Our last blog covered 8 actionable ways to get your startup’s first 100 customers. The next step is to leverage your initial customers to help validate product/market fit. As you’re testing to see if product/market fit matches your expectations, you’ll likely experience one of the following:
- Option A: You discover you are on the right track but you’ll have to say “no” to random feature requests in order to stay focused.
- Option B: You discover your current product doesn’t have the desired product/market fit and a change in direction is required in order to succeed.
I guess you could say Option C is to realize you don’t have a solid product/market fit and you decide not to make the necessary changes. Since the focus of this post is startup success, Option C isn’t a viable option.
As you’re evaluating product/market fit, how do you know when to stand firm (remaining focused on your current product) and when to change direction?
In today’s blog, we’ll cover:
- How to determine if your product/market fit is setting your business up for success
- When you should say no to random feature requests in order to stay focused and on track
- When you need to make a significant pivot in order to attain product/market fit and examples of companies that knocked this out of the park
Before diving into leveraging your startup’s first customers to validate your product/market fit, we should point out the importance of shipping your product early and often.
This concept is a core principle in Lean Startup methodology. If you’re not familiar with the Lean Startup and MVP (Minimal Viable Product), Eric Ries’ Lean Startup book is a must read for every startup founder.
Let’s dive in…
Using Feedback to Confirm Product/Market Fit
When leveraging your first users to confirm product/market fit, you want to pay attention to feedback from two main sources:
- Feedback communicated directly from your users
- Data from your customer’s actions
A feedback loop is essential. The elements of the feedback loop are build, measure, and learn. “We want to get through that loop as quickly as possible. But it’s not just failing fast, it’s failing well,” advises Ries.
The feedback loop is a part of shipping early and often, because you’re constantly measuring for success and making small changes to the product based on metrics and learnings.
Determining Product/Market Fit With User Feedback
The two most common surveys to validate a startup’s product/market fit are:
- Sean Ellis’ Product/Market Fit survey
- NPS (Net Promoter Score)
Sean Ellis’ Product/Market Fit Survey:
Sean Ellis suggests you focus feedback from your product users by starting with a specific survey question:
How would you feel if you could no longer use this product?
- Very disappointed
- Somewhat disappointed
- Not disappointed
- N/A I no longer use your product
According to Ellis, if more than 40% of respondents select “very disappointed” then you have product/market fit.
The “40% benchmark was determined by comparing results across 100s [of] startups. Those that were above 40% are generally able to sustainably scale the businesses; those significantly below 40% always seem to struggle,” explains Ellis.
Don’t have the coveted 40%?
“If you haven’t reached product/market fit yet it is critical to keep your burn low and focus all resources on improving the percentage of users that say they would be very disappointed without your product.”
Net Promoter Score (NPS):
We’ve previously discussed NPS as it relates to SaaS customer success, but NPS is also a tool to help confirm product/market fit in your startup’s early days.
NPS asks your customers to score how likely they are to recommend your product to others, on a scale of 1 to 10.
Intuit co-founder Scott Cook advises, “Find those nines and tens, the ones who are recommending it to their friends, and ask them to tell you why. The answer to where you should focus is in their answer. Why do the passionate ones tell their friends they have to use it?”
One last thing before moving on to validating product/market fit via data: talk to your customers.
The founder should be actively participating in getting feedback from the startup’s initial customers. Active participation includes getting on the phone with your customers.
In our previous post on how to get your startup’s first 100 customers, we mentioned Trey Gibson, who got his first customers by calling every trial user within minutes of signup. He used Zapier to send him a text whenever there was a new signup.
You could use the same method, and call customers moments after they’ve converted to paying customers. They just said yes to your product, so what better time to get feedback?
Groove CEO Alex Turnbull talks about the company’s early days:
“We spent many hours talking to every single one of our customers. We didn’t have a choice; exhaustive feedback was the only way to make our product good enough to reach Product/Market Fit.”
The only way to make their product good enough to reach product/market fit was spending hours talking to every single one of their customers. Just wanted to make sure you caught that.
And the best part?
“You don’t need many tools to talk to your customers. And while it’s a time-consuming task, it’s one of the highest-ROI efforts you can tackle as a startup CEO,” advises Turnbull.
The payoff from hours spent talking to Groove’s first customers? About 9 months after Groove’s initial launch, “something awesome happened,” says Turnbull.
Feedback was more positive. Customers were raving about the product more than they were complaining about it.
