Prasanna Krishnamoorthy

@prasanna_says

A socratic approach to Product Market Fit

May 6th 2017

Dedicated to all the long-struggling Product Founders I’ve worked with!

TL;DR: Founder-market fit, Problem-value fit, Product-solution fit, Market-scale fit are steps on the way to complete Product-Market-Fit. Keep yourself honest on the path by finding answers to the questions that define each step.

The very first time I heard of product-market-fit, I felt the truth of it. Having helped grow one startup to 300 customers in India, and the second to 30K GBP in annual revenue in a year, the lack of PMF was quite easy to feel in those cases.

I eagerly devoured frameworks for PMF that I could lay eyes on.

And while these steps and frameworks helped me clarify what PMF meant, over the last three years of working with 120 startups at Microsoft Accelerator India, I could see quite a few gaps in the way founders grope towards PMF. For context, 100 of the 120 startups I worked with were pre-product-market fit, on the journey to $500K or $1M+ revenue.

To help bridge the yawning gap between not having PMF, and getting there, I posit the following sub-steps on the path to PMF. The first and second are the most critical for first time and early stage entrepreneurs to figure out, while they’re choosing what business to build. The third is the favourite of engineering and product driven founders, while the fourth is usually driven by investor conversations, but is absolutely critical to identify early.

I am writing this in the context of B2B startups, where the buyers, users, and decision makers are rational decision makers, and where their utility functions are fairly well understood.

The most important point to note, as you read the questions below, is that the journey to find these answers is important. It’s not about the specifics of the answers! It’s about being honest with yourself, searching for these answers from your customers, partners, and then formulating them in a way that is a logical, coherent whole that can be communicated succinctly with your team and stakeholders.

And so think of this as a Socratic journey towards PMF, you question yourself, while executing and moving forward, iteratively arriving at better answers, through newer experiences with customers.

Founder Market Fit

Imagine you’ve spent 20 years in the medical devices domain, helping build some, helping sell some. The entrepreneurial itch hits you, and you jump out to create your own ….. WHAT?

Typical entrepreneurial hero-literature suggests finding your passion and building towards that. Problem is after 20 years in a large MNC, whatever passion you had for medical devices died 19 years ago. So that seems out. How about building an app for retirement financing? You would be your own best customer, and how hard can it be to learn about finance anyway?

Or maybe you’ve spent 5 years building mobile games for the worlds leading FB game developer. Your passion is certainly not games anymore, seeing how luck and hit-driven the business is, how about something in the enterprise space, where things are much more predictable and steady?

A better approach I’ve found, is based on effectuation. Start with ‘Who you are’, ‘What you know (that others don’t)’, and ‘Who you know’. Building out from that core will help you have better ‘Founder-Market-fit’. This entire section is inspired by the many examples of founder-market-fit in the effectuation literature. See https://www.youtube.com/watch?v=DnGrcCVG8TE and https://www.youtube.com/watch?v=XWLBrj2lLoA. For a case study covering the entire effectual cycle, raise a cold toast to Yngve Bergqvist.

I’ve seen teams who’ve only done enterprise products before, trying to build marketing driven consumer apps. People who have only B2C experience building good products and getting sunk by the challenges of enterprise sales. Or people building security products, but very uncomfortable with common FUD tactics used to sell security to enterprise.

To check if you have Founder Fit ask yourself:

Prerequisite: Do you have a founding team that can work together towards ill-defined outcomes, communicate effectively internally, and have enough shared equity, runway, goals, values?

  1. What softer attributes of the market does your team match with? Contrast long term face-to-face interaction driven business (enterprise sales) and analytics driven development and marketing (mobile app dev). If your founding team is full of whale hunting sales folks, you may find your team frustrated at the latter.
  2. What credibility do you have in this market? Markets with commodity products need little credibility to operate in. But markets such as security, healthcare, fintech, demand much more credibility of the founders. If you don’t have credibility, then are you prepared to build it over time?
  3. What skills are needed to succeed at this market? Do you have them, or are you prepared to learn them? Do you have mentors who can teach you those skills? Or can you hire people with those skills?
  4. What unique point of view do you bring to this space? If you’re an unfashionable guy trying to build a women’s fashion product, do you have a different angle of attack or point of view that others have missed?
  5. What unfair advantage do you have in this space? Do you have many more insights into this market than a novice?

Founder market fit is critical in being able to build a long term advantage in the business. It’s also a key factor in many startups failing well before they even hit the market at scale.

Many first-time founders try to do things as if it’s their first and last startup, not realising that most successful founders had 3, 4 or even more shots at doing startups. It’s way easier to build your first startup from a position of strength and competence, and when you have a (modest) success behind you, you will be all the better for it.

Read Chris Dixon on Founder market fit & Brad Feld talking about it. And an interesting take from David Beisel on Founder-Go-to-market-fit.

