EP. 9: How to Know You Have Product-Market Fit

Product market fit is often talked about like it is a specific destination. A place you arrive at once and know that you’ve arrived. But the reality of growing a SaaS company is that you may not know if you have product-market fit or if you have it, you may not know how good the fit really is.

In this episode of In Demand, Asia Orangio of DemandMaven shares the seven best indicators for when you’ve found product-market fit and how to take action if you haven’t reached them yet. 

Extra Resources

• The Lean Startup Playbook for Achieving Product-Market Fit by Eric Ries
• The Never-Ending Road To Product Market Fit by Brian Balfour
• The Only Thing That Matters by Marc Andreesen
• How To Find Product Market Fit by David Rusenko
• How Superhuman Built an Engine to Find Product/Market Fit by Rahul Vohra

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.

Hey, we are going to be talking all about how to know if you have product-market fit, product-market fit is one of those milestones. That’s kind of hard to define. There are certainly ways to measure it, which we actually are going to talk about today. But when it’s described by VCs or other founders, sometimes it’s often painted as like this specific moment in time that you can find. And then after that, it’s all just extremely obvious. But the truth is that product-market fit at least entering a state of product-market fit, and then consistently working to improve your product-market fit with new segments and markets. It’s much more like shades of gray, and it’s also much more like a continuum. It’s like a continuous cycle. It’s a process. And it’s something that doesn’t actually ever begin or really end. As you enter into a state of product-market fit.

You’ll continue to strive for it. As you grow your business, as you enter new markets, as you attract different kinds of segments and expand, and you’ll find that while you have a really strong product-market fit for some markets and some segments, your product-market fit for others might not be as strong. And that’s something too to keep in mind. So part of market fit really isn’t this point in time, it’s not a specific moment. It’s much more like a continual process. And again, you gradually, depending on the segment that you’re focused on, but there’s a few indicators of product-market fit. And this, these are really the points I want to chat about today because they are, they are things that I have experienced on my own, both working for clients and also working in house at some of my previous in house roles, different SAAS companies, both VC funded and part of market fit.

Again, it’s one of those things that when you have it, it’s very, very, very obvious. And if you don’t have it, and you’re not certain, if you do, you probably don’t and that’s just kind of, one of the harsh realities about product-market fit is it’s one of those things where when you’ve got it, it’s very obvious and you know, it, you feel it deep within your bones and when you don’t and you’re uncertain, you’re unsure probably likely that you don’t actually have it yet, but let’s talk about the indicators of actually having product-market fit and beat some of these I’ve actually experienced myself. And some of these are things that I look for and things that I absolutely challenged founders on whenever they tell me that they have product-market fit. Usually, these are the questions that I’m asking them or the things that looking for about what they’re telling me about their experience.

And then of course, some of these are pointers direct experiences from others who have achieved pretty incredible growth. And then, of course, product-market fit. The first indicator that you’ve got product-market fit is that it doesn’t feel like you’re pushing a Boulder up a mountain. It feels much more like you’re guiding it down the mountain. If working on the product and working on marketing and sales and growth, if it feels like you’re pushing a boulder up a mountain the entire time getting every net new lead is like pulling teeth, getting every single new closed deal or closed opportunity is pulling teeth. Usually, it’s, it’s not because of a limiting factors based on the product itself. Usually, it’s on behalf of the customer. The customer is uncertain. They have to think too hard about like, why is this valuable? And is it worth my time then, should I really invest in this?

Or why would I use this in a way that satisfies a pain or satisfies maybe a want, these are the kinds of things that usually lead to product potentially not having product-market fit whenever the customer has to think too hard about, well, why would I use this in the first place? Or why should I sign this contract? Or why should I pay, why should I pull up my credit card and pay? Usually, that’s an indicator of, you might not have product-market fit. And if you don’t have product-market fit, that could be because of a number of reasons, maybe the product isn’t positioned very well. Maybe you just need to build more product. There are all kinds of reasons why that could be happening. Conversely, if it seems like you cannot keep up with the demand if it seems like your customers are becoming customers without you having to force them to do anything, but they become customers despite maybe some product issues or what have you, without you ever having to even talk to them, that’s usually an indicator that you do have product-market fit because they are willing to go through a friction experience just to get whatever it is that the product is helping them solve.

