(2019-10-06) Johnson Nailing Product-Market Fit: The Definitive Guide

Sean Johnson: Nailing Product-Market Fit: The Definitive Guide. Some people believe the answer is “when you can sustainably acquire customers for less than the value you extract from them.”

The problem with a definition like this is that, especially in the beginning, you don’t know what your LTV will be, and you don’t really know what CAC is either.

any company that has decided to “blitzscale” (aka blitzscaling) will probably not fit this definition

While not specific, this is perhaps our favorite description:

You can always feel product-market fit when it’s happening. The customers are buying the product just as fast as you can make it—or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account... Tren Griffin.

Can you honestly say the above about the thing you’re working on? Most people who think they have product-market fit probably can’t say this.

understand that product-market fit is primarily a construct used by the world of venture capital. They want companies to achieve product-market fit because they aren’t looking for “good businesses”. They are looking for companies that have the potential for explosive, exponential growth

We would argue innovation teams should have the same goals, at least with part of their broader innovation portfolio.

What is a market?

We like the definition from Bill Aulet. You know you have a market when: The customers within the market all buy similar products; The customers have a similar buying process; The customers expect products to provide value in similar ways; The customers talk to each other, such that a product meeting their needs can have organic word of mouth.

A big market simply makes everything else you do easier

So what is product-market fit?

Product-market fit means being in a good market with a product that can satisfy that market.” Marc Andreessen

In other words, you’ve answered the questions who, what, and how: Who is your customer and what is their problem; What is your solution to their problem; How do you solve that problem in a way that creates proven value for you and the customer.

When you can satisfactorily answer those questions, you have product-market fit.

What product-market fit is not

If you haven’t launched yet, you don’t have product-market fit.

Raising money doesn’t necessarily mean you have product-market fit

Qualitative measurements of product-market fit

Sean Ellis was one of the first to attempt it. He used a single question: “How would you feel if you could no longer use this product?”

Ellis argued that when you achieved 40% of respondents saying very disappointed, you probably have product-market fit.

Quantitative measures of product-market fit – the importance of retention

For a while now, VCs have recognized that the most important metric worth measuring for most products is one related to engagement or retention. AARRR

There are several mechanism folks use for visualizing retention. Triangle charts are perhaps the most common, as they are baked into most event-based analytics platforms like Mixpanel:

Another way of visualizing retention has been through the use of retention curves. Brian Balfour in particular popularized their use.

A final way of thinking about engagement is with Smile Charts, so named because they tend to form a “smile” if they’re good:

These plot the number of days in a month that your users are engaging in the product.

There is additional nuance here, specifically the idea of “meaningful use”.

Advanced methods for calculating product-market fit

Social Capital developed what they call growth accounting. The idea in a nutshell is to break monthly actives into several buckets:

They then developed what they call a “quick ratio,” which effectively measures the sum of those gains in revenue (or users) over the losses. If you have a quick ratio over 1, you’re growing. If it’s less than one, you have a problem.

Other firms have taken this approach and added to it. Tribe Capital uses these metrics and in addition to quick ratio will look at gross retention (retained revenue over total revenue from the previous period).

7 strategies for increasing the likelihood of achieving product-market fit

Start with a BIG, established market.

Disruptive doesn’t mean there is no competition – it means that you attack the competition, usually in ways that are un-economic for for the incumbent to compete.

But focus on a segment of that market.

A good market segment is typically one full of folks who tend to be open to new things, have a willingness to pay, and like to talk to each other

Truly get in front of your customers.

We leverage customer interviews on a regular basis because they’re cheap and you get to ask follow up questions and study body language. It turns out there’s a huge difference between “Sure, I’d use that” and “SURE, I’D USE THAT.” Surveys don’t capture this nuance particularly well.

An even more robust, albeit more time and cost intensive, approach is to shadow your customers. You will ALWAYS get more helpful insights than you can by simply talking to people about what they think.

See how hard it is to generate demand.

I’ve made this mistake personally. We invested in a company at one point that was solving a meaningful problem for a demographically expanding segment of the population. The problem was there was no easy way to find these people

You can de-risk this somewhat easily by creating a growth model. We’ve talked before about the myriad benefits of modeling growth. One that isn’t immediately obvious is the sense it gives you on the relative difficulty of reaching your market.

keyword research to assess the level of potential inbound organic traffic available

Ship. Quickly.

What isn’t okay is failing to commit to a cadence of rapid shipping in response to qualitative and quantitative feedback.

Make your product a closed beta.

you get to shape your audience.

One reason why things like NPS and Sean Ellis’ question can backfire is your audience has commingled data. You have some % of people who reflect your ideal customer. But you have a bunch of other folks who are simply kicking the tires, or are competitors, or don’t have budget, or aren’t in the ideal job.

Some folks object that doing so artificially constrains growth. But growth in top line users who aren’t in your ideal customer profile and who churn doesn’t really do you any favors.

Concierge your onboarding process.

One of the things that impressed people the most about Superhuman was their extremely hands-on approach to onboarding users

Walking them through it gives you a chance to see how easy or difficult it is to get started. It gives you a chance to find places that are confusing, to surface product improvement opportunities and identify ways to make your eventual first time UX better. At the same time, you ensure customers get through that first time experience and experience the core of the product, maximizing the chances the light bulb goes on for them.

Product-market fit is hard to achieve. But it’s possible.