Week 4 - Myths of Product-Market Fit

What we know for sure and ain't so kills us!

Before we start with today’s newsletter, quick announcement : As a part of the GC series, I would conduct an online session - All Things Product-Market Fit at 11 am Sunday, May 31st. The session would start with a quick summary of PMF (<15 mins) and focus heavily on case studies and QnA.

You can register here for the same. [100 attendees only]

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Off to the topic at hand,

Myths can be dangerous, especially when it determines whether you will succeed or fail in an endeavour where you are putting 8-12 hours a day. As they put it at the beginning of the movie “The Big Short”, a movie around market crash of 2008.

These myths exist during different phases of product lifecycle. Let’s start at the beginning. At the end of every myth, I have listed ways to tackle that.

Myth #1: A strong team will create a product that will work

We have been raised to believe that if we work really hard (that is the right way), nothing is impossible. Like all make-believe quotes, this one also comes with a caveat - the thing you are working hard on should be the right thing. We often miss the caveat.

In the context of product development, the right thing is the market.

In his post The only thing that matters”, Marc Andreessen wrote

The market needs to be fulfilled and the market will be fulfilled, by the first viable product that comes along.

The product doesn't need to be great; it just has to basically work. And, the market doesn't care how good the team is, as long as the team can produce that viable product.

And when you have a great market, the team is remarkably easy to upgrade on the fly.

Conversely, in a terrible market, you can have the best product in the world and an absolutely killer team, and it doesn't matter -- you're going to fail.

In 1999, the online grocery delivery startup, Webvan, went to IPO at a valuation of $ 4.8 Billion. The value proposition was that users didn’t need to walk to brick-and-mortar grocery stores. They could place an order via website and got it delivered to their homes. 2 years later, the company shut down in June 2001, filing bankruptcy and laying off 2,000 employees.

In 2012, a former Amazon employee Apoorva Mehta started a similar grocery delivery and pick-up service called Instacart. By 2018, the company was doing $3 B in grocery orders and in the most recent funding round, it got valued at ~$8 B.

The key difference between the two isn’t the core product or the team, but the market at the time of launch. Thanks to the rise of smartphones and online payments, online ordering, tracking and delivery of grocery became 10-100x more convenient to the end users. The masses have now come to internet thanks to the smartphones, making the unit economics of many such business models viable.

Another compounding reason was Webvan decided to build out its own infrastructure (including warehouses across the country and a nation-wide fleet of vans). Instacart leverages the “sharing economy” that companies like Uber and Task Rabbit have popularised rather than building its own infrastructure.

As you can see, a strong team with a good product in two different markets mean two entirely different outcomes.

How do you tackle this?

This one is the hardest one to tackle. The framework that I find most effective is Jobs-to-be-done (JTBD). Dr. Clay Christensen, a HBS professor wrote about JTBD in his book ‘Competing Against Luck’.

The secret to winning the innovation game lies in understanding what causes customers to make choices that help them achieve progress on something they are struggling with in their lives. To get to the right answers, executives should be asking: What job would consumers want to hire a product to do? When we buy a product, we essentially ‘hire’ something to get a job done

Dr Christensen is famous for the book ‘The Innovators Dilemma’ and was revered by CEOs like Steve Jobs and Andy Grove. Oh, but what does it have to do with how good a market is?

It’s hard to evaluate a market in terms of the exact function that your MVP does. But if you look from the lens of JTBD, you can find whether there is a market need for the job your product is trying to do.

A large # of people were using horses to move faster when Henry Ford built the car. It was a big market.

A large # of people were carrying CD players around to listen to music before iPod and smartphones. They were downloading songs from internet before Spotify and Saavn.

A large # of people always showed pictures of vacation and awesome things they did with such enthusiasm that it created headache for the guests, before Instagram.

A large # of people in India in Metro and Tier 1 used to go out every week to eat food outside with their family/friend. Bachelors ate junk food which didn’t require effort at home, before Swiggy and Zomato came.

This framework should be followed by a simple question - “how effectively can your product get the job done?”. For example, IRCTC is way effective compared to going to ticket counters and so it works very well. If the answer to this question isn’t ‘much better or effective’, it will be hard to ask users to shift their behaviour.