Becoming a paying customer to them is so clear. It’s so obvious they get it. They don’t have to be, coerced, or forced into becoming a paying customer, which happens. There are some SaaS companies out there who absolutely do that. And then they wonder later why they churn, but sometimes nine times out of 10, really, it’s just because for whatever reason, the customer at that time wanted to give it a shot. They just wanted to test it out. And then they find out later that maybe they weren’t the best customer in the end. It happens. But typically I can always tell when a company has product-market fit it’s because it seems like the stuff just flies off the shelf and in its own digital software way, the second indicator that you have product-market fit prospects are willing to pay right now. And on top of that, they don’t even bat an eye when considering the price.

This is something that is a little bit challenging, depending what phase of launch you are in. So, for example, if you are in the beta stage, maybe the product isn’t even done being built yet, or maybe it is done. And you want to spend a little bit of extra time being in that beta phase, where you’re getting as many test users as possible, and you’re working really hard to understand what more product do we need if we do, how does our current MVP exist in the outside world? All of those other wonderful, fun things. And on top of that too, this is also kind of a tough one because if you are, if you are not VC funded, then ideally you’re able to generate revenue right off the bat and part of that is because if you’re bootstrapped, things have to net into positive revenue, almost instantly.

In theory, if you have the resources to not have to worry about making a or being cashflow positive, you know, within the next year or two then awesome. But nine times out of 10, if you have to start immediately charging for something, you can usually tell if you have product-market fit because people don’t bat an eye at ping. It doesn’t matter if it’s $1. It doesn’t matter if it’s $20 or a hundred dollars. If people will pay right now, they are more likely to have, or you might actually have the product might actually have product-market fit. And that probably sounds wild because I think a lot of us think that we have to have a depending on the market that you’re serving and depending on if you’re a VC funded or not, some of the strategies that you guys might be encountering are to actually build up a giant base for free work, really hard to acquire as many free users as possible with the hopes of turning them into paid customers later and later could be a year, six months, two years, three years.

And it just really depends on again, what you’re building and how big your market is and what kind of resources you have available to you. And in that case, then yeah, like expecting someone to pay right off the bat. Maybe, maybe that’s something that actually happens. Maybe it’s not, maybe it’s something that you test, but if that’s not your situation and you’re finding that getting actual paying customers is actually really hard, that they’re, that they don’t want to pay money for it usually it’s because there’s just no product-market fit for it yet. There are absolutely ways to overcome this, but typically that’s a huge indicator that you don’t quite have product-market fit. This is also something too that I actually challenged a lot of founders on.   and I say challenge as gently as possible. But, whenever, whenever someone says, Oh, we have amazing product-market fit.

Usually, I define that as, okay, well, so they either have a lot of active monthly users, whichever one you want to say, or they have people who are actually paying. And sometimes every now and again, I’ll come across a founder who isn’t quite yet charging for their product. They want to, but they haven’t yet. And maybe they’ve got a couple of users who are using the free trial and they’re not paying quite yet, but they’re also not really even using it. And usually, my assumption is, okay, we don’t quite have part of market fit yet. Or at least that we know of, which means that going to market is going to be a one big giant experiment. And that’s, that’s something too that you have to keep in mind. If you don’t have strong product-market fit, usually going to market figuring out what acquisition channels you might run a few tests, but for the most part, they’re going to be just that they’re going to be tests.

They’re going to be experiments. It’s not necessarily going to be known. And that’s just purely because if they’re not paying, how can we get more of them? So ideally you’d build your business around people who will actually pay you money to have the platform. I mean, I’m assuming we’re in this for capitalistic reasons and it’s not a charity, which if, you know, if it is maybe a different talk, but usually if a customer is willing to pay, they don’t bat an eye, that’s usually a sign. That’s a good sign. It’s a sign that you likely have product-market fit. Okay. Number three, retention and active users improve with every new, every new cohort of paying customers. Okay. So, this one is one where if you actually have subscription metrics, so say you’re using like a Profit Well or Chart Mogul or bare metrics or SAAS optics.

If for every new cohort of users, customers, if the retention on them improves and on top of that, activity, as you grow as a company, the very first batch of customers that you acquire, they likely aren’t going to be the perfect batch of customers.  , some, usually nine times out of 10, what we see is the very first sets of customers that you actually get. They don’t really stick around for too, too long. And part of that is just because the product-market fit isn’t quite there yet.   sometimes it’s very rare, but sometimes some companies just to hit the nail on the head, they know exactly who they’re targeting. They know exactly what pain they’re solving, and they’re extremely confident that the product addresses that for that specific group of people. And for those companies, you typically see a pretty high product-market fit right off the bat.

