to problem we had faced and so it would be relevant to others too.
And then competitors started to get PR and users so it seemed like a valid approach. Both competitors have died. One had received $2m seed investment and was active in other countries.”
The mistakes he made:
- User feedback / acquisition methodology is flawed
- Not testing enough acquisition channels
- Utilising non-effective marketing channels for the product
Framework for users
Let’s look at these mistakes. I won’t go too deep on user feedback for establishing the MVP. Instead, I would recommend this framework as a starting point - jobs to be done.
With regards to testing enough acquisition channels - I wouldn’t recommend going at it yourself. Although working as an outsourced head of growth, I’m clearly biased here! A decent starting point, not for practical actual advice but rather the mindset, is traction.
Regarding the third mistake, it’s relatively easy and lost-effective to drive visitors to an app (app store to be more precise) rather than go door-to-door to acquire users. There needs to be a separation between feedback gathering and driving engagement.
For mobile marketing the top 4 easiest channels for you to get started are:
- App marketing ads via Facebook
- App marketing ads via Google (AdWords)
- Programmatic media buying in-app advertising (incentivised & non-incentivised)
- App store optimisation (I threw one in there but like SEO it takes time and money)
Once you have your MVP, the next step should be to get to product market fit. And the third step is to scale the business, which can only happen after you’ve accomplished the first two steps.
Startups tend to make mistakes across all three of these early stages.
The above section dealt quite clearly with the recommended methodologies and processes behind the different stages of getting to PMF, touching upon PSF & MVP.
Below I’m going to elaborate on specific mistakes I’ve come across and present some thoughts from fellow marketers and experts in my network.
Innovation projects and using marketing talent too early
One of the biggest mistakes is to bring in sales and marketing too early on, before you have reached product market fit. It’s understandable that companies get excited about an idea and are eager to market it – after all, if you don’t share your product with the world you won’t get any sales, right?
But too many people jump the gun and elect to hire a full-time head of growth / marketer just to scale a business – but haven’t yet established product market fit. Essentially you have someone trying to sell something that isn’t quite ready. The product might be great in your head but the reality is that people don’t want it yet.
There’s leveraging marketing for validation. And there’s pushing marketing to scale a product that isn’t yet ready - it is best not to confuse them.
This gap is what prevents a lot of businesses and products from succeeding. People think that because a product is great (in their opinion), others will want to devote time and resources to it . Actually, they just don’t. Unless a product adds real meaningful value, people are not going to part with their money or time.
Don’t pick providers solely because someone trusted in your network referred them alone. If the person making the referral is not a marketer (note: I get most of my referrals from non-marketers), be particularly mindful. The reason is simply that digital marketing is very fragmented, with a variety of specialisms. There isn’t a shortage of marketers who don’t have the right skills for your particular problem. Not too say they are malicious in intent - rather they are eagerly wishing deliver value but just don’t have the relevant expertise. The only solution to this is to research and validate the right questions to ask.
Advice for bootstrapped startups
The above is pertinent to innovation projects. However, there are plenty of bootstrapped startups who don’t have the resources to afford expert advice. In those instances I’d still suggest seeking expert advice - you can find affordable advice from great experts via platforms such as clarity.fm.
Another option is to approach full-time employees (many will do a few hours of work in the evenings or weekends), or you can discuss with multiple agencies. Beware of growth hacking agencies. More often than not they are inexperienced with quick-hack methodologies that are short-term focused and range on breaking terms and conditions of popular social platforms.
Be aware of the risks, and make an informed choice. Although the original growth hacking term and a large proportion of that community are ambitious and capable, there is a lot of impractical and distasteful advice in those communities
I’ve seen my fair share of ‘analysis paralysis’. This involves lots of time spent inside spreadsheets projecting different scenarios and calculating assumptions. Keeping on top of cashflow, budgeting & user engagement metrics is clearly critical, but nothing provides validation like actually testing it out. All you need to keep in mind is “what’s the easiest / fastest/ cheapest way for me to validate me hypothesis?”
