Finding the right Product/Market fit is maybe the most important differentiator between success and failure of a new software company or product. Yet even though this software product/market fit should be obvious, it is often glossed over in the excitement of a new enterprise. Why is this? In some cases, people don’t really want to know that they don’t really have it nailed!
That sounds ridiculous, but think about it for a second. You’ve come up with this idea that YOU think is great, and have been become very excited about the possibility of creating an all new product and maybe even a new company. The beginning of this journey is VERY exciting and whether you want to admit it or not, the thought of major $$$$ signs may be flowing through your mind – which can cloud anyone’s objectivity.
In addition, many founders may not be product marketers by profession, and are more excited about working on the technical aspects of the new software product; digging into a market segment to verify that there is a great product/market fit may not be nearly as appealing. These two scenarios, along with a number of others can unfortunately serve as “blinders” to the lack alignment of the product and target market.
I’ve seen many companies plan SaaS, mobile and traditional on-premise software products in great detail upfront with very little market input. Technically-driven organizations are often prone to this approach. This can work fine if they are essentially “the customer” themselves (next bench marketing). But in virtually every other case this approach dramatically increases the chance of failure.
The truth is, it’s very hard to plan a product properly from a “clean sheet of paper”. You’re going to get a lot wrong, even if you solicit early customer input. Customers usually aren’t great at telling you what they need – until they are actually able to see it! So even a good effort at pre-product market research can often yield misleading results. But this isn’t an excuse not to do it at all! Pre-product research will generally will get you closer to the right answer. If you’re skilled at it, you can at least uncover customer problems you weren’t aware of, even if not be able to fully ascertain the perfect solution at this early stage.
So the most realistic path to success, imo, is to spend your early time uncovering PROBLEMS that have been left unaddressed by other vendors in the market segment. Then try to solve one of these problems with a minimum viable product (MVP) to get “in the door” of your market segment as quickly as possible. Then listen to those early adopter prospects and customers, as they will inform on the perfect software product/market fit which you can use to polish product releases v2, v3 and v4. This is a particularly viable strategy with modern software businesses, especially SaaS. While there is still a significant amount of “art” to software development, when compared to the “bad old days” the speed and cost of software development has gone down significantly. Using a SaaS model you can make centralized, instantaneous changes to the product for all customers, which works well with the approach of creating an MVP and then iterating toward the market segment’s ideal product (although beware the “SaaS Development Gone Wild” scenario).
A real life example of software product/market fit
An example of this “MVP first” approach comes from my own career, when I joined a $50M defense services company to start up and lead a new data center software product division. This was to be a diversification of the company’s free cash flow, into what was hoped to be a business yielding higher valuation from investors and potential acquirers. It was also to be both the first commercial (non-defense) and product activity within the company, adding to the risk and uncertainty of the project.
Because this was a new effort and quite different than the company’s core business, there was quite a bit of nervousness around devoting a large percentage of the company’s free cash flow toward such a new business that was not well understood by the company principals. As a result, we didn’t quite have the resources at our disposal to create a “great” v1 of our software.
Essentially what happened is that we ended up creating an MVP “by accident”; it didn’t sell nearly as well as we’d hoped, but validated that we were solving a real problem and had a large market opportunity if we could produce the right product definition and execution. Using the knowledge gained while marketing v1, sales quadrupled with our improved v2 release and quadrupled again with our highly acclaimed v3 release. At that point we became profitable and were “off to the races”. What had seemed VERY hard in the beginning with v1 began to feel very easy with v3. It was because we had found the right product/market fit!
I could rewrite history and extol our startup brilliance, but we didn’t follow a set process to create just an MVP initially on purpose – it was because we were resource constrained and under a lot of pressure to get to market as soon as possible, because of political pressures within the parent company. But in hindsight it fit with the process of “find a problem and create an MVP as soon as possible” very well.
Of course if you can get it right the first time all the better. But it’s hard without a “real” product in the market to obtain perfect market feedback. So my message is find a market segment with a significant unsolved problem and go to work, getting your MVP to market as soon as possible.