I’ve had the pleasure of working with one of those companies, or one company I’ve had the pleasure with working with has experienced that. And it was awesome. It was amazing, but I think the vast majority of companies out there are going to experience the ladder, which is, are really the former, which is the very first few cohorts that you get. They don’t really stick around for too, too long, maybe three months, six months. But when it comes to looking at annual retention, that’s where you start to see maybe more than half of that very first cohort isn’t even around anymore. Ideally you get to about 50%. So maybe after six months to a year, you’re retaining about 50% of that very first,   cohort or looking back at least in the last 12 months of that window.  , all of this probably sounds, hopefully I’m explaining this well, it probably sounds really confusing, but basically think about it like this for every new cohort of customers that you add every single month, month over month, if you’re retaining them at least 50% of them, six months to 12 months out, ideally 12 months.

Because when we look at lifetime value, we’re typically looking at years and not just a couple of months, but I digress. Ideally we’re retaining at least 50% of those. And that number improves over time. I would say 40% is the absolute minim but ideally, we’re retaining at least 50 to 70% of our customers from 12 months ago. And that number improves over time. In addition, you could also look at active users or activity overall, number four, this one is actually, I feel like this has been written about tons, but if it’s the first time that you’re hearing about this, awesome, there’s going to be a few links to this resource, but it’s going to be all about running a product-market fit survey. A couple of years back, there’s a company called superhuman. And also if you’ve never heard of Sean Ellis before I know him, at least from his book hacking growth and also from the platform growth hackers and community growth hackers.

So a couple of years back, the CEO and founder of Superhuman Raul. He actually pulled together a product-market fit survey, and I’m honestly blanking if he designed the survey or if it came from base camp. I honestly can’t remember, but what you need to know is he created a very simple survey, what he calls a product-market fit survey, and he is just as obsessed with measuring product-market fit, as I am, and also has, I would love for every founder to be ever. But he created these four very basic questions. One of which actually came from Sean Ellis.   which the question is, how would you feel if you could no longer use superhuman or to you the listener, how would you feel if you could no longer use the product, whatever that is. There’s only three options. It’s either very disappointed, somewhat disappointed or not disappointed at all.

And there’s this whole like tear down process of how Raul from Superhuman, not only, designed his survey, but also how he actually executed it for his now thousands of users and really the number that you’re looking for. And this is also according to what Sean Ellis has discovered, but you need about 40% of people who would say that they would be upset if the part went away. So you’re looking for 40% of people who would say very disappointed. The reason why is because this is a pretty close indicator of who, who would be just be distraught if the product went away. And what I love about this is because it does make it emotional, which I think as we know the purchasing and buying process, it is not a logical one. It’s not a rational one. It’s an emotional one. I don’t think I need to pull up survey and results and research about why that’s important.

Cause I feel like most of us probably understand that to some cognitive level, but very disappointed. That is so specific. I mean, it’s, it’s the like, man, I like life would suck if this product went away. And what I love about using this as a framework is that it makes it measurable. And I think that that’s something too that so many companies and founders are lacking. They’re lacking this ability to be able to directly measure what their actual product-market fit is. And also what to improve. The important part of this particular product-market fit survey is that you’re not just looking at who says number one,   who says very disappointed across the board for your entire customer database, but you’re also looking for patterns on what kinds of customers are saying that what kinds of people, what segments they belong in. And if we were to focus on just one particular segment, do we have product-market fit as strong as another segment that we have, what’s really cool about using that, that framework.

And that survey model is that you can start to analyze your product-market fit for different parts of the market. And that’s also critical. And it goes back to what I was saying earlier about being able to not only measure your product-market fit over time, but the reality is that it’s going to be shades of gray depending on the segment that you’re looking at. And there are going to be some that are just a hundred percent black and that like, that’s the exact, like it’s very clear product-market fit. It’s, it’s a hard, yes, but then there are going to be some that aren’t maybe as strong, but ideally you’re focused on your best paying customers and not just your best-paying customers, but the ones who would be very disappointed again, this entire process and framework. I actually am going to link this both in the podcast and also on the blog because this podcast will be on the blog as well, but you should be able to pull this up, read this and see his exact step by step process on exactly how he did it.

It’s amazing.   but I absolutely love using this to really measure product-market fit. It’s a survey that I run for my clients if we’re unsure, if we’re uncertain and, usually the results almost always come out pretty much,  , pretty clear and also makes it very clear on who needs to be improved, what segment needs to be improved. That’s also an important part as well. The fifth sign that you’ve got product-market fit is one that I find a lot of companies really struggle with as they dart finding the right segments and audiences. But over time they get blocked by this and it actually has everything to do with their growth loop. The growth loop is just basically a loop that says, as you acquire one customer, that customer generates more customers in some kind of way. And some people call this like a vitality loop.

