BSMS 45 - How to diagnose product-market fit

The true definition of product-market fit is highly contested online. But one thing is clear from our experience: most founders think they’ve hit PMF far before they truly have. 

What does product-market fit (PMF) actually mean; and how should your go-to-market techniques change once you get to PMF? 

 

Product-market fit means finding a defensible beachhead of customers (a cluster of similar customers) who pay, stay, and refer others like them. 

 

In this episode, Stijn shares a simple list of 10 milestones we use to measure a company's journeys toward product-market fit. As with everything we share, it’s just a model for reference—not gospel.

Resources:

Suggest and vote on podcast topics at kalungi.com/podcast

 

We basically say there are 10 steps that you can use to help you see, hey, where are you and what to do next to get to product market fit. And of course those can then also be used to answer the question, have you reached product market fit? You want me to just walk through 'em quickly? Mike?

Yeah, let's do it. So a lot of software company founders that we talk to are sometimes under the false impression that I think they've hit product market fit when they haven't really, and it's kind of understandable. It's a vague term with a lot of definitions online and a lot of opinions floating around about what that actually means. But I was hoping that we could maybe talk about it today and go a little bit more in-depth as to why it matters, to know if you've actually found product market fit, what you can look at to see if you're on the right track, and then what changes after you've actually hit product market fit. I know we've mentioned it a lot in podcasts before about what that actually means, but we've never really done an in-depth episode on it, so I was hoping we could do that a little bit today. So I guess maybe we can start with why it matters, knowing if you've found product market fit or are kind of on the right track to getting there.

Yeah, it's the million-dollar question, Mike. I think mostly because it means that you're ready to invest your time, your capital, tell your friends about what you're doing and ask their, not just their friendly help, but actually to maybe come on board on your journey. But most importantly, this is often when companies start to attract foreign capital to hire people to really double down on after reaching MVP, minimum viable product, to double down on really building a business and committing to it. So before you do it, you want to know if you have created that beachhead, that's another maybe way to think about product market fit that you can defend that we have enough position that it's worth sending in the heavy armor to the beachhead knowing that you're not going to be just kicked back into the sea right away. So that's a product market fit.

The words product market fit of course are maybe a little dated, right? Today. It could be service market fit, solution, market fit solution, niche fit. I think we are very passionate here at Kluge, but also I think as the generalist marketers to make our niches that we focus on as small as they can be so that you can be as relevant as possible and the niche cannot be smaller than it being viable so that you can have a healthy business, but the smaller you can make it while it's still viable, the easier it'll be for you to have a fantastic value proposition to a small group or a small part of the market that can have fantastic appreciation for that. So product market fit could mean solution, market fit, company market fit, many other things. But in the end it means that you have established a defendable position with a group of customers, A part of the market that you can define, that you can describe ICP is, of course, the term we use a lot. Ideal customer profile, who now tell you we love this. And the centers that you hear me use also in the book is you now have customers or users who not only pay but they stay. So that's a good start, Mike, to kick it off.

Yeah, I think you also call those engaged advocates is kind of how...

Engaged advocates. Yeah. It's something I stole from my former boss at Microsoft, Chris Capossela, the CMO there. He came up with this, I think he called it, engaged advocates. Maybe he said a little different, but people who are using your product, who like using it, and who tell others about it.

And then when you say beachhead, because I think we use that term a lot, but I guess it may be helpful to define that a little bit more of like, so in real terms, when you find a beachhead, it's really a cluster of customers that kind of look the same or have patterns that are shared between them. Is that fair to say?

And who pay and who stay,

Right? Of course so they have to...

They have to be common attributes that define that group as a part of the market. That's why it says market fit. What is the market definition and an ICP as a way to do it. It could be another, could be an audience, could be a group of personas, right? There's many ways to define it. Yeah, absolutely.

Cool. And what are the things that you look for to kind of gauge where you are in that journey? It's a product-market fit.

Yeah. Sometimes there's a little bit of a gray zone between MVP minimum viable product and getting to real product market fit. And it's usually because MVP status is also about people voting for your solution for your product, but they usually they vote with their time. It's more, "Hey, I think this is valuable. Let me help you actually complete building it." That's why a lot of MVP stage marketing is focused on the early majority, the innovators who want to try new things and who might not only become your first customers, but they help you finish your product and make it better, but they vote with their time.

And I think product market fit is different because now people vote with their economic commitment, they pay or they vote with a certain level of commitment that costs them so much time that it's actually more an equivalent of money. But they really are also telling you, please don't take this away. If you would take this away, I would pay for you to let me keep it. I think that's another way to think about it. And we came up with, there's a whole framework and in the book there's much more detail, but we came up with some cheat sheets, Mike, that for software companies, for B2B SaaS companies can be used to check where you are on that journey. We have one that is 10 milestones to determine progress to reach product-market fit, and they all start with 10. And honestly it's an arbitrary number, but we basically say there's 10 steps that you can use to help you see, where you are and what to do next to get to product market fit. And of course those can then also be used to answer the question: Have you reached product market fit? You want me to just walk through them quickly, Mike?

