What Does Product-Market Fit Feel Like?
Reaching product-market fit is the first ‘only thing that matters’ goal for a startup, but once you find it, go-to-market quickly becomes the next ‘only thing that matters.’
So, how do you know when to invest in a go-to-market motion?
If you’ve never worked for a company that found product-market fit, it can be tough to understand what you’re working towards.
This is a common pitfall we’ve seen founders run into; they have some semblance of product-market fit and then start investing heavily in a go-to-market motion before they have their hands around exactly who they need to go after and why.
For an early-stage company with milestones to hit and limited runway to hit them, a timing miss can be the difference between raising the next round or sending everyone home.
This post will show how to recognize product-market fit and quantify your progress along the way so you can time your go-to-market investment (hopefully in some sales development reps).
What product-market fit feels like
Product-Market Fit is sometimes described as building momentum. The startup journey often feels like pushing a big rock up a hill, and when you begin to reach product-market fit, the rock suddenly becomes much lighter or even starts rolling down the other side of the hill.
It’s that moment in a sales conversation where the prospect is leaning forward and grilling you with buying-intent dripping questions like ‘how long does it take to get started,’ ‘does it work with tool X’ and ‘how long does it take to implement’.
My favorite example is from an early call I was having in the carb.io days, and a customer stopped me in the conversation and asked, “wait… you can do that, and it actually works!?” I replied yes, and immediately knew that we were onto something special.
How to quantify product-market fit
I’m a fan of Dave McClure’s Pirate Metric framework. The acronym of AARRR stands for Acquisition, Activation, Revenue, Retention, and Referral. They’re a common set of metrics that startups use to track their progress, and they’re also a great method for quantifying the strength of your product-market fit.
When you are conducting customer development, here’s how I would go about measuring it:
Acquisition – when we tell them about it, are people excited to try it?
Activation – when they agree to check it out, do they sign up/pay/follow through on your CTA?
Retention – when they sign up, do they keep using the product?
Referral – if they use it, was it so great that they tell their friends?
If 20% of the people who enter the top of this funnel make it to the referral stage, then you likely have a strong product-market fit. If we break that down by stage, here’s what it would look like:
- You tell 100 ideal customers about your product, and 80 are excited to check it out.
- Of those 80, 60 of them convert (sign up, pay, follow through on the CTA).
- Of the 60, 40 keep using it beyond whatever your critical usage metric is.
- Of the 40, 20 of them refer a friend or more.
To hit a 20% funnel efficiency, you will need 50% of your clients offering you referrals. This is a really high number and typically only achievable in small batches of clients when you’re in the early stages of product market fit.
Timing your go-to-market investment can make or break. Too early, and you spend your resources chasing the wrong customers. Too late, and you can give up a dominant market position to a competitor. Finding the right balance comes down to how confident you are in the strength of your product-market fit. The pirate metrics funnel efficiency metrics is just one way of measuring your progress.
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