Product/Market fit

Authors: Tomasz Soroka, Zbigniew Waz

23.12.2016

Introduction

Product/Market fit is a critical factor behind a startup success. How should it be achieved and will one ever be able to say „I’ve done it once and for all and now I can find peace of mind”? Many people assume so, but reality shows that it has a continuous character as it is changing all the time.


What is Product/Market fit?

One of the most frequently quoted definitions, formulated by Marc Andreesseen is:

“Product/Market fit means being in a good market with a product that can satisfy that market.”

For the first time fit/search for a product concept takes place at the moment of formulating preliminary hypotheses – by a project or startup owner.

Unfortunately, they will not always perfectly meet the needs and expectations of the market – but that’s not all – in almost 100% of cases they will not meet them or will, at the most, in an insufficient way… As Steve Blank wrote with reference to the first assumptions in a start-up: there is no such business plan that would survive the confrontation with the market and there is no such product design that would survive the confrontation with the customer…


Why fit the product to the market?

When in the 90’s it seemed that all the world would be ruled with absolute power by international corporations and, in principle, nobody would be able to threaten them, something broke. Corporations, growing to extreme dimensions and specializing job positions to absurd levels, lost their ability to function efficiently. An extreme mass and the inertia (in physics the bigger, the bigger the mass) of these entities made such giants as Kodak, Commodore, Atari or Nokia practically disappear from the market. Although it has to be admitted that Nokia by oversleeping the moment of pivot – change in strategy of development of mobile devices – still preserved its identity and by cutting off one mobile phone division it survived and is doing so well that it is again planning to come back to the market soon.

No low-budget startup should have any chances in a clash with giant corporations.

So how can small startups try to find their place on the market among such giants?

Thinking differently.

The concept of product/market fit stems from a certain startup feature: limited resources for product development – and then even more limited to launch it on the market and to be suitably promoted…

As history has shown many times – the biggest weakness can easily become the biggest advantage, and the biggest strength – the biggest weakness.

Corporations, most frequently being convinced (with few exceptions) of their power and infallibility, have carried out projects in the environments with a high degree of uncertainty (new products/new markets – for more information see Cynefin framework), in the belief that the better they would plan their operation at the beginning of a project, the better and faster it would be completed.

So projects were planned, designed and carried out/implemented, and their success was to be sealed with a big marketing big-bang with a staggering budget.

Each successive stage of the project meant at least multiple increase in outlays. Sometimes market research was conducted and focus groups were involved. Sometimes it happened that at the implementation stage someone noticed a threat or incompatibility of the product and expectations of the market, but the decision to go back to the planning and designing stage was so painful and difficult that nobody dared to take it – after all, the project has lasted for so long! We have already exceeded the budget! Let’s end it finally. Let’s launch the product on the market. We don’t want to prolong it indefinitely.

No wonder that nobody wants to return to previous stages – in the end how many times can everything be repeated without guarantee that it will be better… perhaps we will manage and it won’t be that bad.

Hundreds of thousands or millions spent from the budget and another spectacular defeat…

As startups don’t have sufficient budgets, they can compete with corporations only with products ideally tailored to target customers (market). Users delighted with such products speak about them more easily and more willingly. They often recommend them to their friends. In exceptional situations synergy of the power of social media, ease of spreading information and extraordinary features of such products triggered the phenomenon of viral marketing – a dream of every marketing specialist – the most powerful and at the same time the cheapest channel to get through to potential customers.

The conclusion seems to be obvious: any theses and assumptions should be faced with reality and later fit to the market expectations. Probably it will have to be reviewed more times than you expect… In case of technological startups, where the product and its fundamental part is the application (mobile, web, desktop, etc.), it is easy to operate on MVP – the prototype of the product which one can modify in fast (and rather short) iterations while waiting for the desired “Wow!” coming from potential customers.


How to fit to the market?

Product/Market fit forces the owner of the project/product/startup to change perception. He had to cut the umbilical cord joining him with the product and start verifying the assumptions from the market angle. The faster he realizes who his customer will be, what kind of environment attracting such people (fora, social, etc.) will infect with the idea those willing to help with designing and testing the product, the better for him. Certainly, there is no point in creating a draft of a concept of a huge community in the initial stages. A dozen persons or so should absolutely do. If you don’t know how to find them, try to discover where your potential customers look for knowledge. What connects them? What can possibly interest them? What has a value for them? Follow the answers and you will certainly get to them easily.

What should be verified with them?

In the initial development phase – most of all key parametres of the product/service:

- problems/needs which should be addressed: make sure that others recognize them as distinctly as you do, that they understand them in a similar way and that they are not important to them. What are the customer’s expectations? What are his fears? Do not be afraid to delete, improve and search for new needs. This is what it is all about.

- solution – is it really the best possible way of solving problems? How are they solved at present? What is your solution? What is the product that you want to deliver? How should it be delivered? How would customers like to learn about it? Why should they want to use it? Before you invest in MVP, discuss if what you want to include in MVP in the form of features is what, among all the discussed solutions, has the greatest value for the customers. Do not assume that you know better. Steve Jobs knew, but before he learnt, Apple had gone bankrupt. You cannot afford it.