Yeah, let's do it.

So the first one is super simple, right? Do you have people actually visiting you on your website in your online presence? It could be a social page as well, but we have 10 people who actually found you organically. They found you because they chose to type in a need and through a Google search or somehow, or they heard your name from someone, they may have typed in the URL because someone told them about you, but you somehow get people who find you unaided, you don't pay for those clicks. So those will be visitors, 10 users, 10 visitors. Then the next step would be, can I get 10 keywords to rank in Google search queries? Non-branded keywords are not keywords that are the name of your product or the name of your company, but keywords that are really describing the problem that you solve, the solution that you solve it with.

And those start ranking. And in the same describing it with the number 10, we say have 10 non-branded keywords that have at least 10 monthly searches. That tells you there's enough interest that are ranked in the top 10 in Google search results. Because if you're outside of the top 10, it's really not that meaningful yet, right? It's good to measure if you're making progress towards getting into the top 10, but only if you get in the top 10, you'll get on that first page of most screen sizes, and it'll start to be relevant for your business. It means people will actually find you.

And then the next milestone, so this is number three, is that those visitors, especially the ones that find you through some of those keywords that you're now ranking for, also convert to become subscribers. They basically land on your website and they say, "Hey, this is so interesting for me. This is such a good solution for the problem that I know I have. I want to subscribe." And they basically say, "Follow me home." They say they give you their email or they subscribe to your video channel or they subscribe to some other form of a digital channel. And I think that's a great third milestone that says, Hey, I'm onto something. I have 10 people, at least 10 people who say that what we do is meaningful for them.

And then the next milestone, so now we're at milestone number four is 10 people have not only subscribed, but they filled out a form, they raised their hand so to speak, or they came to a webinar and said, I want to learn more. I want a demo. I want to have a conversation. I want to have a call with you. I want to speak with someone. And once you get to that point, this is of the 10 milestones, this is milestone number four. You are very well on your way to product market fit. If you found 10 people who've said not only, hey, this is interesting, but they said, "Hey, I want to talk with you. I want to spend time learning more and maybe even considering buying this product." And then the next six milestones are really sort of make that commercially really specific and concrete. So the next one would be 10 users who have not only signed up for your product, but they've used it at least once. I don't give a lot of value to someone signing up unless they actually sign in. They can sign up and sign in, which basically means I'm using your product if it's an online SaaS solution. So they have to use it at least once.

So 10 people who've used your product at least once. Then milestone number six is that 10 people did not only use it once, but they came back to use it a second time. So they use it twice. So that is a fantastic testament to a real beachhead. You're not only getting people to say this is an important problem, and I think you have a good solution, and I've tried it once and I've tried it twice, but now they're actually going to the next stage. Do you pay for it? So that is milestone number seven, 10 people who pay for the solution, and now you get to, I think what's more traditional. I think often in description of product market fit, you get paying customers and I don't know if it should be users or customers or people who install something on a device on a phone, for example.

It depends on the product.

Yeah, it's units, right? ARPU, A-R-P-U, it stands for annual revenue per unit and unit can be a lot of things, but let's say you have 10 of those who pay you. So that would be milestone number seven. The milestone number eight is that those people are not only paying you, but they tell others about it. So they pay and they stay, and now they say something to others, this is maybe the most important of these 10 milestones that really solidify your beachhead, right? They're standing on the beach head and they say, "Hey, I'm going to call out to some friends to come join us here." And this way of driving referrals can also take many forms. It could be people downloading a discount code and sharing it with someone else, or they are okay with you writing up a testimonial and give you a quote.

There's many ways you can count people saying so publicly that they like your software and telling others about it. Then the next one would be they're not just telling people, but they're actually sharing your service with them. So I call this 10 people who have shared your service with someone else unprompted again.

So the last one, milestone number eight, you could still say, Hey, there's maybe a referral program that you have where you drive people to say, Hey, tell your friends and here's a discount code, etc. So you're really driving that behavior. There's nine milestones that it happens completely unaided.

They love it so much that they're just willing to go out and spread the word.

Yeah, and this is where you see even content from where other people are writing about your product or publishing blog articles. Maybe someone writes a book about your software, how to use X, Y, Z. That's really what number nine is. And then what I like about the last one, it's the final milestone. It adds a certain level of scale. So the last one is 10 new paying customers that came from these referrals that were made by order. So now while milestone eight and nine are about people actually referring you and saying so publicly and doing that unprompted and aid milestone number nine, milestone number 10 counts actually the new customers that you have now acquired because they came from referrals. So 10 new paying customers that came from referrals, and of course you'll have to have some kind of tracking mechanism in place to have.