Problem solving and value
Getting people to pay for a product or service requires that you solve a serious problem for them. It’s no secret that humans aren’t that eager to part with their money. Even if it isn’t true, assume they worked hard for it and it means a lot to them.
Your job is to give them something that is so valuable that it’s worth it for them to let go of some of their hard-earned cash. Usually this isn’t what startups I help talk about. They are mostly busy talking about their own revenue and growth trajectories. Ironically, there isn’t nearly enough focus on the customer in most cases. Some great theory for this is The Fogg Behavior Model.
This means you have to conduct a lot of qualitative and quantitative research in order to validate this need as scientifically as possible.
Take a look at this shockingly common scenario:
Here’s a guy who has a really fantastic idea. I ask him what he plans to do with this idea. He says he’s going to build a product. That sounds like a natural progression, right?
Well, I ask him how many people he has spoken with who have a need for his particular product. He himself has the problem that the product is addressing – he has a need for it and claims that maybe three or four other people he has spoken with have the same problem and need the same solution. Do you see the mistake he has made? He has jumped ahead to a developed product without firmly establishing need and producing an MVP to learn more from.
He needs to operate a methodology and a process.
Minimum criteria for product market fit
You need a minimum of five users in order to get anywhere with your business. To establish a minimum viable product (MVP), get product market fit, and succeed, you must have five users who meet the following criteria:
- Not friends or family
- Have been using the product fluently
- Have been users for over a month
This helps to ensure that your service works without any problems and doesn’t have any bugs. Releasing a product with bugs is going to be the death of your company. It doesn’t make sense to rush for a quick release of a product that still has flaws.
You’re better off waiting and conducting more tests on a foundational object that people are consistently using and have a need for. At that point, you have something interesting to offer to the world.
Sean Ellis suggests that when you survey your users and 40% of them report that they will be disappointed if you pull the product, then that’s a good indication that you have product market fit. You’re never going to achieve that without having at least five users who are constantly testing out your product for a substantial amount of time. Preferably more.
Most people think that if 20% of users say they like the product then you’re in good shape. But that’s not enough. You need users who will be disappointed to live without your product. You need to have something that is essential. Product market fit isn’t about monetising users and getting traction going – that is too superficial and it’s much deeper than that. It’s about creating an emotional connection to the tool or product and staying competitive.
The two biggest issues are:
- People don’t establish a strong enough user base or community
- People don’t establish the clear problem they are trying to solve
It’s competitive out there. It’s rare to meet or talk to someone who has a brand or new idea that other people aren’t already working on. Also, people don’t really want to listen and challenge themselves to figure out what the problem is and how it can be solved. They want to build something based on an idea they have rather than shape it around the problem.
The most important thing to do is to take a really deep look at needs and make sure that you are creating something that will get people hooked. This means meeting all the needs for the minimum viable product.
Lack of experience
Many people are building products for a space they just don’t have any experience in. For example, someone might think that estate agency is an easy industry – you may have had an experience with your estate agency and acknowledge the fact that they weren’t very good or the ways they let you down.
But, never having worked as an estate agent or at an estate agency and never having been a landlord or property manager means that you can’t deeply understand the industry. That one experience doesn’t qualify you to build a mobile app to disrupt estate agencies. I also cover this in my piece about fatal startup failures, which you can read here.
On the one hand, it’s a good instinct to recognise that there is a flaw or hiccup in the industry that needs to be addressed. But jumping on the challenge without a really deep understanding of what’s going on isn’t going to make you a millionaire. You can’t build a minimum viable product in a week and find a designer, build the product and then do it better than anyone else without having the necessary experience and background.
In a situation like this, it’s important to have an understanding of the operational complexity of being an estate agent and not underestimate the amount that you don’t know. It’s always much more complicated – which is why the best apps and tools are developed by people who have experience in a certain industry. The people that have done their due diligence and put effort into researching and learning in order to gain clarity on the problem are the ones who are going to succeed. That’s what it takes to come up with an effective solution that will be superior to what already exists.