When you can already explicitly choose the most important functionalities of the product, you will be most likely ready to prepare MVP and you will know how to formulate unique value propositions regarding your product in the way that is accessible for the target segments and which channels of communication you should use. Do not assume, however, that none of these elements will change. We are learning to move in an unknown environment. So it is time to specify key metrics and start MVP tests. Let’s start from a modest, already befriended group. Find out if they understand the way of operation, if it can be improved and verify if the need is properly met. Improve it until you hear: “Wow! This is really a marvellous product!”.

How to recognize that product/market fit has been successful?

Only from customers’ behaviours. Apart from more frequent „Wow!”, one can also observe that they are using the solution delivered more willingly.

They ask fewer questions connected with the need for buying it and instead they start reporting problems and articulating further expectations. They suggest directions connected with its development, and strangely, it looks as if they cared about improving it.

It is the key moment when a startup owner feels a thrill of emotion – the idea has caught on.

Only then should you go to the next stage – testing the size of the market, testing income sources and cost structure. Each one separately and all together. Do it before you burn the capital meant for your project…

A much simplified life cycle of the startup/product looks as in the diagram provided below.


 

Picture 1 Startup life cycle


Running a project is a clash of two opposing forces: progress and avoiding mistakes, by possibly frequent verification of assumptions with the market. Each verification ending in a result below expectations should lead to pivot (moving back to the stage when the mistake appeared) and to fixing it – or in a critical case – taking a decision to kill the project.

It appears that at best total cost of the project will be the sum of individual stages of the whole project. However, it hardly ever happens. More frequently we learn about mistakes in the assumptions or improperly verified hypotheses – e.g. at the commercialization stage… then it starts to hurt. The cost of improving such a mistake means going back to the stage at which it wasn’t sufficiently verified.

Considering that each successive stage is several or more times more expensive than the previous one and that each essential stage will have to be repeated, costs are rising exponentially.

Let’s calculate it using an example. We can assume that:

-the Customer creation phase is fourteen times more expensive than the Customer development phase.

-the Customer development is, on the other hand, 8 times more expensive than the Customer discovery phase.

-the mistake made in the Customer discovery phase will not emerge in the Customer development phase, but only in the Customer creation phase…

What will be the cost incurred due to its improvement?

It is easy to calculate that the cost of carrying out two successive stages amounted to 96 times more than the Customer Discovery stage. So if it appeared that at the Customer Discovery stage we spent 20 000, the two next can amount even to 2 520 000… Assuming that the change will generate 70% of changes in Customer Discovery, 30% in Customer Development and 20% in Customer Creation (it is a very cautious assumption), it gives an extreme cost at the level of 546 000PLN (20 000*70% + 280 000*30% + 2 240 000*20%). A nightmare.

It is the cost of introducing only one change!

From this simple calculation it turns out that it would be better to repeat “Customer Discovery stage” like a man obsessed – every time changing it in 100%, e.g. 20 times than to overlook a mistake two phases later. It would cost a mere 400 000 (it would still cost by 25% less), and it would simultaneously be extremely time-saving.

The conclusion: the deeper the pivot, the higher the cost…

Of course, it doesn’t mean that we should avoid pivots: on the contrary – a pivot can be the best – or just critical investment in a project.

What will happen when finally the product has been happily commercialized?

It is time for the deepest pivot that you can do in a project: return to the roots and to formulating new theses – maybe even in contradiction to what determined your startup success. Time for another iteration of your startup…

The optimal moment for taking this step is the time of the biggest success: this is when the project is most prone to the attack of competitors. Caution disappears – after all, we know how to do the business (I have earned a lot of money, I can slow down for a moment… in the end, I deserve it). Instead, there is languidness, apathy, self-confidence. This is how all the biggest ended… Nokia (mobile phones).

Product/Market fit never ends for one simple reason – the market is not standing still and from time to time some factors appear that change the rules of the game. If you don’t adapt to the market, somebody else will. Nothing works in a vacuum and there will always be somebody who will do it for you. That’s why worry when everything is fine, look around, throw the success far away, stand aside/by and think what you would do if you were to compete with your own product?

Remember that product/market fit is a continuous process. It should be a part of your company’s DNA. It should be as much integrated with the heart of the business as possible.

On the Internet there are many tools available, which can help you manage this process. It can be monitored in an analytical way with the use of suitably created metrics, such as degree of users’ satisfaction, their retention, recommending your product among users, feedback on the degree of satisfaction from using it.

Summary

Is product/market fit a complicated process?

On the one hand – it is not as it is mainly based on listening to customers, to their needs, on analysis, on drawing right conclusions. On the other hand, it is a process even more difficult that hardly anyone can listen and draw the right conclusions.

Benefits of possibly early search for relevance of the product’s assumption to the market expectations seem to be obvious. An early discovery of irrelevance allows to save substantial resources, but most of all time and will show clearly an optimal way of communication with potential customers.