You will have heard it a lot; finding your Product Market Fit is critical to the success of your business. But what is it, how can you get is and keep it, and what does success look like?
Let’s start with some definitions:
Marc Andreessen defines it as “being in a good market with a product that can satisfy that market.”
Alan Gleeson defines it as “the point at which there is *broad* market acceptance for a new application.”
We’d like to offer this definition of Product market Fit:
Product Market Fit (PMF) occurs when for a defined market segment, MRR is scaling in a fast, sustainable and predictable way (Good is > 20% monthly), churn is low (Good is < 1% monthly) , and affinity is strong and measurable via metrics like expansion sales, referred business, reviews and NPS .
Product Market Fit requires a Product and a Market
It’s obvious that to be a success you need to have a market. A successful product without a market is of course ridiculous. But what types of markets are there?
In 1957 H. Igor Ansoff published his paper “Strategies for Diversification” in the Harvard Business Review. SaaS companies can learn a lot from this simple matrix. In it he suggested that in order to grow you need to follow one of four paths:
- Market Penetration: Sell an EXISTING product to an EXISTING market (easiest)
- Market Development: Selling an EXISTING product to an NEW market
- Product Development: Sell a NEW Product to an EXISTING market
- Diversification: Sell a NEW product to a NEW market (hardest)
With SaaS start-ups, it is a lower risk plan to target a market that you know exists with a better product, than to create a new product category / market.
Either way, you need to firstly have or define a market of sufficient size and value that can support your growth plans.
TAM vs SAM vs SOM
Market sizing is an exercise we’ve all got to do. Especially if you’re looking to raise money. There are 3 useful ways of market sizing.
- Total Addressable Market (TAM): This is the big number. The total number of people everywhere that could buy your product. For ZOKRI we could argue that this is all businesses, as OKR are a good fit for all types and sizes of company. OKRs are best kept in OKR Software. Consider trying ZOKRI for free.
- Serviceable Addressable Market (SAM): Is the market you can actually acquire with your product. There are often limitations on geography and language for example.You may also chose to apply extra targeting criteria like ZOKRI has i.e. SaaS Companies. This is useful as it’s an advantage to create a specific high value solution for a market segment in order to be able to differentiate yourself against competitors. Trying to ‘boil and ocean’ is a tough ask.Once you have traction it’s easier to move to a Market Development phase. Your Market Development plans can show how you’d extend into new markets.
- Service Obtainable Market (SOM): Even in a more focused segment you’re not going to get everyone to use your product. The question you need to answer then is, what share will you realistically get Q1, Q2 … Qn?
Inertia and Status Quo
If you’re targeting a market that you know exists with a product that’s better than the current Status Quo. For example the Status Quo for ZOKRI is Google Sheets.
Generally, you need to not just be a bit better, but a lot better to get over the inertia that’s involved in changing.
Depending on your solution, change can mean moving or even losing data, time spent on-boarding, using new unfamiliar processes, generating new reports, creating new integrations, getting contracts signed ….. and so on, and who do you know that’s not busy?
There’s also risk:
- Who are you?
- Are you going to be around in a year?
- Is your product going to develop with the market or even lead the market?
- Will you stay focused on me and my needs or prioritize another type of customer?
It’s not uncommon at this point for a buyer to say “fuck-it, I’ll go with the market leader, even though they cost more and aren’t as good”, or, “I stick with what I’ve got.”
It’s worth saying that again. It’s hard to break through inertia and challenge the status quo. Your product needs to be a lot better, not a bit better to get over the inertia if a status quo solution is in place.
It’s hard to break through inertia and challenge the status quo. Your product needs to be a lot better, not a bit better to get over the inertia if a status quo solution is in place.
Guy Cohen from Wonder said “you want to be a painkiller, not a vitamin – vitamins are nice-to-haves, but people can’t live without painkillers.”
And if there’s not a solution in place it’s a bit easier but it’s still a time, effort and money investment.
Creating your hypothesis
Finding your product market fit is a big experiment that needs a hypothesis. Guy Cohen has created a really good Google Sheet with different phases you need to go through to find your fit. The first Initiate Phase requires you to answer questions like:
- What is the size / type of ideal firm?
- What departments feel the pain most?
- Who is the buyer (actual purchaser who can approve / write checks)?
- Who is the end user (s)?
- What is the pain point we’re solving for?
- How do they solve for this today?
- What is the advantage of {Your Product} solving for it than current solution?
- What is their workflow (recurring event where {Your Product} fits in)?
- What other similar / competitor tools/ service do they pay for?
- What’s the cost / pricing for those tools / services?
- What’s the best way to reach buyer / end user?
- What’s the best way to sell into these firms (e.g. to end users first; or direct to purchaser)?
- How to build awareness and credibility in the new market to get past early adopters?
- Are there channels and partners you can leverage to accelerate the close of new customers?
- How big is the market (for {Your Product})?
- Is that specific sub-market large enough?
- What’s the best way to acquire leads for prospecting?
- What are the major potential roadblocks (hypothesise 3-4 issues you may encounter)?
- How price inelastic is this industry? Scale of 1-3 (1 being elastic, 3 being inelastic)
- Thoughts for best pricing structure to initiate / test with?
Are we there yet?
Like a child or a long car journey looking out the window, it can be hard to know if you’ve reached your destination. How would you know if Product Market Fit has happened? Here are some tell-tale signs.
- MRR is growing fast through new sales and expansion sales
- Churn is low and your Quick Ratio is over 4
- Referrals are a significant lead source, word-of-mouth is in overdrive and journalists have heard about you
- Reviews are full of superlatives
- Scaling Marketing, Sales and Customer Success take up most of your time
You also need a Sustainable Advantage
If you’ve got your Product Market Fit you’ve done brilliantly. Most SaaS Start-ups don’t. But I’m sorry, you’re not out of danger yet.
If you’ve found your Product Market Fit it doesn’t mean you’re the next Unicorn on the block. You’ll need a moat to increase your chances of getting there. Jerry Chen at Greylock Partners wrote a great article on Moats. Jerry wrote:
To build a sustainable and profitable business, you need strong defensive moats around your company. This rings especially true today as we undergo one of the largest platform shifts in a generation as applications move to the cloud, are consumed on iPhones, Echoes, and Teslas, are built on open source, and are fuelled by AI and data. These dramatic shifts are rendering some existing moats useless and leaving CEOs feeling like it’s almost impossible to build a defensible business.
Moats include:
- Economies of Scale: You’re big and have become efficient with scale at key parts of business operations.
- Referral Engines: Users are getting users, usage is scaling fast and your CAC is low.
- Methods / Patents / Super Smarts: You’ve got methods, patents are smart hard to do things creating a barrier to entry.
- High Barriers to Exit and High Inertia: Once your software is being used if it’s hard and painful to switch then the new solution on the block is going to have to be truly amazing to get you to switch, or you will have made a massive mistake.
- Systems of Intelligence: Jerry Chen think Systems of Intelligence are the new moat. Here you take data, learn from it and create new and unique competitive advantage often using AI and Machine Learning.
Take action
Product Market Fit is fundamental to your success and your can’t scale up before you’ve found it.
Hopefully you will find the tips a guidance on how to think about segmenting, sizing, testing, and measuring Product Market Fit useful and you will nail it and scale up.