Some people say referral loop just really depends on, on, you know, how you like to think about it. But a growth loop is basically when you acquire one customer, somehow some way that produces more when one customer generates two or more customers, or even just one other customer, they recommend it in the wild without you having to even ask them to, that’s usually an indicator that there is a certain someone who absolutely loves your product, which is awesome. It’s even better. When you notice that certain kinds of customers continuously recommend refer, promote your product without you having to do anything. We call this word of mouth, word of mouth, traffic, word of mouth acquisition.   really just word of mouth. People are talking about your product in a positive way, and it generates more customers. This is critical from a SAAS perspective and really any business perspective, just purely because all of the work that it takes to acquire one customer, not to lie, it’s substantial.

And I don’t know that many founders really truly understand just how complex and how vast it is, how much work it takes to just acquire one customer. But when you think about all of that work spread across acquiring one customer, and then one customer doesn’t really become one customer. Really, they become five because they recommended it to their friends, their colleagues, people who they’re part of groups with their communities. So now all of the hard work gets spread across many different kinds of customers. This decreases your cost to acquire. This keeps it much more affordable, much more.   I don’t want to say cheap, but it keeps it for every net new customer that you generate. And for every extra referrals that they generate the cost to acquire, the customer can sometimes even be free. And that’s awesome if you don’t have this though, meaning you have to work really hard to acquire just one customer and they don’t recommend it to people, they don’t refer it to others.

And usually that’s a sign that you don’t have a product-market fit or the segment that you are currently serving. Probably isn’t the most profitable one. And that’s a distinction too that, could honestly probably be its own podcast episode, but when it costs a lot to acquire a customer and they don’t actually refer others or promote you in any kind of way,   that can be challenging. It, it basically means that your cost to acquire will probably is pretty high but it’s also linear. You might not ever get that like virality effect. You might not ever see the growth curve. That is so awesome to see and not to say it’s not possible. It’s just mathematically speaking. If an acquisition effort nets only one customer at a time and that customer never refers. You just don’t see like that really like crazy growth curve spike.

Typically, not always, but you know, typically on the contrary, however, I don’t think I’ve ever seen a company where they got absolutely no referrals. It was just much more that referrals were so slow. And when we, when we found that we kind of pulled it all back and focused on a very specific kind of customer, we found that there was actually a pattern between the customers that were referring and what we ended up doing was doubling down on those customers. Okay, well, how do we get more of you? Cause you’re actually referring the product to other people, which says a lot. So what segment w what part of the market would we put them in if that was the case? But anyway, I digress basically when one new customer generates two or more, that’s usually a pretty good sign that you’ve got product-market fit.

And if not, it probably means that there’s something about their experience that just prevents them from recommending it to others. Or it could be that they’re just not a really profitable customer. They don’t share, for some reason it could be due to their industry, personality, demographics, like there’s all kinds, mindsets, psychographics, all kinds of things that actually could be preventing them from doing that.   or it’s just not in their nature to, they don’t think to do that. If that’s the case, then how can we find a certain segment of customer that would do that? And on top of that, you know, actually have the pain that the part of the solving could be an excuse, or I don’t want to say excuse much more like could be a reason to maybe evaluate, could we potentially serve a more profitable part of the market, something to think about, okay, number six, your CAC to LTV ratio is pretty solid CAC to LTV.

What does that mean? The cost to acquire a customer and LTV is lifetime value. So, the cost to acquire a customer for the most part, it’s within a third of what your lifetime value is of that customer. So let’s say your customer is worth a $3,000. If they throughout the lifetime of, of using your product, let’s say that there is $3,000 is how much a customer is worth to you. Ideally we want a three to one, or I guess technically this would be a one to three ratio. If you were to do, LTV to CAC, it would be three to one, but ideally the cost to acquire a customer is a third of the cost of what they ultimately end up spending with you. So if the lifetime value of our customer is $3,000, then in theory, we could spend up to a thousand dollars on acquiring that customer.

And that would keep us within that, three to one or one to three, depending on how you’re looking at its ratio. Ideally. Now another way to think about this is it just simply consistently costs less to acquire new customers in the early days in the very early days. So, we’re talking less than 50 K in MRR, sometimes even less than that, 2010 10 K MRR, sometimes it’s actually you just end up breaking even the entire time. So maybe your lifetime value is only a thousand dollars, but you spend a thousand dollars to acquire just one customer, one paying customer, and they only stay with you for a year. They’ll end up ever paying you back a thousand dollars, but you’ve broken even that’s actually still valuable. You might not necessarily have product-market fit, but so many different SAAS resources recommend, and SAAS experts recommend that you actually still go through that process and still do that because you learn one and two, you’re technically not losing any money, but you’re gaining the knowledge you’re gaining an understanding of who actually does stay with you for several years, who actually does have a very high LTV.

