How to Reach Product-Market Fit using Metrics
Product-market fit (PMF, PMFit) is a mirage for startups. You think you see it, but as you move closer, it vanishes just to show up again in a different direction.
In hindsight, you always know when you cracked it, but looking forward you have no idea if you are there or even going in the right direction.
“We are at product-market fit” is a statement that happens only a few times during a startup’s lifecycle. Still, it is something founders tell every two weeks.
If you look at the reasons why startups fail, most of the reasons could be summed up with failing to find product-market fit.
Product-market fit is a rather vague term. Generally, it describes the situation when being in a good market with a product that can satisfy that market. It takes time, and might take several pivots to get there, doesn’t come easily or quickly. Many nuances influence the specifics. It is different for B2C and B2B products. Apart from that, whatever definition you find probably covers just half the truth. What you have to look at differs more or less case by case. Some of the metrics used for defining PMFit will guide you to the local maximum whereas you might miss the absolute maximum as you have no metric to show whether it’s a local or global maximum. You can learn more about the difference here.
If achieving the fit is such a big problem, how come we don’t know more about it? How come it is still dark magic and whomever you ask, will tell you a different story or something that is totally intangible? Especially in the uncertainty-filled early stage when you are acquiring the first few dozen/hundreds of clients. Obviously, you can’t say that you have reached product-market fit with a few dozen clients but you sure as hell would like to know if that is the right path to get there.
We have developed a set of indicators that can help you in figuring out if you are on the right track. We still can’t tell you if you are there, but at least that you are navigating your ship towards the right direction.
Let’s see the metrics you already use and how these will translate to PMF.
- CAC Improves
Customer acquisition cost. No matter what business you are in, the CAC should be continuously improving in the early phase. If you can keep improving your CAC, it typically indicates you are getting closer to your customers (decision-makers), reducing the waste efforts, and understanding the problems you solve better.
- Churn is at least OK
Churn is indicative of how well your product serves your customers. High churn can either be a consequence of bad marketing or bad product. Bad marketing means that the user acquired by marketing and sales are simply not the right buyers for you. A bad product is, well, a bad product.
- Your Sales Funnel is Moving from V to T
Sales efforts usually start with a “V-shaped funnel”. Conversion rates are typically low at the first step, and high for every other step. When a sales funnel is shifting to be closer to a T shape (rather than a V), it means you are better at fast and early qualification. Saves a ton of effort if you can wave goodbye to leads that you know will never convert or will churn. If you can convert qualified leads 90%+, congrats, you are definitely onto something.
- Stable Value Proposition Messages (number of messages/marketing A/B tests)
Marketing needs to be agile, but changing the messages you use to acquire and convince customers is not what leads to PMF. If you can say basically the same points to your customers and get the same results, it means your clients buy into the same promise. If you have to change the promise case by case, chances are high you are also changing the business problem you solve and the targeted niche as well. Or as we say, the box where your solution fits into.
- Customers Can Indicate the “Why”
Now, this is tricky. Obviously, you have no measures for this, but the easy way is to get referrals and see how they are referring to your solution. So the number of referrals would be one indicator, and if you add to the referral option a field: “how will this help the person you refer” will help you understand where you are at. If your clients can formulate it, you got a win. Once they understand the value, they will know what will be taken away from them. They know why it will hurt.
- Product Features are Actually Used
You develop what your customers need and they use what you develop. If you have feature creep you develop more and more features believing that will make your users stick with you. You end up with a Death Star. So complex, that it consumed all your resources and you don’t have enough people to maintain it. It comes with great self-confidence to say no to a new feature. When you are just starting out less is definitely more. The measure for that is to check the features that generate usage, and sales.
- (Bonus) Your Investors Stop Talking About Traction
Okay, this is a fun metric only. Hope we don’t need to over-explain this :D. When your investors start to talk more about marketing and sales and distribution channels, wanting to invest more to gain bigger clientele, and not grilling you about why and what you developed, perhaps they already know your unit economy and promise looks good.
Let us know if it holds true for you or if you were using different metrics.
Originally published at https://blog.abilitymatrix.com on January 21, 2021.