Defining and validating product-market fit
How do you define product-market fit for B2B companies?
- First, answer the question: What do you uniquely offer that people desperately want? You will only find PMF if you have desperate customers.
- When you’re able to prove the value hypothesis—not the growth hypothesis—you have PMF.
How do you know when a customer is desperate?
- A customer is desperate if they’re already spending money on tech to solve a problem.
- When you meet with a customer who is desperate, the customer will figuratively (or literally) “reach across the table and beg you for your solution.”
- One of the biggest mistakes founders fall into is believing that “maybe” from a potential customer will turn into yes.
- Maybe = no.
- Unless someone says “I want to buy the product now, where do I wire the funds?” the answer is no.
How do you find the right market to pursue?
- People are desperate for replacement markets and finding a cheaper way of buying something. If you build something that’s exactly the same and cheaper, then PMF is not an issue because it’s a cost play.
- If there’s a good enough alternative from competitors, people will use it because it’s low risk.
- To find your market, find brave new worlds where customers are craving something new.
How do you validate PMF and what drives it?
- The best test of whether or not people are desperate is whether or not they tell everyone they know how great your solution is. NPS is a proxy for this.
- You know you have PMF when your customers become raving advocates for you.
- For product-driven enterprise companies, the PMF proxy should be exponential organic growth. The only way to get exponential organic growth is through word of mouth. (Note: If your market is tiny, you won’t get this.)
- People often kid themselves when they have growth. When you buy growth (aka inorganic growth), customer retention lags.
Iterating and refining your product to achieve product-market fit
How should I think about iterating my product?
- The value hypothesis for your product is what, who, and how. A common pitfall founders fall into is iterating on the “what”. You should not do this, instead, iterate on the “who.”
- Why? If you change the what, that means that your original insight was invalid. Once again, focus on finding the desperate customers.
- Your insight is what creates your advantage. When you change the what, that’s a restart, not a pivot.
- Adding more functionality seldom increases demand because people don’t become more desperate if you add more functionality.
If you change the “who," do you need to change the “how”?
- Not always. Sometimes you change the way you offer or charge for your product. Depending on your "who," you might need to change the pricing structure or business model.
- Ask yourself: What's the business model that will enable the desperate customers to buy from me?
How complete does a product need to be at this stage to be ready for PMF testing?
- Your MVP should have the minimum amount of functionality to get someone to pay you.
- Focus on your uniqueness. What do you uniquely build that people want? Make sure your MVP has exactly that.
- Functionalities sometimes distract. Take functionality out of the MVP to find your desperate customers. This will also help provide clarity on your initial insight.
How should you handle customers who say they’ll buy your product if you have an additional feature?
- These customers won’t buy from you. They are saying “maybe” which is not yes.
How do you respond to the functionality removal when the functionality is a differentiator?
- Differentiation is irrelevant for startups. If you’re competing with another company or an incumbent in the early stages, you’re screwed.
- You need to find an audience that can’t find your product anywhere else. Yes, this is difficult but it will be the difference between a successful company and one that's out of business.
Go-to-market strategies for achieving product-market fit
When do I start hiring for sales?
- You cannot achieve PMF on founder sales alone. PMF is about having a go-to-market strategy.
- You need to hire a couple of people on the sales side to understand if you have PMF. These salespeople need to be adaptable based on the skillset of the founder.
- Advice: Only hire one or two of them. A common founder mistake is hiring 10-12 sales reps when you start to see growth. Hire one or two and prove it with them, even if it takes a little longer. When the sales reps can cover all of their expenses, you’ve found PMF. Sales yield is one of the signal metrics that captures this.
How should I handle free trials?
- You need to pull the free trial after 30 days. People don’t want to do this because it can feel like you’re giving up on the prospect but here's the reality: If the customer pays you after you pull it, they’re desperate. If they say “ok” and don’t scream after the trial is pulled, they were never going to pay for it.
How should I think about charging customers?
- You must charge customers. Don’t give your product away for free.
- Revenue at the earliest stage is a far more important signal for PMF than it is a source of cash. If you don’t charge, you haven’t proven your value hypothesis. (Except for ad products.)
- If you’re giving something away for free, you have no traction. You never want to give your product away even if there’s some strategic advantage. References aren’t references if they haven’t paid you because what will you learn from someone who wasn’t willing to pay you?
How should you address multiple buyers within one customer?
- Focus on the most desperate buyer.
- Selling to multiple buyers is really hard. When you can, avoid selling to multiple buyers and focus on just one.
- You need to find PMF with each of the buyers, so the more you can make the sale about one person, the better off you can be.
Early customers as they relate to product-market fit
How should I think about my early customers?
→ Early customers fall into four groups
- Visionaries: Your first customers are visionaries who are trying to solve a problem. They are revolutionary not evolutionary and they care about proof of concept, not references.
- Pragmatists: This is the early majority and the largest part of the market. They want to solve a productivity problem. They are evolutionary, not revolutionary and they want references. Entrepreneurs go after them first thinking that if they offer a better product they’ll buy. They won’t. They want references.
- Conservatives: This is the late majority and they will only buy once everyone else is.
- Laggers: This group will never buy your product.
How should you think about customer acquisition early on?
- Think of it like bowling: If you knock one pin down, it falls over and knocks down other pins.
- Companies have to knock the first pin down. To do this, find someone who is really desperate. Find a group of customers who reference one another—if they don’t talk to one another, they’re not in the same market. Your customers will talk to other customers in the same market.
- To knock down every bowling pin you have to start with the visionary group and gather references to sell the early majority group.
- The first pin doesn’t need to be perfect, just adjacent to other markets. Solve for the level of desperation. Find the most desperate market first.
How should you think about lighthouse accounts?
- Enterprise software founders focus heavily on signing lighthouse accounts (big customers/companies) but early customers (visionaries) do not buy because of lighthouse references. They buy to solve a desperate problem.
- Forget the lighthouse accounts when you’re early on. Go after little customers and hoover up lighthouse accounts later once your little customers are raving advocates.
Finding product-market fit in today’s economy
How should founders think about sales cycles extending in today’s market?
- The economy is irrelevant. Companies who break out in recessions are solving a problem that people have and are desperate to fix.
- Desperation overcomes budget. Sales cycles are extending only for non-desperate customers. Almost every successful tech company I know is serving a need for which there wasn’t a budget. But they solved such an important problem that people realigned their budgets to buy the product to solve their problem.
- If you’re losing sales, that means that you’re a nice to have not a need to have. You have to find people for whom you’re a need to have.
What should I focus on in today's shifting economy?
- Focus on your uniqueness, not what the early majority wants (i.e. references/lighthouse accounts).
- The market shift could cause you to reconsider your “who." The audience that is desperate for your product may have changed as priorities shift.
- Example: A hiring-focused product may be in greater demand in more recession-proof industries such as insurance and healthcare that have not experienced as much of a slowdown as tech.
- Advice: Segment your customers and prospects in as many ways as you can think (by industry, size, buyer type, use case, etc.) and listen intently for variations in levels of desperation.
Have questions about any of the advice Andy shared? Have more thoughts to contribute on product-market fit? Feel free to send us a note: email@example.com.
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