How do you know you have product/market fit?
You have product/market fit if:
- Your customers are so delighted that they are recommending it to others.
- Your customers would be extremely disappointed if your solution disappeared.
- Your customers can describe the big problem they had and the big benefit they achieved from your solution.
- There is clear demand in the market place for your solution.
You do not have product/market fit if:
- Your customers are not recommending you to others.
- Your customers would not be extremely disappointed if your solution disappeared.
- You customers cannot describe the big problem they had and the big benefit they achieved from your solution.
- The marketplace is not demanding your solution. You have to persuade/educate your customers that they have a big problem with a big opportunity.
- You are not clearly and obviously differentiated from competitors in terms of the value customers achieve. Your only differentiation is price.
How do you measure product/market fit?
The single most important question is asking “Would you recommend our solution to others?” (Follow on questions could be “If so, why? If not, why not?”) This metric is known as NPS (Net Promoter Score). What is your NPS? Above 0 is good. Above 50 is excellent. Above 70 is world class. How do you compare to your industry and competitors? What has been your NPS trend? You can find links to more information about NPS in the Further Reading section at the end of this document.
A more detailed question for customers would be (Sean Ellis developed this). “How would you feel if you could no longer use our product or service?”
- Very disappointed.
- Somewhat disappointed.
- Not disappointed – it’s not really that useful.
- I no longer use.
At least 40% of your target customers must say “very disappointed”. If it’s less than 40% you need to reposition/change your product. One approach can be to segment the answers to find a customer segment where the response is above 40%.
You must understand the group above 40%. The five questions to ask them are:
1) who are you (demographically)?
2) why did you seek out our product/service?
3) how are you using our product/service?
4) what is the key benefit you’ve achieved?
5) why is that benefit important?
How large is your TAM, SAM, and SOM?
Having the facts to demonstrate that you have product/market fit is not enough to make the decision to invest capital to grow your business. You need to have facts regarding your TAM, SAM, and SOM.
What is TAM (Total Addressable Market)?
What would be your company’s revenues with your current solution if 100% of the global customers demanding a solution to their problem bought your solution? You would have no competitors. The focus here is on your current solution, not the solution you might have in five years time. Note the phrase “demanding a solution”. You must not include in TAM ghost customers who are not demanding a solution.
Is your TAM large enough consider growing your business? For example, the global smart phone TAM is huge, but the global TAM for smart phones that have a keyboard is tiny.
What is SAM (Serviceable Addressable Market)?
This is the portion of the TAM that is within the reach of your distribution channels and partners, and your ability to deliver and support your solution. Geography may be a constraint. This still assumes 100% market share of those customers demanding a solution.
How will your customers connect with you? If they are seeking a solution, how will they find you? How will you make customers aware of your solution? How will your customers and you connect?
What is SOM (Serviceable Attainable Market)?
SOM will be lower than SAM for two reasons: you may have competitors, and every customer who is demanding a solution may not actually buy a solution.
How do your customers perceive your competitively differentiated value proposition? How hard is it for a competitor to copy your solution or to provide a better value proposition to your potential customers? What is your retention rate and your churn?
Will your company make money?
You must now build a cash flow financial model for your company, to determine if your business will make money. Some of the components of the model include:
- Current results and future targets for TAM, SAM, and SOM.
- LCV (Lifetime Customer Value).
- CAC (Customer Acquisition Costs).
- Costs to deliver and enhance the solution. Many startups overlook the ongoing need to enhance the solution by fixing bugs, keeping pace with evolving customer needs, and staying ahead of the competition.
- Financial costs and investor exits.
- The costs of acquiring, retaining, developing, and exiting. Talent is the greatest challenge. Unlimited capital is available for a successfully growing business. Quality talent is the scarcest resource.
My Observations:
- Most startups don’t actually achieve product/market fit with a large TAT, SAM, and SOM.
- Many startups are not able to successfully scale, because the founders are unable to transform the company and themselves.
- Many existing large companies have lost product/market fit and are in a fight to survive, often with declining TAT, SAM, and SOM. These companies don’t recognise they are in this situation and devote the bulk of their resources to resolving secondary issues, leading to decline.
Your next steps, regardless if you’re a startup or a long established company:
- Document the facts and assumptions regarding product/market fit, TAM, SAM, and SOM.
- Validate assumptions, resulting in facts. It is critical that product/market fit is based on facts rather than dreams and hopes.
- Build your cash flow model.
- Do all of the above in the context of a documented value proposition and business model. The further reading section contains links to workbooks from MaRS, which will guide you through the documentation.
Further reading
The Net Promoter Score concept was initially developed by Bain. The following is a link to the Bain website homepage for Net Promoter Score, which contains several short articles:
http://www.netpromotersystem.com/about/why-net-promoter.aspx
The following is a quick overview of using Net Promoter Scores:
Business Model Design Workbook from MaRS:
https://learn.marsdd.com/wp-content/uploads/2012/12/Business-Model-Design-WorkbookGuide.pdf
Crafting your value proposition Workbook from MaRS:
Koor and Associates 