Groove sent out Sean Ellis’ survey, and were rewarded with the following results:
Over 40% — they were on the right track for product/market fit.
Determining Product/Market Fit With Feedback From User Data
Engagement data can help you confirm “that the user is getting meaningful value out of the product,” and allows you to validate successful product/market fit.
Ok, so you’re looking at your initial customers’ engagement data to verify your product/market fit expectations…but what metrics signify a successful fit?
Retention is the key metric when evaluating product/market fit.
“While getting paid is the first validation, getting customers to keep coming back is the ultimate validation towards building a repeatable and scalable business model,” says LeanStack creator Ash Maurya.
Maurya ranks retention “above revenue because it is possible for a customer to buy a subscription, not use it, and simply forget to cancel. But it’s hard (if not impossible) to fake retention.”
Beware of false positives when reviewing engagement data.
Ellie Cachette learned firsthand from finding product/market fit with her own startups and cautions, “first adopters are not always the best adopters.”
“For instance, in the beginning, a few customers may be willing to pay $100 a month for your service. But if there aren’t enough of them (say less than 10,000) or if the expense to acquire a user is more than the amount you can charge them for three months of your service, you may not have business model after all,” advises Cachette.
Remember, with the feedback loop, you’re regularly testing, measuring, and iterating until you’ve verified you have product/market fit. Lean Startup methodology refers to each iteration, whether small or complex, as a pivot.
Pivot To Obtain Product/Market Fit
Techstars Berlin’s Managing Director Jens Lapinski defines a pivot as “a change in the target customer, product proposition, marketing and sales approach or a significant business model change.”
Lapinski’s definition makes it clear that a pivot to find product/market fit can be a minor iteration or a “significant business model change.” We’ll go into how to identify which category your startup’s product falls into, in a moment.
For now, let’s quickly look at why pivoting matters.
Lapinski has first-hand experience creating and investing in over 20 companies. Based on his personal experiences with those companies, he mapped out the correlation between product/market fit one month after initial launch and the companies that were successful one year after initial launch:
“About half the companies that had partial traction pivoted and became successful. Several tried to pivot, but failed to find product market fit. Every ‘yellow’ company that optimized without pivoting failed,” explains Lapinski.
In Lapinski’s experience, it is possible to pivot until you find product/market fit but failure to pivot will cause your business to die.
Marc Andreessen is credited with creating the term “product/market fit” in his infamous blog post, “The Only Thing That Matters.” Another must-read for every startup founder.
Andreessen believed so strongly in the need to achieve market/product fit that he advised:
“Do whatever is required to get to product/market fit. Including changing out people, rewriting your product, moving into a different market, telling customers no when you don’t want to, telling customers yes when you don’t want to, raising that fourth round of highly dilutive venture capital — whatever is required. When you get right down to it, you can ignore almost everything else.“
Ok, now that we’ve looked at the importance of pivoting to obtain product/market fit, let’s look at the two different paths you may find yourself on when determining product/market fit:
- Based on the feedback loop, you discover you’re on the right track, so you want to remain focused on that path. Necessary pivots to validate product/market fit will still be applicable, but you’ll need to differentiate between user requests that will confirm fit and random requests that you need to say “no” to.
- Based on the feedback loop, you discover there isn’t a great product/market fit for your current product and you need to make a more complex business shift in order for your startup to succeed.
Let’s start with the first scenario…
When To Say “No” In Order to Remain On Track For Product/Market Fit
According to Balfour, you have product/market fit when you experience the “trifecta”:
- Non-Trivial Top Line Growth
- Retention
- Meaningful Usage
The wildly successful Snapchat achieved the trifecta a few months after launch.
According to a Snapchat advisor, a few months after initial launch the startup had approximately:
- 200,000 downloads
- 100,000 daily active users
- Daily active users sent, on average, 1 million photos per day
Does that fit the trifecta? YES!
- Non-Trivial Top Line Growth (200,000 downloads)
- Retention (half of the downloads were active daily)
- Meaningful Usage (each daily user was sending an average of 10 photos per day)
Snapchat’s popularity is evidence of their successful product/market fit, and you can see their continued usage expansion in the graph below:
While most startups (sorry to burst your bubble — see graph below) won’t experience the kind of explosive popularity and growth that Snapchat has, you can use the same principles of the “trifecta” to help identify as you’re nearing product/market fit.
Andreessen stated you should do anything to reach product/market fit, including “saying yes to customers when you don’t want to” and “saying no to customers when you don’t want to.”