So yeah, that's it, Mike. Those are the 10 milestones to reach a product market fit that of course are, they're not mathematically accurate. It could be five or 10 or 20, but it is a good framework. I think that I've often seen used, for example by a CEO who thinks, "Hey, we have reached solid product market fit," and you go through this list and you find out that they don't actually have 10 people who've actually paid for the software or who have come back a second time after they actually signed in the first time.

Or maybe there's a false sense of product market fit because they've got a lot of people to refer others. But maybe it was completely prompted, I think especially out of the recent...

Paid for.

The kind of growth at all costs mentality that were kind of shifting away from in a lot of software in that universe right now has driven some of that. So it's not about just getting people to download it. You think of Clubhouse, right? Clubhouse had this exponential growth, but then they had a really hard time retaining people and coming back to it and getting value.

I went to a clubhouse session once, Mike...

Same.

...and so I made it to milestone number five. I voted with my time and I used it at least once, but I never came back a second time.

Cool. That's a really good framework I think to work from. And once you have kind of gotten this indicator that you've reached product market fit, what is, in your opinion, what do you think that actually changes? How should a founder or a marketing leader change the way that they approach their go-to-market given that information?

Yeah, I think it's very scary. Unless you have reached most of these milestones to pour in a lot of effort dollars, sometimes growth capital into a certain part of the market. If you don't know if these customers are going to be a good fit and they will stay, then you could waste a lot of money. And that's why the beach hat analogy, if you have a beach hat that you can't hold where you're going to be driven back into the sea, you really don't want to spend a bunch of money on Google clicks or on webinars that are paid sponsorships and things like that. Because yeah, it's the leaky bathtub problem for a SaaS company. You pour a lot of new customers into your funnel, but if they don't stay. So yeah, I think getting through these 10 milestones, if you look at investors, what they look for before they give you series A money or serious seed capital, these things are you able to retain the customer that you're not going to buy with my money? So that's why these things are so critical and why product market fit is such an often used term as SaaS companies grow up.

One other thing that, and I think I mentioned this in one of the articles that I have on the Kalungi site, which is how to define your ICP and how to find it and one of the frameworks that you put together. It's also in the T2D3 book, but it's basically this difference in segmentation models depending on kind of if you have found product market fit as well, and also the maturity of your market. So I think before you have product market fit, you're really focused on, again, like you said, getting the innovators and getting the people who were like, "Hey, this is just a really big problem for me." So you're kind of focused more on the job to be done and the psychographics of segmenting the market.

And once you've found the beachhead and you start to see patterns, firmographic, technographic, demographic patterns between what your customers start to look like, then you can build these filters that you can go stamp on the market to find more people that look like them. But the ways that you segment and try to find people before and after you've found that beachhead look a little bit different. And I think people can sometimes get in the trap of trying to segment the market by those like, Hey, I think I'm targeting this company headcount, revenue size, et cetera, et cetera, and they'll go do a bunch of outbound, but they're may be aimed at the wrong place as opposed to confirming with the market that this product is valuable for this specific job and then looking at the patterns between those and then using that to go find more people that look like them.

Yeah, I think what's really important is that you understand what your audience looks like and what are the common characteristics that map to the solution you're providing, but that before you've reached product market fit, those will be very different. It'll be about someone who caress enough about the problem to help you build the solution versus after you reach product market fit, it's about someone who cares enough if they want to pay for it, maybe because the attributes to find them are going to be different. The other dimension of this is that the product market fit milestone doesn't have to be a lot of people. It could still be a relatively small group, but to your point, they have to have the same job to be done, or they have to have really a good common denominator.

Cool. Is there anything else that you would add that you think is important for people to know about product market fit specifically?

Yeah. The other thing that's really important, Mike, when you think of have you reached product market fit, is that a lot of the customers we work with early-stage SaaS companies, they will have to go tell the world about what they are offering. Especially when you're creating a new category, you're solving a problem that maybe a lot of people are not even aware they have. You need to go knock on some doors to sometimes do outbound marketing. We have found that although inbound marketing and being found by people who are looking for a solution is of course far more economical, it's a fantastic way to grow. But the reality is that if you're solving something new and you're doing it in a new way, that sometimes you have to go pick up a megaphone and talk about it, and ideally you talk about it to the right people.

So that's where product market fit really helps. If you want to do some outbound, if you want to go knock on some doors to make sure you knock on the right doors where your message, because it will be an interruption form of marketing, which none of us likes or we don't like to be spammed, we don't like cold calls, but if you feel that you have a solution for someone that they can really benefit from and you're doing a good job of making sure you don't knock on the wrong doors, then we do believe there's value in doing that. But then, yeah, product market fit helps you make sure that you know what doors to knock on.

Mike:

Yeah, no, that's a great point. I think in a lot of cases too, with especially less mature markets, people aren't necessarily looking for a solution in the same words that you might use to describe your product because they might not even know that the problem that they have might not be very visible to them. So you kind of have to sometimes educate them on, we have a solution that actually fixes this thing for you, and that's what account-based marketing or outbound will actually allow you to do.