EP. 13: How product-market fit ACTUALLY works

Does your business have product-market fit? Are you sure? There can be a lot of grey area when it comes to understanding your business’s product-market fit, but with a bit of examination, we can bring clarity to the topic and plot a course for strengthening your products fit with the market.

In this episode of InDemand, Asia Orangio, founder of DemandMaven, breaks down product-market fit and how to think about measuring and improving your own product-market fit as you bring to market and grow your product.

Extra Resources

• None

TL;DL

Transcript

What’s up founders! And welcome back to the In Demand podcast where we talk all about how to reach your first $1m ARR. I’m your host Asia Orangio and I’m the founder of DemandMaven where we work with early-stage SaaS companies on reaching their very first growth milestones.

Today we are going to talk about reaching one of those topics that’s pretty widely accepted by the SAAS and startup community, especially when it comes to the early stages of the SAAS or the product. And it has everything to do with you guessed at product market fit. And I just want to give you a little bit of context for where I’m coming from as a consultant who works with SAAS, founders and startups on defining their go-to market strategies, go to market. Whether that’s in the early stages of really defining a launch or working to a certain level of product market fit or go to market in the sense of we’re troubleshooting growth, and the business has achieved a certain level of growth, but we haven’t necessarily achieved. What we were hoping for or expecting or growth is actually really challenging. It’s uncertain why, or there are many reasons why, and we need to figure out how to divide and conquer.

So from a product market fit perspective, product market fit is the degree to which upon you have built the right product for assuming the right market, right, is one of those words I’m going to put in finger quotes here, but just purely because right. Can mean different things to different people. In this particular scenario, we’re going to assume that right means that these people will ultimately pay for the product and not just pay for it, but also love it, really love it. And product market fit is one of those things that there’s a lot of misconception about how it actually works and others, of course, just think that product market fit is a particular end point or milestone. Again, it’s something that is only achieved once and has never really considered or thought about ever again. And then, and then others really strongly feel that product market fit is a really specific point in time.

And it is, it is really clear on any given day or week when you have product market fit, versus when you don’t and depending on your industry, depending on your market, depending on the product that you’ve built, even, there’s certainly varying different experiences of product market fit. So there are certainly going to be outliers. And those who do experience product market fit almost instantaneously, or it does very, very clearly feel or seem like a particular milestone or end point things that they have achieved. And then they’ve never had to think about it ever again. And then there are other businesses that experienced the opposite product market fit is a continuous, never ending process and cycle. And I would argue that more often than not most businesses are in the latter scenario than in the former most businesses need to continuously improve their product market fit.Product market fit really is not black or white. It is really much more shades of gray. It occurs in degrees as opposed to this really clear black or white scenario where you implement one feature and then suddenly you have product market fit. It is much more likely that it’s actually varying there’s. It’s certainly a spectrum across a few different just inputs in general. And part of the founder’s job is to figure out what are those inputs and to what degree are we in at any given time, you’ll find that one of the most common inputs, if you will, or degrees that will determine the level of product market fit is the customer segment that you’re targeting. So if you decide to change the market or focus on a particular part of the market, that can have very distinct varying levels of product market fit, something that happens quite a bit, uh, with, with founders in the early days.

And it’s specifically when they are going from building their MVP to enabling users, customers, or people to use it more often is that there tends to be this moment where the founder just assumes that they have really strong product market fit, even though they’re not charging for their product. And even though they don’t have any paying users, it’s actually really, really, really easy to just assume that you’ve built the right thing that you’ve built in the right context, that your users and customers ultimately want to use a product in. And it’s not to say that you haven’t done the work or that you haven’t done the research. There are plenty of founders who spend months and months and months really validating and really testing their assumptions. But I would argue that until someone is actually either a using the product regularly so much so that they would be really upset if you took it away from them or B are paying for the product and continue to pay for the product, it’s actually really difficult to know if you truly have product market fit.

It’s something that happens a lot in my conversations with founders who are thinking about hiring demand Maven, for example, and they will have zero paying customers. Sometimes they’ll have maybe one or two users, but the users are friends or they are colleagues in some kind of way. And the conversation in almost always turns to product market fit in some way. And, um, the founder will say something like I have amazing product market fit. The product market fit for the product is great. And to which I say, well, technically we don’t have any paying customers and we don’t have any active users who are total strangers. So how do we really know if we have product market fit until people are regularly continuously using the product market fit levels are relatively unknown. However, um, the conviction of the founder or the belief or the confidence of the founder now that might be really strong.

And, and that’s not, of course, to, to, um, you know, say don’t be confident in what you have built or to what degree you think it will really satisfy the needs of a market. But to say that you have product market fit before you have paying customers that I would say I would rethink that I would, I would take a step back from that statement and, and really, um, break down what parts of product market fit do you feel like you do have, and then what still remains to be unknown. And I think the answer ultimately is here that it is relatively unknown and, and that’s okay. And that I think is something that is perfectly normal and fine and good to accept in those very early days. You really won’t know what product market fit is truly going to be like until you get people, either a using the product.

