What does product-market fit feel like?
What does Product-Market Fit feel like?
“Product-Market Fit”. We hear about this term often in startup-land.
It’s like good art. You can’t describe what it is, but you know it when you see it.
One proper definition of Product-Market Fit is “a unique product offering that people desperately want” according to the Wikipedia article.
Read that again. “People desperately want.”
I have heard it explained that when your company achieves product-market fit, the market is pulling the product from you. There is an insatiable appetite for the product you offer and you will work tirelessly to fill the demand.
I’m convinced that product-market fit is one of those imaginary states of being for a company.
In my experience, product-market fit is as elusive as El Dorado. I’m not sure it really even exists for companies, with some rare and well-known exceptions. And even then, it probably doesn’t feel like product-market fit while you are operating the business.
I remember feeling the pressure of getting to product-market fit. I would create false hope for myself by attaching product-market fit to arbitrary targets.
“When we get to $1MM in ARR, it’s going to get so much easier…”
Then we hit $1MM and it didn’t feel any different. Same at $10MM and even $20MM.
In fact, in the entire run up to scale at Levelset, I never really felt like we hit product-market fit.
Every day felt like hand-to-hand combat. We always felt like we had to sell on value and couldn’t rely on brand or traction alone. We had to convince customers of value in every sales conversation. There was no flood of inbound demo requests or lines of customers screaming “here, take my money!”. No one “desperately” wanted the product.
So what is product-market fit if you don’t even feel it at scale?
Here are some signals that did tell us we were on to something big:
Raving Fans
As you scale your business, you are going to find customers who share your company’s cultural values. These customers can be early adopters, but they don’t have to be at the cutting edge of innovation. They just have to believe in what you believe.
Every company has a vision for what they want the world to look like. The job of early stage companies is to build your tribe of “raving fans” who will buy into your vision and evangelize this vision to the people around them.
When you see customers willing to give a 5-star review or when you get an introduction to a new sales prospect, this is a sign that you are headed toward product-market fit.
This will happen organically as you scale your business, but you can impact how quickly you build your base of raving fans.
Build the habits and motions within your team to manufacture raving fans. Here are some ways to do it:
- When a customer has a positive interaction with your team, ask for a 5-star review on TrustPilot or G2
- Send customers company swag (t-shirts, mugs, etc) and ask them to send a picture with the swag. Trust me, people love to show off the gifts that you send them.
- Ask for referrals to other businesses who might need your product
- Use the customer as a reference for prospective customers
- Film a video testimonial with the customer
- Create a community where raving fans can support each other
All of these actions are initiated by you and your team. The customer may offer to do one or more of these things, but you can create more raving fans by getting good at creating them.
100%+ Net Dollar Retention
You may be able to convince a customer to buy your product once, but can you do it again and again? When they renew, are they willing to spend more for the same thing?
If you can get customers to spend more money with you over time, that’s a strong signal that your product has found fit in the market.
Churn is a part of life in almost every subscription business. Customer retention is all about leaning into the customers that actually get value from the product.
It’s OK to have churn, but you want the customers you retain to spend enough to cover whatever dollars walked out the door.
For example, if you have $100,000 in churn for the year, but your remaining customers expand their accounts by more than $100,000, then you have retained 100%+ of your recurring revenue.
Getting your dollar retention over 100% is a game-changer for software businesses because each dollar is accretive.
It’s common for mid-market and enterprise products to have 100%+ dollar retention. Switching costs are quite high for enterprise businesses so the vendor relationships are quite sticky.
For SMB software sales, the logo churn is high and the wallets are tight, so 100% net dollar retention can be hard to reach.
In either case, you know that your product is valuable when your customers are using the product and looking to expand.
To reach 100% net revenue retention, your packaging needs to align with the value that the customer receives from using the product. The more the customer uses the product, the more value they get, the more money they will pay.
At Levelset, it took us years to find a pricing model that scale with the customers’ usage. When we finally locked in on the correct pricing model, the sales cycle shortened, the customer was happy, and the expansion revenue took off like a rocket.
In some instances, we had legacy customers that needed to move to a modern pricing structure. The problem was that they had used us for so long under an old price that didn’t scale with usage. One customer had a $5,000 per year subscription with unlimited usage. When we reached out to right-size the contract at renewal, we were going to take them from $5,000 per year to over $50,000 per year.
How did we pull that off? It starts with the relationship and by delivering strong value over years we were able to move that customer to an appropriately-sized pricing structure for their business.
This will be true for you as you scale your customer base. You will make pricing mistakes. You will strive toward 100% retention. And when you see your customers renewing at higher rates or buying more products, you will see that you have a strong fit with the market.
Customer Stories Will Fuel Your Team Culture
As your customer base grows, you will hear from your successful customers about how the product is helping them. The “raving fans” that we referenced earlier in this essay will share with you how your company has made a positive impact on their lives.
These are human stories, not product stories. So lean into those human relationships.
Put your company purpose on the wall. Share those customers' stories and case studies with the team during your all-hands meeting. Turn the customer success team into a scout team that is constantly looking for stories that you can repeat internally and externally.
When your product gains adoption, the company grows and your influence on the market grows. This is a platform for you and the team to make the impact that you want to make.
If you pay attention, you will see your team respond positively to all of those stories and examples of helping customers get better.
When the team is focused on helping customers and delivering on the purpose, the money finds a way. So make those customers’ stories come alive and you will see your team motivated to gather more and more success stories.