A question that I get asked a lot is about product-market fit.
This usually refers to the point in time at which a startup company begins to find an increasing number of customers in the market that resonate with its product.
For the company, this marks the transition from the “startup or survival phase” to the so-called “stationary phase” of business development.
You find more elaborate information on these phases in other posts on this site.
The transition from the first to the second phase is of course an exciting time for any entrepreneur. After the seemingly endless time of experimentation, finally entering the phase of stabilising sales seems like a dream come true for every startup entrepreneur. This dream is made possible by the so-called “Product-Market-Fit” and the very pressing question for every startup entrepreneur is: “Have I already reached this point in time or am I at least close to it?”
My answer usually goes like this: “Reaching product-market fit is like falling in love.” Mister Spock could certainly list a whole series of criteria on the basis of which one could estimate whether someone is in love or not. The person concerned, however, has a much easier option to decide. She just knows. And it is the same with product-market fit. If you are still wondering whether you have reached it, well then, you haven’t. Unfortunately, this answer isn’t really all that helpful or actionable.
So let’s ask better questions then. If you want to know whether you are close to product-market fit or at least on the right track, you need to consider certain indicators.
The question then becomes which indicators are the best ones for signaling that you are on the right track and approaching or perhaps achieving product-market fit. And as is so often the case, the answer is: “It depends” – in this case on the growth engine you are relying on in the development of your company.
It does make a difference whether you sell operating systems as Microsoft does or online software that you use to keep in touch with your friends, such as Facebook.
While for Microsoft the ratio of the number of customers who remain loyal and do not switch to an alternative operating system to the number of new customers is all-important (also called customer retention rate), the all-important figure for Facebook, however, is the so-called reproduction rate sometimes referred to as viral coefficient. In times of Covid, every child now knows what the reproduction rate is – in a business context: how many new customers does each customer automatically bring into the system just by using the product?
In the first case (Microsoft), with a customer retention rate of say 80%, a growth rate for new customers of at least 20% would be necessary in order to not go out of business. For net growth, an increase in one or both of these key indicators is required. For the startup entrepreneur in this business scenario, it is first of all important to measure these two key figures, whereby the tendency is what matters most here.
For the entrepreneur with the viral growth model, however, knowledge of the reproduction rate is crucial. If this number is greater than one, the growth is exponential. Again, the startup entrepreneur should know how this number is developing over a certain period of time. If, despite all efforts, this number stays below one, then don’t get fooled – this company is going down; even the largest advertising budget of all time (and a growing number of new customers going with it) will not be able to change the fate of this company for the better.
So coming back to product-market fit a set of indicators that signals steady growth of your business is a solid sign. Whether that growth is sustainable over a longer period of time is another question, of course. The degree of implementation of business systems is another indicator that shows how well your business is equipped for growth.
Get in touch with us for an assessment of your business systems if that is of interest. We use a well-proven system for systemising your business and we always start with a thorough assessment first.