Steve Blank once said that there no business plan which survives a confrontation with the market and no survives a confrontation with the customer. Actually, not only can we close this article with this statement, but also our business. The end, white flag, no chance for success.
Read more if you want to find for yourself how I have been able to contradict Blank’s thesis.
What does being product/market fit mean?
One of the most frequently quoted definitions whose author is Marc Andreessen is the following: “Product/market fit means being in a good market with a product that can satisfy that market”. The greatest players on the market tend to fail to do it. When in the 1990s it seemed to us that the world would be indivisibly ruled by international corporations and that nobody could jeopardise their activity, something broke. Corporations had soared to invisible heights, specialised their employees beyond the boundaries of reason, and lost their ability to function successfully.
The corporations’ spectacular size and inability to act led to the fact that the giants of the kind of Kodak, Commodore, Atari or Nokia practically disappeared from the market. However, we must admit that Nokia, having overslept the pivot moment – a change of strategy of mobile devices development – has still preserved its identity, and by cutting off the mobile phone division, has survived and is doing so well that it plans to come back to the market in the near future. No budget start-up could possibly have any chances against the corporate giants.
How can small start-ups try to find their place on the market of giants?
The notion of being product/market fit has its roots in one of the start-ups’ features: limited resources for product development – and then even more limited resources for its introduction to the market and proper advertisement… Most start-ups repeat the phrase Let’s do marketing, but without spending any money! and look for guerrilla forms of advertisement.
As history has often shown – the greatest weakness can be the greatest strength, and the greatest strength – the greatest weakness.
Corporations, which are often confident (apart from few exceptions) about their strength and infallibility , have been implementing projects in the environments with high degree of risk (new products/new markets – see cynefin model), believing that the better they plan their actions at the beginning of the project – the easier they will implement it. So they planned, conducted and implemented projects, and their success was to be sealed with a great marketing big-bang with an astounding budget.
Every next step of a project meant a multi-fold increase in investment. Sometimes they even conducted market research and worked with focus groups. Even if somebody saw the threat or incompatibility of the product with the market demands at the stage of placing the product on the market, the decision to return to the stage of planning and designing was so painful and difficult that nobody dared to make it – after all, the project has taken up so much time! We have already exceeded the limit! We will finish it in the end. We will place it on the market. We do not want to extend it indefinitely.
Why doesn’t a start-up need budget for marketing?
Start-ups, lacking the sufficient financial means at disposal, have to compete against corporations only with the use of their products, which ideally satisfy the demands of target customers (target market). Users of the products who admire them are more prone and willing to talk about them. They often recommend the products to their friends. In exceptional cases, the synergy of the social media, ease of spreading information, and the unique features of such products has brought about the phenomenon of viral marketing – the dream of every marketing specialist – the most powerful, and at the same time the cheapest, channel of reaching the potential clients.
The conclusion seems to be obvious – all ideas and assumptions should be verified against reality fast, and subsequently become product/market fit. It will probably happen more often than you can expect… In the case of tech start-ups, where the product, or its fundamental part, is an app (mobile, web, desktop etc.), it is easy to operate on MVP – a product prototype which can be modified in quick (or rather brief) iterations, and to look for the longed-for amazement of the potential clients.
How to hit product/market fit?
Becoming product/market fit forces the project/product/start-up owners to change perception. The owners have to cut the cord connecting them with the product and begin to verify the assumptions through the prism of the market. The faster they answer who their clients will be, what type of environment concentrating these people (internet forums, social media etc.) will attract people willing to help in designing and testing the product – the better for them.
Of course, there is no sense in creating a huge community at the initial stages of developing an idea. Several people are enough. If you do not know how to find them, try to find out where your potential clients look for information? What connects them? What can interest them? What do they value? Follow the answers and you can surely reach them.
What to verify?
In the initial phase of development – first and foremost the key parameters of the product/service:
problems/needs which can be solved: make sure that others can see them as well as you do, that they have a similar understanding of the problems and needs, and that these needs and problems are equally important to them. What are customers’ expectations? What are the customer’s fears? Do not be afraid to change your ideas, to improve and to look for new needs. It’s all about it.
Solution – is your idea really the best possible method to solve problems? How are the problems currently solved? What is the product which you want to deliver? How should it be delivered? What clients would like to find out about it? Why should they benefit from it? Before you invest in an MVP – discuss whether the thing that you want to include in the MVP as features is the thing which has the greatest value for the clients among all the discussed solutions. Do not assume that you know better. Steve Jobs had known better, but before he found out, Apple went bankrupt. You cannot afford it.
