A common challenge for SaaS startups is finding Product Market Fit. Although it’s a widely discussed topic, I don’t see many sources that provide a step by step process on how to go achieve it. In this post I’m going to present the 5 steps you need to take to reach product market fit.
This post is based on a talk given John Ndege (founder of Pocket Risk) who presented his startup journey at a SaaS meetup I attended at London’s Rainmaking Loft in 2015. John learnt the PMF process whilst working at Facebook and he was inspired. He left his secure job at Facebook and decided to implement this PMF process in his own startup. John demonstrated this process works and built a modest SaaS business in the meantime. Here are the 5 steps to achieving product market fit.
1. Problem Identification
This task is fundamental to a start up, identifying an addressable problem that you can attempt to solve. The main challenge here is finding a problem big enough that people are willing to pay you to solve. Also part of this challenge is identifying a market with a large enough audience that you can scale sufficiently once you have developed your product. During development phase, it’s advantageous if you can find a bunch of potential customers that will collaborate with you whilst you develop it.
John spoke with 26 financial advisors, 18 said they had a problems analysing risk, 6 helped him design an MVP and 9 paid him £300 to access the service once it launched.
Here’s how John approached the problem selection phase, he began by contacting people in different industries to ask them about their challenges. The key difference here is that John was actually speaking with people on the telephone and in meetings. This enabled him to quickly identify if the problem had potential. He spoke with plumbers but found that they are not prolific tech adopters and it would be difficult to persuade them to use an app. He tried speaking with lawyers and accountants, but didn’t identify a problem he could solve for them. Then finally, he spoke with financial advisors and they explained to him that they had problems identifying risk in the investments they made. A-ha, John had the inkling of a problem he could go about solving.
2. Establish Your Market Size
John’s next challenge was that his ideal customer market size was too small. How you identify this may depend on your goals for your company, but fundamentally your market size needs to be large enough to enable you to foresee profitability for your enterprise. In John’s case, the UK alone did not seem large enough to build a scale towards profit, so he began targeting US customers. After making the necessary adjustments to sell beyond the UK and some social media activity, Pocket Risk found some US customers. Targeting a global market, Pocket Risk now had a feasible market size.
Ensure your ideal customer market is large enough. The key here is that the audience should consist of your ideal customers, not the total number of potential customers in the market you serve.
If you’re not sure who you’re ideal customer is, you need to get clearer and more focussed on this. Once you know you’re ideal customer, how many do you need to make your business profitable? Run the metrics. If you find there aren’t enough to scale sufficiently, start exploring options to enlarge or broaden your target audience. If you seriously struggle here, it may be time to assess the feasibility of your proposition.
3. Product Validation
Pocket Risk validated it’s concept early on by finding 9 customers who were willing to pay in advance to build the product. This is a great way to quality the interest in your proposition and justify the work you’ll need to do to get your product built. But do these early stakeholders represent future customers? Not really, because they represent a small group of potential customers who are willing to be a part of the problem solving journey. They are pre-early adopters who represent a small proportion of your initial customers and join with a different set of circumstances to that of a cohort of mature customers.
That said, at this stage you’ll need to validate your proposition again. Now that you have the product built, will ideal customers buy? For Pocket Risk, John was able to prove that new customers would buy his product, a second validation phase, if you like.
Each cohort of your customers may have purchased for a different reason. When you’re developing your product, ensure to validate each group of customers you target. From the early adopters right through to mature customers, you need to qualify if your ideal customers will buy and why. Each customer type has different circumstances influencing their buying decision.
4. Ensure User Acquisition is Repeatable & Profitable
If you launch and new customers are buying, you’ll find that you may have a new set of challenges. You’ll want to ensure you build a repeatable and profitable model for customer acquisition. You might not know a typical customer lifetime value (LTV) so you may be wondering how much you can spend per new user acquisition. But what you can do is hypothesise, test and work on getting new customer acquisition cost as low as possible. By setting budgets and projecting estimated LTV forecasts you can develop a framework for monitoring and assessing marketing spend.
On the journey to product market fit a repeatable and profitable method for new user acquisition is the difference between product failure and success. During a product lifespan affordable methods of user acquisition may change, so you need to repeatedly test, measure and optimise your route to market to ensure your business maintains profitability.
John found that industry publications were responsible for a third of Pocket Risk’s new customer acquisition. Cold email (based on the methods outlined in Predictable Revenue), webinars, partnerships and integrations all contributed to the channels that enabled a Pocket Risk to achieve a repeatable and profitable system for new user acquisition.
5. Optimise Your Processes
Now you’re in a position to scale. But you might find some gaps in your onboarding process and business operations. Firstly, you’ll want to analyse the conversion ratio for your customers. How many of your free trials convert to paying customers? This is a great metric to measure and will have a significant impact on your user acquisition cost.
A qualifier of Product Market Fit is a high free trial to paid conversion ratio. If a high number of prospects convert to paid customers it’s proof that your proposition is of value to your market. If your user acquisition cost is lower than your customer LTV you have scalable PMF.
John’s focus here was to understand customers implicitly. In the second year of Pocket Risk he spoke to 354 customers and learned ‘why they buy, why they don’t buy, why they use it, why they don’t use it, and why they churn’. These are incredibly valuable insights. Armed with this knowledge, John was able to rectify customer problems and optimise their user experience to increase conversion, engagement and utilisation. At this stage Pocket Risk was still lacking an onboarding process, but the insights here enable John to build one that proved effective.
In conclusion John Ndege shared some of his learning outcomes during his 3 year process building Pocket Risk, ‘If I did it again, what would I do differently next time?’
- Greater focus on market sizing and segmentation early on
- Look for more effective repeatable profitable customer acquisition channels
- Find a technical cofounder (although John stated the benefits of giving customers what they wanted without building new features)
- John explained how he enjoyed speaking with his target market but he emphasised the importance of founder market fit
- Appreciate the time required, it took John two years before he even felt that Pocket Risk was ‘going anywhere’