This could be for free. It could be closed beta open beta doesn’t really matter, which, but they are actively engaged in using the product. And when I say actively engaged, of course, this is going to depend on the nature of the product itself, but this isn’t just a, Oh, they signed up for the product or they signed up or they got access to it. And then they never used it ever again, this is something where they do continue to use it. And on top of that, they seem to be relatively engaged. They seem to get value out of the product. And then on the flip side, they are paying for this. They are paying for access to this, and it does not feel like twisting arms to get them to pay for it. That’s usually a really great sign of product market fit.

So we know that product market fit is a constant ongoing process. It’s not this end point or this final destination. Instead, I actually encourage founders to think of it much more like degrees of strength, rather than just a check box. Your product market fit could be extremely strong. It could also be kind of average or neutral even. It could also be very weak. Something else to know, however about product market fit is that it absolutely changes as you enter new markets and as you acquire new customer segments. So for example, product market fit will constantly fluctuate as new competitors enter the market. And of course, as the product gains new customers and markets, and this is on the one hand very much in the control of the product of, of the founder of the business in itself, and then at the same exact time, very much not.

So for example, we could decide to go after a very specific customer segment, and we could really evaluate our value propositions, our positioning, and our messaging for that particular customer segment. Or we could say, you know what, we are actively not going to try to acquire them. We’re really going to focus on this other customer segment over here. And we’re also going to actively decide therefore to not maybe build certain features that that particular customer segment does not necessarily care about. And then as your competitors are also making decisions about the market and the product that they build, it, it creates, uh, just this natural ebb and flow of who you end up attracting, who you also intentionally attract, and then also varying degrees of product market fit. Based off of that, a great example of this would be if you were to think about notion, the product notion, and then also another product that’s really similar to notion with different value props and also different features.

And it’s called slight, they’re both incredible products used in very different contexts but based off of who they ultimately work to acquire. So what their go to market strategy is probably very different and the kinds of customers are hoping to attract probably pretty different than what notion is currently attracting and to continue to really hone in and focus on their primary customer segments and markets, their product market fit across those different segments and markets probably pretty variable. And where notion is really strong, slight might not be as strong and were slight, is really strong. Notion might not be as strong. Even in that scenario. There’s many different ways that both of these products can ultimately win in their markets. And then at the same exact time, they absolutely have varying degrees of product market fit depending on the customer segment part of the market.

And then also compared to competitors that they have. One last thing I’m going to leave you with when it comes to product market fit is that money does actually change everything. And this is, this is one of those concepts that is actually really hard. I find it to really teaches founders about it and even I’m still figuring out why is that? Why is, why is that phase so gray and so hard? But whether you decide, go to market wise to launch with an open beta, a closed beta, maybe you decide to launch the product with a pure free trial model or a demo model. Whatever that is. One thing to keep in mind is that money will absolutely change everything. It might change it a little bit. It might change a lot. You might find that once you start charging for the product, the diehard users that you thought were absolutely amazing, might completely fall away and say, you know what?

That is not what I wanted to paint. I don’t want to pay anything for this. I want this to be free forever. And then suddenly you have to figure out, okay, well, who’s actually going to pay for this. And that is a transition that every business, at least one that wants to profit from the software or from the product, it’s a transition that every business goes through and it can be a really short one and it can be a really long one. Most of us want it to be as short as possible and also as clear and predictable as possible. And to be honest, I think the only way to make that as predictable as possible is to have, um, a very phased approach to going to market, meaning you maybe start out with a closed beta, maybe then you move to open beta, and then eventually you get to the fully self-serve free trial model or demo model that you’re hoping for.

And then on the flip side, of course, depending on what your expected LTV is, or maybe what your expected average revenue per user is going to be, perhaps that also, um, dictates how you ultimately end up going to market. Maybe instead you focus on sales much more aggressively first, either way. We ultimately still have to reckon with when we do launch pricing or we start charging in some kind of way, do you know that psychologically it changes the perception of the product. There are some businesses that launch right off the bat with pricing. There are some who decide not to. There are some who, um, depending on the size of the customer that they’re trying to acquire, maybe they go enterprise. Instead. They might actually have a scenario where they require a one-year agreement where maybe it’s free for the whole year, but then after that they start charging.

And here’s maybe the pricing plans and models that they’re thinking of launching at that time. There are so many different ways that you can do this, but do know that psychologically speaking money will change everything. Once you start charging, it’s suddenly a different world. And it’s one that I guess you can absolutely prepare for, if you don’t necessarily have the resources to prepare for that, then you do have to make slightly different decisions when it comes to how you go to market, how you want your product. But overall, keep in mind that when you do start charging for the product, your product market fit will be much more solidified, whether that makes it strong or weak or average or neutral, how it, whatever degree upon which it is, you know, remains to be seen. But when you do start charging for the product, that’s, that’s truly, when you start to really know where are we product market fit wise.