Problem value fit

What is the economic value for a particular customer, if you solve a particular problem they have? Simple question. Yet most founders are unable to answer this well.

Listen to this call, for how an expert entrepreneur extracts a utterly painful problem, and the economic value of solving that problem for the customer.

As an entrepreneur, you can never get more money from a customer, than the economic surplus your product generates for her. In order to provide a value based pricing, you have to first know the value of solving a particular problem for a customer, and the way it changes for different customers. In a startup this process is typically iterative, your understanding deepening with every customer conversation and customer acquired.

There are different classes of value propositions you can offer customers, based on the type of problem you’re solving for them:

  1. Increase their revenues
  2. Increase their profits (or reduce their costs)
  3. Increase their productivity (or reduce their time spent)

Depending on the customer and the type of market they’re in, and the specific department you’re aiming at, i.e., cost-center vs profit-center, these value propositions resonate differently.

Fast growth market businesses buy revenue impact products. Slow growth or competitive market businesses try to increase their bottomline profits, and buy products that promise cost savings. Individuals, in economies where cost of time is high, buy tools for themselves and their teams, to improve productivity.

Why are so many startups focused on sales & marketing tools? 
Answer: If you can show a revenue impact, calculating economic value to the customer is easy. And asking for a share of that, i.e. value based pricing, works very well. Take SMBs in India, where growth is 30%+ a year: which would be easier? Selling an employee productivity tool vis-a-vis selling a lead generation tool.

Take manufacturing in a highly regulated sector like oil & gas with growth at 3% a year: which would be easier? Selling efficiency improvement (reduce costs) or lead generation (market share increase)?

To check if you have Problem-value fit

  1. Define the customers problem in 100 words or less. Define the segment the customer is in. Craft SEM ads that have a high conversion for the specific problem/query, and check the conversion.
  2. Is this problem life/death for the customer, or is it a pain they’ve lived with? Vitamin vs pain-killer? How soon after someone searches and clicks an ad do they buy a solution?
  3. Break the problem into the different users/personas that it impacts, map that to the organisation, to understand who the decision maker would be.
  4. For the segment you’re targeting, are you able to ever more accurately understand and quantify the economic surplus created by solving this problem for a typical customer?
  5. If you’re improving their bottom line, or if you’re improving individual productivity, can you quantify that in $ or hours? Write the economic value in an Excel model with customer size, use-cases as variables. Usually called an RoI calculator.
  6. What rank is this problem in their priority list in their organisation?

In many startups, founders stop when they find a surface level problem, that has some economic value. Using five-why style root cause analysis while working with sophisticated customers who are ahead of the rest of the market, you should dig deeper into finding problems that have higher value when solved.

As a caveat, customers will not always make it easy for you to quantify the economic value, or the value may be dispersed over different end users. In that case building good proxy metrics for problem-value would also help you on the journey.

The problem-value fit has another proxy, how much are customers willing to commit, up-front, to a chance of solving the problem. Taking these effectual commitments, will help you both with resources, and with sharpening your roadmap and deliverables. Flip side of the coin is getting locked in early into a smaller market, or a one-customer niche. The latter is why you need to work with sophisticated customers who are ahead of the market, and not with laggards who rarely adopt new tech, and are more likely to ask you to build patchwork products.

While in many cases, the best problem to solve may not be much harder to solve than any other problem, at a startup it may be a later stage in a Problem Roadmap (Hat-tip Melissa Perri). And while you will discover many problems for your chosen customer segment, prioritizing by pain of customer usually leads to $ quicker.

Product solution fit

Once you’ve found the right problem and understand the contours of it, including the economic surplus, and you have a problem roadmap, then you need to look at how to build a product that solves the problem, how to deliver the product, and how to extract your value from the economic surplus generated by application of your product.

The product solution stage is where things can be better measured, and while “What gets measured, gets improved”, unfortunately, “What can be measured, gets improved”, even if that’s not the critical factor that needs to be improved.

So “WHAT TO MEASURE”, is critical at this stage. Resist proxies and vanity metrics. Try to prove that you can, and in fact have, delivered end-to-end value to your user, buyer, decision maker. In the B2B SMB context, show the owner that you have given them more revenue or more profit. In the Enterprise context, show the user, buyer, decision maker, a path to a promotion. In all cases, identify and calculate the value you deliver, in as close to real time as possible, and as close to the usage as possible. In the beginning it’s likely to be less accurate, so share it on-demand with customers, but as you continue to get better at it, start showing it directly on a customer dashboard.

Questions to ask yourself about Product-solution fit. Long form written answers are good!

  1. How soon can you deliver “Wow”? Within the very first session of the user? Within the customer success activity? Do you need a (paid) pilot?
  2. How long does it take to deliver the entire value after the sale? What does it take on your side and the customer side? Was delivering the value under your control during the process?
  3. How many users do you need on board to deliver the value? What % of the customer org should adopt it? Do you have a strategy/plan/checklist to get everyone on board to unlock the value?
  4. What kind of integrations are required to deliver the value? What integrations are required to showcase the RoI/value delivered?
  5. Can you calculate an RoI per customer? Did the customer get the RoI you promised? Are you able to show the RoI in realtime on a dashboard?
  6. What % of users on your product got the expected RoI?
  7. Are users giving you referrals which talk about the exact value delivered?
  8. What’s your NPS? (lead indicator of solution value)
  9. What % of your new customers come through referrals? (lag indicator)

Don’t worry if finding these answers is tedious. Nature of a startup.

Do panic if thinking about these questions is painful. It means that you have to develop more clarity through deep open conversations with your target segment.

Depending on your market, segment, and how cutting-edge you are, you may find your solution needs to be more Do-It-Yourself (DIY), or Do-It-For-Me (DIFM). Your past experience, and what this solution delivery demands may not match — beware!

For a cutting-edge product, which is changing behaviour of your customers, what’s more likely to work faster & better? What’s more likely to get you much needed feedback right from the trenches?

For an SMB audience, where the owner is the buyer, with a hundred pressing problems, and rudimentary systems, what’s easier to sell, DIY or DIFM?

For an enterprise customer with 3 different types of users, what’s more likely to get to customer success — DIY or DIFM?

And on all this, does the $ they pay, match the delivery cost?

In the B2B world, as more products are bought than sold, clarity of value delivered becomes a critical differentiator in positioning. Driving towards clarity of value delivered also improves the possibility of landing enterprise deals without having to have expensive field sales people.

Market scale fit

If you’ve reached this far, great! Perhaps 5% of startups I see are able to clearly articulate founder, problem-value, and product-solution fit.

Many early entrepreneurs do a top-down analysis of market scale, and find large meaningless numbers. Especially in B2B, a bottoms up building of the market, including looking at your own capacity to build scale, is a much better indicator of where you can reach.

  1. Does the industry at large have a similar set of problems, or is there something unique with early customers? How does this problem lie on their priority list?
  2. Who are the thought leaders in this market? Who identifies solutions that work best? Who shapes the ways in which people access solutions today (Gartner, or G2Crowd, or your friendly neighborhood blogger)?
  3. To get your first ten early adopters quickly, to getting your next ten thousand customers at a competitive CAC — can you grow your business switching through channels when you outgrow them?
  4. Is there a unified channel to these customers? Are there channels of varying depths and breadths? Is there an single/feasible channel to access a substantial portion of the market?
  5. How cohesive is this market? Geo, community for instance.
  6. Is this a new or underserved market? Who else sells to this market today? How much market share do they have?
  7. Do referrals work in this market? Is word of mouth or virality possible?
  8. Is there a network effect in your problem/solution/product? Are you able to measure the value & health of the overall network, especially as it grows?
  9. What is your CAC? Does the CAC go down with scale?
  10. What is your TAM? What adjacent markets exist that can add to the TAM?
  11. Does the same (or substantially similar) market exist at 10X the current pricing? At 100X? Can you move your ACV from mice to rabbits to deer to elephants or from elephants to brontosaurus to whales?

The question of market scale is the difference between hiking your local hill versus striking out to climb K2. Both provide a challenge, both provide a view, and both provide a sense of accomplishment when done. But one has a death rate of 0.01% and the other has a death rate of 23%. And only one will put you into an elite club of a few hundred people in the world.

Bootstrapped entrepreneurs typically suggest you shoot for a small niche market; one which you can dominate, and grow up and out from there.

VCs and funded entrepreneurs suggest that the effort/risk for most startups is the same, so why not shoot for large outcomes?

In reality, entrepreneurs drift into a market, as much by chance, as by choice. Capitalising on where they are and choosing where to go from there marks the effectual and successful entrepreneurs from the rest.

Adding it all up

Product market fit is not a point you arrive at, it’s a walk on a slackline (hat tip Clement Vouillon). The most successful entrepreneurs keep evolving as their journey progresses, changing problems, products, markets, as they find out more about where they are and where they’re going. This happens as much by luck, but as they say ‘fortune favors the prepared mind’.

Product market fit can and should be measured, by lead and lag metrics (hat tip Brian Balfour). Defining these metrics, tracking them, and making decisions with them, are key to being data-driven on the journey to product market fit, rather than following the HIPPO.

The PMF journey requires tremendous amounts of discipline, humility, customer empathy, and endurance. There are many false positives (I think I have PMF, yay!), and equally dangerous false negatives (I don’t think I have PMF yet, need to add some features/pivot/shutdown).

Here’s to you crossing the PMF journey in one piece! See you on the other side!

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