The case for simplicity
There are so many businesses out there. And the successful ones often only do one, simple thing. But they do it better than anyone else. There are no current alternatives that outperform them. Building a really successful business is simply doing one thing better than everyone else - in a way the users value.
But in order to do so, you need to really understand what the problem is and how to fix it – and even fixing a simple problem requires a tremendous amount of experience and insight. Keep it simple, stupid.
The immutability of human behaviour
Think about it this way - there is almost no problem out there that is affecting a large number of people that someone isn’t, in some way, already attempting to manage.
In many ways, this is much easier than coming up with an entirely new product or taking on a whole new industry. There is an existing source of awareness and information that you can take advantage of and build upon. Some companies come along and change human behaviour completely (think: Google, Apple, Uber, etc.) but they are the rare exception. Most companies piggyback onto an existing solution for a problem but just find a smart way to do it better.
I’ve seen at least three or four companies that have tried to change human behaviour, but the fact is it’s almost impossible to do. It takes an incredible amount of energy, money and resources to make it happen, and most small businesses just don’t have that kind of stockpile. But even with those resources, changing behaviour still requires you to create an easier, simpler way to solve a problem or fulfill a need that already exists. You can’t create new needs.
Many companies don’t understand this basic concept of human behaviour. It’s not as though their ideas are inherently bad – it’s more that the problem they are trying to solve isn’t meaningful enough or that they are trying to create a need for something when that need doesn’t really exist.
When it comes to using a new product, there are essentially two types of human behaviour. People are either:
- Switching from a new product that they are currently using
- Have a new need they didn’t have before
Product market fit is all about figuring out how to get a customer to either switch over to your product, or to tap into a need they, essentially, don’t know that they have.
The first tactic is much easier than the second.
The problem of scaling
Common marketing channel budget distribution mistakes I see are:
- Spending too much money on either earned, paid or owned media and assuming one of them is the key to success. This often comes about by looking at success stories from other businesses or previously owned businesses which had got great traction on that particular channel.
Unfortunately this often isn’t replicable easily. A simple example of this is with PPC or SEO, wherein in one industry there is a lot of long-tail searches, such as travel e.g. “cheap city breaks Barcelona”. Replace Barcelona with any city from the 50 largest cities in Spain (above 100k population) and you have a long-tail campaign with the potential for cheap traffic (compared to the keyword ‘Spain hotel’).
- Massive waste in these channels. Often people bid too broad in PPC, or don’t conduct thorough enough research to inform iterative testing processes. Budget is burned as a result, and when it’s gone, it’s gone.
The economics of scaling a business and getting a sustainable cost acquisition relative to the lifetime value can be incredibly costly. Consider that the lifetime value of someone matures over a three- or five-year period. So, essentially, you have to have enough cash on hand to pay to acquire a user who will eventually bring you dividends in three year’s time. That is a difficult model to work with
The problem with a startup or brand new business is that you don’t have years of experience in the industry and you have no idea whether the customers you’re investing in now are going to pay-off or not.
Scaling is a challenge because in order to justify the money you are spending, you have to make a case for the fact that you’re building something new that is so wonderful that it’s worth spending the money to acquire these customers – when the fact is that the company likely won’t be profitable for some time.
So, funneling dollars into your marketing channel, while probably the most worthwhile use of your money, can feel futile.
Spending money on posters, billboards, direct mailings, Facebook, Adwords, etc. is super expensive. Offline is even more expensive. You will almost always experience a loss of initial customer acquisition, but it’s an essential part of building and scaling your business.
Building a brand
The secret about scaling is that it’s not just blindly investing in customers you don’t yet have – it’s about building a brand. Direct acquisition is just a byproduct. With all of the early work and marketing you are doing, you are building emotion. Your customers are connecting your product to their need and they are connecting to the personality of what you’re selling. They aren’t just buying a solution to their problem – they are creating a human connection and an extension of their identity.
Your brand is an experience and it is an emotional one. You want to be in charge of how people experience and perceive your brand at the same time as solving a problem for your customers. It’s a multi-pronged problem that requires you to do a lot of amazing things at once.
