We all know that finding product-market fit is critical for any founder looking to grow their startup and attract investors.
Accelerator and investors constantly stress to founders that they must acquire and demonstrate that they have product-market fit in order to be successful.
But how do you know when you have product-market fit?
For starters, product-market fit is not a feeling. Nor does having customers and revenue mean you have product-market fit.
Revenue is one indicator of product-market fit. But it’s not definitive. That’s because product-market fit is not black-and-white or one dimensional.
Revenue is the leading false-positive of product-market fit.
So, how do you know if you have product-market fit?
There are five measurable outcomes that you can achieve that reliably demonstrate product-market fit. If you follow this five-step process, you’ll find yourself with demonstrable product-market fit.
1. You Have a Specific Customer Type and Use Case
The first measurable outcome to determine if you have product-market fit is to have a specific and intentional customer type.
To determine if you have product-market fit you must first define in very specific detail two things:
- Who – exactly – is your market (think customers not industries); and
- The specific use case for your product.
There’s a popular startup maxim that founders die more often of overeating than they do of starvation. It’s counterintuitive, but true.
In the context of finding product-market fit, that means if your customer and your product use case are constantly changing then so will the other known variables to customer acquisition.
When your customer and use case change, your messaging, price point, sales process, average contract value, sales cycle length, etc. all change, too.
Committing random acts of marketing may lead to revenue. But what you’re really looking for on the path to product-market fit is repeatable revenue.
Having the discipline to narrowly define your customer and use case enables you to better control the variables of both customer acquisition and customer success.
Less random and more intentional market activities yield market and product feedback that is much less susceptible to shiny object syndrome (i.e., new features and website copy).
Similarly, if you stay focused on a specific customer and use case, you are able to shorten your path to product-market fit by accelerating the time it takes to develop subject matter expertise, complete experiments and ultimately win target customers.
Click here for a helpful resource to define your specific customer type and narrow use case.
2. You Have a Satisfied Customer Who Won’t Let Your Product Go
The second measurable outcome to determine if you have product-market fit is one customer who will fight to keep your product.
The test to determine if your product is valuable enough to your customers is simple and unambiguous: how upset will your customer be if they lose access to your product?
If your customer is not kicking and screaming to keep your product, you do not yet have product-market fit.
In the event your customer is able to simply walk away, you’ll need to carefully evaluate what went wrong with your experiment before you simply move on and change the primary variables – the customer and/or use case.
The cause might be that your solution was not implemented in a way that helped the customer achieve their desired outcome from using your product. That’s a customer success issue (i.e., an onboarding issue that you can test with the next customer).
On the other hand, if your product delivered the intended value and the customer was still able to walk away, that’s a use case issue. It’s an example of another popular startup maxim: your product is a vitamin and not a pain killer. In which case, you’ll likely need to change either the customer, use case or both.
Regardless of the cause, if your customer can easily walk away do not waste your limited resources filling the top of your funnel with noise.
Instead, reevaluate your customer type and/or use case and continue running high-touch, non-scalable market experiments to find an environment for your product and your customer to succeed.
3. You Know Why Your Customer Will Not Let Your Product Go
The third measurable outcome to determine if you have product-market fit is verification that you know why your customer would be upset if they lost access to your product.
Now that you have a customer that can’t let go of your product, your next step is to capture the specific and tangible value your product creates for them.
Like Step #2, this isn’t an ambiguous exercise. Many of the founders we work with report having “happy customers.”
But it isn’t until they go back to their customer and investigate how their product impacts their business that they truly understand the value they create.
Customer satisfaction is not a feeling. It’s an objective outcome.
Once you’ve identified the key business metric that your product impacts, you’ll also need to capture how much you impacted that metric and the time it took to do so.
Armed with that information you now have a clear, objective time-to-value. In other words, you know how long it should take a customer to achieve the intended tangible business outcome.
4. You’ve Been Able to Rinse ‘n Repeat ~3-5 Times
The fourth measurable outcome to determine if you have product-market fit is to successfully rinse-and-repeat the above three steps with additional customers that look the same within the same use case.
At this point, you have a successful customer who will kick and scream if you take your product away. You may have product-market fit.
But, this is not the time to scale or move fast and break things (yet). In fact, quite the opposite.
Here’s our favorite maxim: slow is smooth and smooth is fast. At this stage, you’ve only been successful one time.
Now the trick is to simply repeat that success, ~ 3-5 more times. Everything you are doing remains high-touch, personalized and non-scalable.
You are validating your learnings with additional revenue.
You are not growing revenue for the sole purpose of increasing your ARR.
Resist the temptation to build or buy a list and execute an outbound email campaign. Do not hire an SDR or BDR.
Instead, reverse engineer the entire pre- and post-sale experience from your first customer and rinse-and-repeat.
Review everything you’ve learned about that customer type, use case, customer acquisition strategy, market messaging, pricing model and time-to-value realized.
Once you have all of that detail organized, identify a few (3-5) similar customers that you can acquire by repeating your customer acquisition and success process.
You’re not testing your messaging, branding or top-of-funnel strategy. This is still not the time for a LinkedIn or email campaign. Start by asking for referrals from your existing relationships (including your first customer).
Describe in detail what you know about your current customer to help your contacts identify the best fits from their network.
Retain control of the process. Ask your contacts to share the details of who they think is a good fit so that you can first research and approve them.
Retain control of the messaging. Use your customer’s language; not your language. Mimic any industry jargon that you heard.
Draft the email for your contact to forward to those approved contacts along with the request to introduce you.
If this now-familiar set of activities produces a reliable amount of revenue from satisfied customers in roughly the same amount of time, you are very close to having product-market fit.
5. Your CAC is Less Than Your LTV
The fifth and final step in the sequence to determine if you have product-market fit is to make sure you are acquiring customers in an economically rational way.
That is, your cost of acquiring a customer needs to be less than the customer value.
This is not the time to compare your performance against the published milestones required to attract venture capital.
At this point, if your CAC is ‘n’ than your LTV just needs to be > n.
In this instance, you’re likely on the path to product-market fit but you haven’t fully achieved it yet.
However, if you’re unable to identify much more upside value for your customers, it’s likely that you won’t be able to bring your price up and balance our CAC to LTV.
The answer to getting to CAC<LTV is highly contextual. It might simply be pricing or it may be messaging. In most cases, the problem is not the customer type or use case.
Avoid jumping ship on your customer and use case until you’ve eliminated all other possibilities.
You now know you have product-market fit because:
- You have a narrowly defined customer type and use case;
- You have acquired 3-5 satisfied customers who fit that type and use case following a similar customer acquisition process;
- Those customers will kick and scream if you take your product away;
- You know the specific and objective reasons why they would be upset if they lost access to your product; and
- Your LTV:CAC is better than 1:1