And also it forces you to think about how you’re actually allocating your resources and allocating your budget and really digging deep into, okay, well, what does it actually cost to acquire a customer that was simple math, not everyone is going to have an LTV of $3,000 or, and some might be much higher. Some might be much lower than that, but ideally the cost to acquire that customer is less than the LTV. If that consistently happens for you, there’s a pretty good chance that you’ve got product-market fit. Ideally, it’s pretty cheap, or at least it’s cost-effective to acquire new customers. And if it is that tells me a couple things, you probably know exactly where to go to find new customers, they find you and they are, it does not cost a lot for them to find you. So there’s a good chance that you’ve got a pretty strong content marketing game.

Maybe the sales team just has their outbound strategy nailed. It could also be that you’ve started with paid acquisition. And it just so happens that based off of your market, based off of your keywords or your strategy that you’re able to acquire, not only net new leads, but net new paying customers, just purely based off of that. And on top of that, you have, you have a strong product. It solves a pain for them. It’s obvious, it’s clear, you’re not pushing a boulder up a mountain. You’re actually guiding it down the mountain. Instead. Usually that’s an indicator that, Hey, there’s something happening here. And it doesn’t feel like you’re pulling teeth to get new customers, which is always a really nice spot to be in. All right, here’s the last one. Number seven, you constantly hear about how wonderful the product is hearing. Just any compliments about your product.

It’s one of those, Oh my gosh. I could burst with joy moments and it’s something I think that not only do I aspire towards, in my case, it would be for my clients, but every time a founder ever hears positive feedback about the product, whether it’s through a chat support or whether it’s during the demo or wherever that feedback happens, especially the positive feedback. It’s absolutely wonderful. And I find that founders that have strong product-market fit in their market or audience or segment or wherever, usually it seems like they’re constantly hearing how great and how wonderful it is. And this kind of goes back to customers recommending and referring the product without you ever, having to even ask them to when you have strong product-market fit, you can also find testimonials and reviews and people who rave about the product both publicly and also to use specifically to the founder, to the team when that happens across the board, especially publicly, that’s also a great indicator that you have product-market fit.

If you find that it happens only for certain kinds of customers, then I would say, figure out what those patterns are because maybe you don’t have global product-market fit, but maybe you have product-market fit for a very specific kind of segment that kind of goes back to the superhuman survey, the product-market fit survey, where what kinds of people are saying, I’d be very disappointed, very, very valuable to know who is saying such positive feedback, what the feedback is and what is the context upon what you’re saying it. Okay. I’m going to do a very quick recap because I think that was seven points. Okay. So the first is it doesn’t feel like you’re pushing a boulder up a mountain. It feels more like you’re guiding it down. The mountain to prospects are willing to pay right now. And they don’t bat an eye when considering the price three retention and active users improve with every new cohort of paying customers.

And again, ideally, you’d be looking for 50% retention 12 months, ideally after signing up. But it could, you could use six months if you don’t have 12 months quite yet for run the superhuman slash Sean Ellis product-market survey, put a market fit survey, excuse me, at 40% who say that they, are upset. If the product went away, that’s usually an indicator of product-market fit. If you are less than that, go through the process. Again, I’ll link to it in both the blog and the podcast, but go through the process again, see if that 40% is coming from overall, like overall the entire survey and or for specific segments. Cause that also could be a way to see if you actually have strong product-market fit for specific kinds of users. Number five, one new customer generates two or more customers. They recommend it in the wild without you having to ask them to, this is critical. Everyone should be striving for word of mouth, but that’s also a good indicator that you’ve actually got a strong product-market fit.

Six year CAC to LTV ratio is solid. It consistently costs less to acquire new customers. Ideally it’s a one to three ratio. So, the cost to acquire is roughly a third of what their lifetime value is. Is this a perfect science in the early days? No, actually I find that most businesses are more like one to one. So however much it costs to acquire that’s how much they end up spending, lifetime value-wise. So basically, just breaking even, but in a more mature company, cactus LTV, ideally, traditionally it should be that one to three ratios. And in the last one you constantly hear about how wonderful the product is, both in the wild, but also to you, the team pretty much everyone involved

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.

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