Another real life example of the wrong approach
The other important message in this area is how critical it is to avoid believing you’ve achieved a winning software product/market fit – before you actually have. Many startups believe they have found a product/market fit too soon and start to scale based upon this. An example of this problem was a company which a VC I know introduced me to a while back. They were also in the data center software business and the CEO asked to have lunch to discuss his business model. A very smart guy, but from a technical background. I believe that they had around 7 customers at that time, all of which were of the “brand name” variety. But regardless of the stature of the customer, not even double digit customers yet. All of the sales had been made with heavy involvement by the CEO and senior product developers. Yet at our lunch the CEO stated that they had just hired a “rockstar” VP marketing and that they were in the process of scaling their sales force. This was not advisable as they clearly hadn’t established a repeatable sales & marketing process and almost certainly didn’t yet have a winning software product/market fit. I’m not in close contact with them so I don’t know the details, but the VC later told me that the company had adopted an Open Source business model – and apparently not for the right reasons, but as the “business model of last resort”. This is a cautionary tale of the hazards of scaling before a software product/market fit is achieved.
The “perfect” product/market fit isn’t universally the same for all
Marc Andreeson in his legendary post on this topic opined that the most important thing for a VC is MARKET, not product or people. I admire him taking a stand and trying to provide a simple answer. For his purposes – trying to build huge, unbelievably successful “hit” companies even if there are a lot of failures in the portfolio this makes a lot of sense. But a great market also usually attracts BRUTAL competition. So unless you know you’re going to get funded with $100M to attempt to reach Unicorn status, trying to find the absolute biggest/best market may not be the best advice to follow. His post also makes a big deal of stating that you know you’ve reach software product/market fit when you’re seeing OVERWHELMING demand for the product and that’s when you can REALLY start to scale. But I see “overwhelming demand” as a trailing indicator of Product/Market fit in the software business.
Again, that may be a great approach if you have essentially unlimited resources. But I believe that if you wait until you almost can’t fulfill demand to decide that you have a great product/market fit, that may be too late for most SaaS or mobile software companies to decide when to deploy a “scale-out” level of resources. If you wait too long and you’re more of a “long-shot” contender in your segment, you may miss your window of opportunity. So it’s important to find leading indicators of traction, not trailing.
So what represents a great product/market fit isn’t universal, but more nuanced depending upon your particular situation.
Leading indicators of software product/market fit
- If your model is sales-intensive, your regular sales folks are able sell the product as currently constituted
- Your sales cycles are starting to shorten
- Word of mouth marketing is really starting to pick up via your customers and prospects
- Vertical publications in your market segment are providing positive articles on your product
- You begin to get a lot more inquiries from channel partners and prospects outside of our current geographic/vertical marketing focus.
- A broad segment of your marketing programs are starting to show increased results, without any changes to the campaigns themselves.
- Your marketing programs are now converting at a rate which will grow the business fast without more than “light” sales intervention – if your model is marketing driven
- In general, things seem to be “getting easier”
Bullet point #8 is the clincher for me when it comes to validating whether or not you’ve reached a software product/market fit that will enable success. In my experience, once you’ve found a good product/market fit, doing business every day seems to transition from one analogy of “pulling teeth” to one of making sales “like a knife through butter”. Obviously this isn’t an objective/quantifiable measure of traction, but I really believe that you will know it when you see it. You will actually FEEL it.
I recommend using the list above as a rough guide when you are considering the very important question of when to begin to scale. Once you can recognize at least a majority of these milestones on this list, then and only then should you put the pedal to the medal on scaling your sales force and marketing efforts.
That’s a summary of my thoughts on the importance of software product/market fit for a SaaS or mobile software product or startup. Find a big problem, create an MVP to enable real market research, don’t delude yourself into thinking you’ve got a software product/market fit prematurely and don’t scale until you actually do. Use the list of bullet points above to gauge whether or not you’re there yet. What have I left out, or what don’t you agree with? Post your own comments on this important topic below.
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