The reason most businesses fail isn’t because they are facing one problem or aren’t doing their job well. It’s usually because of this multi-faceted challenge where a lot of smart people are doing wonderful things and just aren’t getting all the variables to come together at the same time. Building a brand and getting customers on board to love and trust you is a very tricky game.
Key tips for establishing product market fit
So we’ve realised that finding a market need, coming up with a new product, and establishing product market fit is not an easy process. But there are some things you can do to make it easier for yourself along the way.
First of all, try to get as close as possible to the people who have the problem you are trying to solve – and try to do so for as long as you possibly can. You really need to have a consistent relationship over a long period of time with the people who are experiencing the problem you’re trying to solve.
Let’s say you are developing a new accounting software – a multi-faceted B2B solution. You would look at existing software and count the number of individual pages, the number of buttons, etc. and find weaknesses. Perhaps the flow for users isn't working as seamlessly as it should and there could be improvements on the way they interact with the software.
The trouble is that there is an overwhelming amount of data that you have to play with in order to understand how to improve the product. And you need to grapple with that data in order to gain the deep insight and analysis into the features and problems that the users are having. You need to streamline the problems to separate each one and look at it critically.
Second of all, you have to make sure that your product is doing the bare minimum before launching it. That’s why it’s called minimum viable product. The initial goal isn’t to build a successful software, which is what most companies set out to do. The goal should be to build an app or program that is the minimum viable solution that could improve the life quality of the customer. Ask yourself how you can meet the needs that your customer has. This usually boils down to doing extensive research and having a stronger knowledge base of the industry than other people working in the field.
The struggle to achieve product market fit
You can’t get growth and traction without first nailing product market fit. And product market fit only happens when people who know they really want your product are super happy with what you are offering. At that point, you are ready to shift your focus from product to distribution and win the market.
These days, most startups fail because of lack of product market fit – not because of technology risk. And it’s actually easy to get product market fit. Paul Graham, who runs the successful startup incubator YCombinator, has a motto: “Make things people want.” Pretty simple, right?
Remember Marc Andreessen’s philosophy that we mentioned earlier - that “the life of any startup can be divided into two parts – before the product market fit and after product market fit.” The before part should be obsessively focused on people, rewriting your product, moving into new markets, figuring out exactly who you are and where you stand on things.
There is no specific metric for determining product market fit, but the idea is to develop a product that users will be unhappy to have to part with. Ideally, you would want 40% of your users to be very disappointed without the ability to use your product. The startups that struggle for traction tend to be under 40% while the ones with the most traction exceed 40%.
Keep in mind that this is just an arbitrary figure, meant for the early days of your startup. You’ll need to continue to grow your user base over time. But this initial measure of product market fit is incredibly important and will keep you from wasting money on pursuing a product or business that is eventually going to fail. Until you achieve this initial product market fit you need to keep your burn low and focus all of your resources on improving the amount of users that would be very disappointed without your product.
Don’t worry about bolstering your marketing and sales teams before you have addressed this core problem. That will only detract from the real issue, which is solving the fundamental problem of creating a “must have.”
After product market fit
Once you have arrived at the end of the rainbow and found the pot of gold in product market fit, it’s time to start scaling your business to put you on the track to sustained success.
Follow these three steps on your way to scaling and you’ll be in good shape:
- Promise: Figure out what the promise is that you are offering to your customers who “must have” your product. What are the benefits that you are delivering?
- Economics: Find a business model that makes sense for you, based on your budget and initial investors. What kind of model will allow you to acquire users, profit and continue running for the long-term?
- Optimise: Streamline a customer acquisition process that you can repeat and scale as necessary. This involves testing a number of different approaches and tracking them in order to get your metrics down.
Establishing product market fit before kicking-off the scaling process will enhance the outlook for startup success, and embracing these steps will make sales and marketing initiatives more effective, affordable, and sustainable. It goes without saying that scaling is no mean feat. There are complexities which demand their own in-depth article, and this is where I shall turn my attention to next.
Also on the Kurve blog: