Product-market fit is the most fundamental aspect of your go-to-market (GTM) strategy that could determine the difference between high-growth success, and low growth failure. It is so essential to your high-growth success that you could do everything else right, but if there is not a good product-market fit, you are probably doomed to slow-growth misery. On the flip side, if you get product-market fit right, you can do a lot of other things poorly or plain wrong and can still recover and build a strong business.
So what is product-market fit and how can you make sure you have it? Product-market fit is when the market need exactly matches the capabilities your product delivers. And that market wants to buy your product in great quantities, as fast or even faster than you can fulfill it. Ideally it’s a large market and there isn’t much competition chasing it at the same time. But you’ll know it when you see it, as your biggest challenge will not be selling as much as it will be fulfilling and supporting your rapidly growing customer base.
If sales are sluggish, customers don’t understand your value proposition and move slowly, and most of your sales reps are not hitting their quotas, then you either 1) don’t have a good product-market fit, or 2) your market is not big enough. Having good product-market fit with a really small market can be super frustrating since you’ll have some really happy customers, but will quickly tap out the market that fits and will not be able to grow fast outside of that market (more on that in future blog posts.)
Below are a few things to consider when evaluating your product-market fit.
Timing is Everything
All markets evolve over time as customer’s needs change and competitive solutions reveal new capabilities. You want to make sure you are early enough to establish a good market position without too much competition, but not so early that there is no market there yet to build a business on. A great lesson in timing comes from the smart phone and personal digital assistant (PDA) market. The Apple Newton came out in 1993 with great fanfare, but the market was not ready for PDA’s and it failed. The Palm Pilot came out in 1997 and it had more success, but ultimately was also too early. Blackberry came out in 1999 and was very successful for a while. Then smart phones started to evolve rapidly and took over the PDA category. Ultimately Apple came back into the market with the iPhone in 2007 and built a $100B business from it.
Apple was too early with the Newton and failed because the market was not large enough for PDA’s at that time. 14 years later, the market had been stoked and developed by Palm, Blackberry, Nokia and Motorola when Apple re-entered the market with a much better smart phone and has never looked back. They say pioneers get all the arrows, and settlers get the land, so make sure you are not pioneering a market too early or there will be no market for your product to fit into.
Creating a New Category
Related to market timing is the especially deft maneuver of creating a new product category. This is the grand slam of your GTM arsenal and can yield tremendous growth if you crush it, or isolation and misery if you strike out. Creating a new product category means being the first one to identify and serve a whole new market that no one else has been able to tap. You are first to market and become synonymous with that category, and therefore get the lion’s share of the growth of that category. And it means you got the timing precisely right, by recognizing an opportunity just as it was developing, and came to market with the perfect product for that opportunity. Think Nike with running shoes. Oracle with relational databases. Twitter with micro-blogging. Spanx with a reinvented girdle. UnderArmour with reinvented t-shirts and athletic wear.
The biggest challenge with creating a new category is that there is not a category to start – just a blank slate, or an older category like girdles that is probably dead. If you go this route, be prepared to do a massive amount of category-creation work with analysts, influencers, media and key customers. You have to convince the world that what you have is the next big thing. It is a marketers ultimate challenge. But if you get it right, it will become a gold-mine that will drive meteoric growth for years to come.
Need to Have vs. Nice to Have
If you want to achieve rapid growth, you must build a ”need to have” product. Your customers must feel like they can’t live without it because it is critical to their operations or their business goals. To achieve this, you have to directly tie your value proposition to a critical company priority or key initiative. Companies have many priorities and not all can be at the top of the list, and not all will get funded. For example, given recent cyber-attacks, Security solutions always seem to be at the top of the list of corporate initiatives. And that “need” should come from the top of the company, i.e. senior execs and executive staff. When a CEO or CFO needs something, they always find funding for it. That is not the case as you go lower in the organization.
If you fall into the “nice to have” category, it means your product is not as critical as others. It means the company can live without it, and that you won’t be a high priority for budget or resources. It is the business version of “let’s be friends.” It also means you can achieve some growth, but likely not the meteoric growth that “need to have” solutions can achieve.
If you want good product-market fit, make sure your product is a “need to have.” Not sure if you are a “need to have” or “nice to have”? Ask your customers and prospects. They are usually very clear what their top priorities are.
Product-Market Fit is Critical for SaaS
Product-market fit is especially important for SaaS companies because they are subscription based, and are reliant on renewals and upsells for growth. Typically initial deals for SaaS companies are relatively small with one-year commitments. I like to tell people that every SaaS customer is a 12 month trial because every year they evaluate how well the product is working and if it is meeting their needs. If not, they won’t renew and you have lost a valuable customer. If it is working, then they’ll renew and maybe even upsell to more seats or more products. This is typically where growth and profit comes from in the SaaS business because the cost of initial acquisition is much higher than the cost of renewals and upsells.
So if product-market fit is not right for your SaaS business, you’ll not only see sluggish initial sales, but then high churn rates and few upsells – a deadly combination. Almost as bad as that is when you fall into the “nice to have” category mentioned above. You are not mission critical to their operations, but are interesting enough to buy initially to try out, and maybe renew. Or maybe not, if other priorities arise.
So get product-market fit right and you can achieve rapid growth. Get it wrong and you have a tough road ahead.
In my next blog, I’ll talk about some of the common pitfalls companies fall into that hurt their product-market fit.