How to identify product-market fit.
To me, there are several distinct phases in the search for product-market fit. You need to:
- Have a basic understanding of the market landscape and the key pain points being solved by your products
- Research the various industry verticals and potential buyers where your product may sell
- Take your product to market to validate your hypotheses, and begin to optimize your target clients, use cases, messaging, price points and go-to-market strategy
- Close your first clients, and learn your conversion funnel metrics and marketing economics (e.g., CAC and LTV)
- Learn user behaviors like product engagement levels, utilization rates and lost customer churn rates
- Optimize the above to make your sales process repeatable and scalable in a large market vertical, including optimizing your hiring, employee training, customer onboarding and sales-to-operations handoff
- Validate your ability to scale is profitable and that your churn rates are low and will result in a material size business
The right way of gathering market intelligence.
The best way of doing market research is actually talking to your potential customers -- dozens of them. And, no, not in some online survey; in an actual face-to-face or phone meeting that is more interactive so you can see how the conversation evolves in real time. Ask them what their current pain points are around your industry, products or competition, or how much they would be willing to pay for a solution. You would be amazed what great insights come out of their mouths. They’ll tell you exactly what you need to build to make their lives materially better.
In addition, seek insights from your employees, especially your sales and operations team. Your sales people are in the market everyday talking to customers, and your operations team typically sees all the problems with the product and hears complaints from your customers. Have a process to get those insights to senior management. Any customer-facing complaints need to bubble up to management and the product team so they can quickly fix them. But, worth mentioning, make sure you have a large enough data sample here. The opinion of one person, is just that, an opinion. But, hearing the same points over and over again from multiple stakeholders is something you most likely need to jump on fixing.
Test, test, and test again.
There is not just one correct answer for determining product-market fit. You need to be tinkering and testing all the inputs along the way. For example, try three different price points, and see how far you can push it before the customers start complaining or your conversion rates fall. Or, as another example, A/B test various sales pitches, emphasizing different aspects of your product, to figure out which specific feature is the one that gets your customers the most excited. Then double down on the winners after each iteration along the way.
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Focus on one vertical at a time.
It is very easy to say your product appeals to many different industries and many different use cases, so let’s go out and sell our products to them all. That is a recipe for disaster. When startup budgets are limited, it is always better to have a much more narrow focus to start, and go really deep in that one narrow vertical. That will make you the clear industry expert in that domain, which will help spread the viral word-of-mouth and stimulate growth materially faster. In this case, it is much better being the master of one domain than being a Jack of all trades.
After you have built scale and profitability in your first vertical, you take those “bullets” and fire them away in the second and third tangential verticals. But, before doing do, make sure you have documented your process, learnings and framework from the first vertical, so you can apply to the next verticals. You don't want to make the same mistakes twice. And, at all times, make sure you stay focused on the long term vision. Don’t get swept up in the whims of the market that can having you chasing rabbits into unprofitable holes.
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