Recently, as part of an Astia portfolio gathering in San Francisco, I had the honor of participating in a panel on Product-Market Fit. The conversation was moderated by Jamie Lerner of Seagate, and we were joined by David Weiden of Khosla Ventures and J.L. Valente of Seagate.
We kicked off with a quote from Marc Andreessen: “Product-Market Fit means being in a good market with a product that can satisfy the market.” We talked about how you get to product/market fit and how you recognize it when you’ve got it (or when you don’t).
In my experience, there are some basics that every entrepreneur needs to know when considering Product-Market Fit. Your baseline responsibility as an entrepreneur is to build something that people need and want. When you’ve got it right, that’s Product-Market Fit.
To determine this fit, it’s critical to get a sense for how what you build will be used by people and other businesses. To do that, you have to think through lots of variables. Ask yourself: What’s the cost to build it? What’s your pricing model? How will you distribute your product to get it into the hands of people and users? How does your product compare to existing and future alternatives and competitors? Even once you nail that down, you have to be prepared to pivot quickly in the initial stages of bringing something to market. You may see early traction, but it may not necessarily scale. In fact, as we joked on the panel, the only thing more dangerous than zero customers is one customer — because it can give the false sense that you’ve found your fit even if you haven’t.
In short, finding your fit involves paying attention to important variables, and then adjusting if necessary to make sure that your product is meeting its intended use and remains needed. It’s a lot like learning a complex dance (Tango, anyone?), where you have to adjust to the music, your partner, and the dance floor all at once.
In order to test Product-Market Fit best and most quickly, entrepreneurs can, and should, opt to go to market with MVP (Minimum Viable Product). This involves building something quickly to take to the market to test, since the only way you’ll know if you have good fit is if customers are buying or adopting your product. If you put out an initial product that has some hooks and stickiness to it, customers will keep coming back for more. Finding the right product to launch with can be tricky, too. If customers are disappointed, and especially if they end up abandoning the product, they won’t come back. Negative first experiences must be avoided; all the marketing dollars in the world can’t help you once customers turn away in disgust.
So, how do you come out the gate strongest and most ready to maneuver quickly? In a devops world, products can be updated daily. Companies have to be well-situated to gather product feedback with very frequent release cycles. In fact, they need to build into their product the ability to test scenarios and collect analytics from the start. It’s critical to measure what people are doing with the product, what’s sticking, where people are spending time, and where they’re running into difficulties. The gaming industry does this particularly well in order to see from the get-go where people get stuck in games. To keep people going despite frustrations, they throw points or incentives at them, or sometimes they simplify the game. Reminders to re-engage also are useful with games and with consumer apps when behavior is hard to predict. We used this strategy a lot with RingCentral’s mobile product. If we saw a spot where people were clicking over and over again, we knew it was a trouble spot that needed attention, usually in the form of a clearer UI/UX.
Also in the context of finding Product-Market Fit, a lot of entrepreneurs and investors talk about Total Addressable Market (or TAM). That’s because the total market will help you think about pricing and distribution, which are both critical to your product and market plans. It’s not just the total market size that matters, but also the growth potential. When I started a company in 2006 in interactive advertising, our TAM was maybe just over $10B, but the market had a very high compounded growth rate. It was like a gold rush, with dollars from other channels moving from offline to online. In 2013 the mobile advertising market alone grew to almost $10B, mostly due to the widespread adoption of smartphones which was virtually nonexistent in 2006. So, don’t make the mistake of starting a company thinking that you can sell through one specific channel in the market, as that channel may be limited. You never want to cut yourself off from the full market potential. You also need to think about the global size of the market. Some products are easier to take globally than others but most companies should aim to grow internationally at some point.
When you have landed with a good Product-Market Fit, there are a number of signals you’ll see. Sometimes momentum like downloads, impressions, or users matters most. Other times it’s engagement and time spent on the product. But ultimately, whatever metrics you’re looking at, you need to understand how they’ll eventually translate into revenue. Freemium is a fast way to get your product to spread. But successful companies know how to do more than collect metrics. For instance, acquiring users via downloads is meaningless if people aren’t using your product. It’s important to move quickly from download to conversion/usage. Keep in mind that Facebook had a lot of users before it had revenue, but they ended up monetizing users more successfully than Twitter. Remain focused on how everything you do gets you to the best Product-Market Fit, as that, ultimately, will drive revenue.
Building something that people need and want is the goal of any entrepreneur and must remain the goal of any company long-term in order both to build a loyal customer base and to grow. When start-ups focus on attaining Product-Market Fit, revenue follows. That’s how companies grow successfully from start-ups into lasting businesses.
This post originally appeared on the Huffington Post on October 1, 2015 and on LinkedIn on October 16, 2015.