And that I would say is incredibly invaluable information, but I would also say that doesn’t necessarily mean let’s rush to charge. It’s not always the case. Sometimes you need the time in order to really understand how people in the market will react to the product in general, how your target audience, or how your target customers might react. And then of course, really identifying what is the best monetization strategy that is going to be attractive to the market that we’re hoping to attract. And then of course, close into paying customers. It’s a complex constant cycle. And it’s one that I think can only really be solved by doing pretty heavy customer research, but then also doing some form of beta launch where you do get to identify who those active users are going to be. And then from there, you can start to gauge, okay, who really gets a lot of value out of this.

And it would be painful for this to go away and then who doesn’t get value out of this. And if we were to start charging them, no skin off of our nose, if they don’t ultimately become paying customers because they weren’t super high value users. Anyway, of course, to be continued overall, if there’s one thing I wanted to leave you with, if you are a founder and you’re in that phase where you don’t have active users and you don’t have paying customers, and you’re unsure about your product market fit well, first I just have to say, that’s absolutely normal. This is one of those phases of the journey. It’s a part of the journey. It’s a part of the cycle. And the wheel will turn eventually where you get to a place where you get people in the app, or you get people in the product or the marketplace or whatever it is that you’re building and launching.

But it is really important to remember that you’re, you aren’t necessarily going to know and like really know what that product market fit is going to be until you have one of those two things. You either have active users, they are using the product actively regularly. They, it could be daily, it could be weekly, whatever that frequency is, but it’s really clear that it provides value. Or, and I’m going to say, and, or cause it could technically be both. These are not mutually exclusive, but it could also be that you’re charging them and they’re not churning. And that’s really another strong indicator that you are closer to achieving product market fit. Just remember that conviction doesn’t necessarily mean product market fit. It’s okay to be confident and you should be confident in what you’ve built and the research you’ve done, the customer discovery and the customer development that you’ve done.

But also remember that part of market fit won’t really truly be knowable until one of those two things happens. And the reason why I, I hone in on that and I focus in on that so hard. And I, I encourage this thinking is because when you do get active users or you do start the process of getting people into the product, it won’t feel as much of a bumpy ride. And it won’t feel as disappointing even if product market fit is a challenge. In fact, you’ll go into it, expecting it even. And I think that that’s a much better situation to be in because then you don’t have to get over the emotional or mental baggage of, Oh crap. This isn’t exactly what our users wanted or isn’t exactly what customers will pay for. But now we have a place where we can iterate off of it and we can build off of it.

And we can kind of move on from the well, we should just have product market fit because we did all of the hard work ahead of time. If anything, I’d argue that the hard work really begins when you actually get active users. And then you kind of have to figure out who do we prioritize? Who do we build for? Who do we charge and what do we charge that’s to me, the hardest part, just a quick recap product market fit. It’s an ongoing process. It’s not a milestone. It’s not a, it’s not an end point. I’d argue with certainly a stage. It’s a phase it’s degrees of strength. It’s certainly gray. And there are moments where it does become really clear. And then as you gain new customers, as you enter new markets, you start all over again. It’s a constant, never ending process, never ending cycle.

You’re not really going to know product market fit. If you, if, if the product really hasn’t, you’re not really going to know until you either have those active users or they are paying customers and, or I’ll say it could be both, but you really won’t know what the degree is until that happens until then. It’s really much more about your conviction level or your confidence level in what you have built. And that’s okay. That’s good. That’s normal. Your part of market fit will absolutely change as you enter new customer segments and markets. So just be prepared for that. Be prepared to identify what that is and be able to measure that as quantitatively as possible in addition to qualitatively. And then finally money changes everything. Once you start charging, there is something psychological that happens for people where they really start to value if what they’re paying for and the value that they get from it, if those two things are imbalanced and if they are not imbalanced, they will churn.

If they are not imbalanced in terms of, they don’t feel like they’re getting enough value, they will turn. If they feel like they’re getting tons of value, then that can actually be an opportunity to charge more, which could be really interesting. Thank you so much for listening. I hope that this was helpful. And also that you learned something today. And I think if anything, give yourself some grace around the product market fit process. It is certainly a process it’s definitely degrees and stages and phases. I would not say it’s just like okay, January 1st, 2021, you got product market fit. We’re done. So be open to that process and make sure that you have the tools and resources that you need to identify what those degrees for the product actually are. And when you do start getting those active users and paying customers that you can continue to measure as quantitatively, so qualitatively as possible.

As always thank you so much for spending this time with me to learn more about how to reach your growth goals for your SAAS business, head on over to demand maven.io. You’ll find all kinds of free resources, articles, and content. Don’t forget to subscribe if you haven’t already and I’ll see you at the next one. Let me know what you think. I am always available on Twitter, @AsiaMatos. Thank you so much again and have an awesome day.

✨