Once you are able to choose the best functionalities of a product, then you most probably will be ready to prepare the MVP and you will know how to formulate unique value propositions connected with your product in a way which is accessible to your segments and what channels of communication you should use. However, do not assume that all of the elements will remain unchanged. We are learning to exist in an unknown environment. It is high time you specified Key Metrics and started the MVP tests. Start with a small group of people you already know. Check if they understand how it works, whether it can be improved and verify if the needs are met. Improve until you hear Wow! It’s a really great product!
How do you know that you’ve hit product/market fit?
We know it only by observing the customers’ behaviour. Apart from the wow! which we can hear, we can also observe that they use the delivered solution. They ask fewer questions connected with the purpose of purchasing it, rather, they start notifying their problems and articulating their further expectations. They suggest the directions connected with its development – and surprisingly – they seem to care for the product and want to improve it.
This is the key moment when the owners of start-ups feel the thrill of emotions – the idea blossoms. Only then proceed to the next step – testing the market size, testing the sources of income and cost structures. Each and every one of them. Do it before you burn the resources intended for your project… The simplified lifecycle of a start-up/product is presented on the following chart.e.
Leading a project involves a clash between two opposing forces: progress and avoiding mistakes by frequently verifying the assumptions against the market. Each verification which gives the effect below your expectations should end in a pivot (coming back to the stage on which an error occurred) and fixing it – or in a critical case – making the decision to kill the project.
It is clear that in the best case the total financial cost of the project is the sum of individual stages of the whole project. However, this is hardly ever so. Actually, more often we find out about mistakes in assumptions or erroneously verified hypotheses – e.g. on the stage of commercialisation… then it starts to hurt. The cost of correcting that mistake means returning to the stage where it was not properly verified.
Taking into account the fact that each stage is several times more expensive than the previous one and that we will need to repeat each essential part of the stage, the costs grow exponentially.
Let’s calculate it on the example. Let’s assume that:
- the Customer Creation stage is fourteen times more expensive than the Customer Development one,
- the Customer Development, in turn, is eight times more expensive than the Customer Discovery one,
- the mistake made on the Customer Discovery stage will not reveal itself on the Customer Development stage, but only on the Customer Creation one.
What are the costs of correcting a mistake?
You can easily calculate that the cost of conducting the two following stages was 96 times more expensive than the Customer Discovery stage. If it turns out that we spent 20,000 on Customer Discovery, then the next two stages can cost 2,520,000… assuming that the change will generate 70% differences in Customer Discovery, 30& in Customer Development, and 20% in Customer Creation (it is a very careful assumption). It generates the huge cost of 546,000 (20 000*70% + 280 000 * 30% + 2 240 000 * 20%). Horror! This is only the cost of making only one change!
This simple equation shows that it is much better to repeat Customer Discovery – each time changing the whole idea 20 times than let a mistake slip two stages later. It would cost only 400, 000 (it would still cost 25% less), and would save a great deal of time.
Conclusion: the deeper the pivot, the greater the cost…
It does not mean that we should avoid pivots: on the contrary – a pivot can be the best or even critical investment in the project.
A Few Words on Monetisation
It’s time for the deepest pivot you can make it the project: returning to the roots and formulating new theses – maybe contradictory to the ideas which made your start-up successful. Time for the next iteration of your start-up…
An optimal moment for making this step is when you are the most successful: this is when the project is most susceptible to the attacks of the competition. Caution wanes – after all, I know how to conduct this business (I have made loads of money, I can slow down for a while… I deserve this). Caution is replaced by drowsiness, apathy and self-confidence. This is the graveyard of the great corporations such as Nokia.
Attempting to be product/market never ends because of one simple reason – the market never stops and every now and again some new factors emerge, which change the rules of the game. If you are not product/market fit, somebody else will be. Nothing functions in a vacuum and there will always be someone who will do it for you. Thus, you should worry when the times are good, be aware, postpone success, stand aside and think what you would do if you had to compete against your product.
There are tools on the Internet which will help you to manage the process. It can be monitored analytically by suitable metrics, such as the degree of consumer satisfaction, their retention, recommending your product between users and feedback on the satisfaction of use degree.
Be wary and draw conclusions
Is being product/market fit a complicated process? On the one hand, no – it is based on listening to your customers and their needs, analysing, drawing correct conclusions. On the other hand, the process is so difficult, that hardly anyone can listen and draw correct conclusions.
Benefits of looking for compatibility of the product with the market demands as early as possible seem to be obvious. Early detection of incompatibility does not only allow us to save funds, but to save time as well and will indicate an optimal channel of communication with our potential clients.