You’re going to get a multitude of requests from users, and in order to stay focused and on track for product/market fit there are requests you’re going to have to say “no” to. You shouldn’t scale the product to satisfy customer requests at the detriment of your business.
CEO Rick Perreault experienced this in the early days of Unbounce:
“It’s especially tough when you’re bootstrapping, and you’re Ramen profitable, and you start getting recognized brands calling you up saying hey, if you just build this feature, we’ll buy. It’s so tempting, but it’s also a huge distraction. We fumbled around for two years trying to do everything for everyone, and it took a lot of discipline to get focused.”
Rather than scaling the product to constantly satisfy user requests, Cook recommends “looking beneath what customers are saying. Hear what they say but, most importantly, watch their behaviors as the indication of where the pain is. And then go solve that pain.”
Solving those uniform pains will still involve iterations (UX, added features, etc.) to make the product better, but they will be more minimal pivots because you’re already on track for product/market fit.
Now to the other end of the spectrum…
When Changing Direction Is Necessary for Success
After all the blood, sweat, and tears have been poured into your startup, discovering that you aren’t on the right track may seem devastating.
You can still pivot to a successful product/market fit, but the pivots will likely need to be more significant than a few added features.
When reviewing engagement data you may even find there is a single feature users are engaging with significantly more than any of the others.
“In these cases, it’s possible to ditch the extraneous functionality, and turn the popular feature into a stand-alone product,” says Law.
Companies that knocked it out of the park:
Burbn was a location-based social network with an optional photo feature. Reviewing the engagement data, founders realized users were spending most of their time interacting with the photo feature.
Close.io content writer Jo Johansson explains the monumental pivot that happened as a result:
“Kevin Systrom and his team decided to switch their focus from check-ins to photo sharing. Having paid close attention to user feedback, they threw out one year’s worth of work and put all their efforts into the part of the product the users were committed to—photos. Eight weeks later, Instagram was born. How much is paying attention to user feedback worth? In Instagram’s case, 1 billion dollars.”
Many people know Eloqua because of its acquisition by Oracle for $871M. Fewer people know that at one point, the company was days away from bankruptcy.
Eloqua started as a “chat/messaging app geared toward financial services, insurance, and real estate companies,” says Jonathan Crowe.
Company founders discovered there wasn’t product/market fit. Usage wasn’t centered around chatting, and users were more excited about lead follow-up email capabilities.
Eloqua founders “went back to the drawing board and decided to shift their go-to-market strategy to target companies who were desperate for lead gen (companies like themselves).”
Over a decade later the company went public, and were acquired by Oracle a few months after going public.
The pivot required for successful product/market fit may even center on the technology you’re utilizing. PayPal is a great example.
PayPal started as a company called Confinity and it allowed the exchange of money via PalmPilots (the precursor to smart phones).
That didn’t succeed as they had hoped, so the founders pivoted and created PayPal. At that point PayPal allowed people to email money to each other over the web.
When eBay users discovered PayPal, the company pivoted once again and it became the eBay users payment processor of choice.
That final pivot led into what PayPal is known for today: offering safe and secure payments via the internet.
Whether making minor changes or a significant directional change to get to successful product/market fit, in all these examples the startup built on their previous learnings.
The key to a successful pivot is to always utilize what you’ve learned thus far, “while making a fundamental change in strategy in order to seek even greater validated learning,” explains Ries.
Conclusion
Reaching product/market fit is mission critical for startup success. Along that path, you’ll likely find yourself in one of two scenarios:
- You’re on the right track to reach product/market fit. While smaller iterations will still need to be made to improve the product, you need to stay focused. Remaining focused will mean saying “no” to random requests.
- Your current product doesn’t have traction to reach product/market fit, and you’ll need to change directions to succeed.
In either of those scenarios, not making any pivots is not an option.
The feedback loop helps determine which pivots to make. You’ll need to be measuring both user feedback and engagement data. The good news is that you can continue to tweak and pivot until you find the sweet spot.
While we’ve focused in this post on validating your initial product/market fit, it is important to note you’ll continue to utilize the feedback loop throughout the life of your product. Balfour explains why:
“This process never ends primarily for one reason – your market doesn’t sit still. It is always moving. These days markets are moving/changing at an accelerating pace. As your market moves, your product needs to move with it making product/market fit a pulse that you need to constantly keep your thumb on. Additionally, in the effort to maintain growth, companies tend to expand their target audiences to new segments causing the need to step through this process again.”