Myth #2: Getting PMF means you can start scaling to dominate the whole market

“Our CAC:LTV ratio is looking good at 1:3, we should start scaling fast next month”, said the CEO.

The marketing spend got revised to 2x of the current spend, along with the revenue targets. After a month when they visited the numbers again, the ratio still looked good but different; at 1:2. The marketing spend had increased by 200%, but the revenue had only grown by 33%. Needless to say, the fast and furious companies crash and burn in real life!.

It’s a true story and I have seen it happen multiple times. Often we fail to realise that we can get good numbers in a particular segment of our market but when we try to scale it up by including other segments of the same market, it doesn’t work. That’s why, Facebook and Google built age, gender and demographics based ad targeting capabilities. They know that what might work for one particular group might not work for others.

So how do you tackle this? Let’s start with two things in mind.

  1. You need to focus on a segment of the market at the start to be effective. This is where SATISFY framework from the last post can help you in identifying the segment to focus on.

  2. In a big market there are distinct segments that have their own needs requiring unique solutions. You have to start building for one specific group, and then you can move to the next adjacent one where least amount of effort is required.

Few pointers to understand based on quantitative data:

  1. Keep a track of marginal ROI of your difference marketing channels MoM basis. The channels, say FB, with higher ROI means your TG is present on that particular platform. If the ROI of a particular channel has started dipping, it’s time to investigate what happened. It could happen either because the consumer behaviour is shifting, or you are scaling too fast.

  2. Segment your data on age, gender, device (device can be used as a proxy for socio- economic state) to see if the acquisition costs and retention for certain segments from a channel are higher than others. This will help you understand what age, gender and socio-economic groups your customers belong to.

The key takeaway is that PMF is usually present for a narrow segment within a larger market. Trying to serve everyone in a market – or assuming your fit is transferable – will lead you to build products that eventually fail.

Myth #3: I shouldn’t build a product in a market that has another company with PMF.

Unless you are building a product that creates a new market, you will have to compete with another product in any existing market. While analysing the market, we often feel that if there is a product getting the job done, we should look at another market.

However, you will find big companies in the same market getting the same job done, especially for enterprise software. For example in email marketing, there are multiple billion dollar valuation products:

  • Marketo : built for marketing automation of large companies

  • HubSpot : mid-size businesses

  • Mailchimp : SMB

These products have been successful in serving to unique needs of different segments.

So, how to tackle this?

Understand the value chain of different products and do a structural analysis of the industry through Porter five forces. This can help you find the positioning and GTM of your product. This is the topic of next month newsletter.

Myth #4: PMF is a moat.

Markets are constantly changing especially in consumer tech because the cost of software production isn’t that high. A key example in recent times is Skype.

Skype was heavily used as a video chat app. Skype had become so big that in 2011 The Onion joked that “Skype” would be added to the dictionary. Three years later, the verb was added to the Oxford English Dictionary, highlighting how popular the service had become. By 2015, it had 300 million monthly active users. No doubt Skype had a strong PMF.

Come March 2020, despite a surge in video calls due to Covid-19, this number is less than 100 million monthly active users. So what happened?

Well, the market changed from a pc to a smartphone majority.

Microsoft, the parent company of Skype, knew this and made some changes. The problem was that the changes weren’t made in the right direction. In 2017, it tried to create Snapchat out of Skype. A year later, they redesigned it again and tried to kill the snapchat feature. If only, they had created a simple video chat app that works like Zoom.

So, how do you tackle this?

Keep listening to the customers is the best way to avoid losing PMF. You should do a user research every quarter and analyse it to understand if things have changed compared to the last report.

Brian Balfour, former VP of Growth at HubSpot, sums this up nicely:

“Fortunately for startups, large companies lose sight of this never ending process (PMF). They either don’t move with the market, or as they expand their target audience, they assume product market fit and end up pushing a product that ultimately fails. This creates an opportunity for disruption and startups.”

History supports this. Remember Blockbuster?

Unfortunately, big tech companies of our era like Google and Facebook realise this more than anybody, and that is why they have built huge research groups and are on constant lookout to invest and buy products that can threaten their moat.

The key takeaway is that product market fit is not a moat. It is a moving target, because both the customer expectations and markets are continuously changing.

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I conducted a survey in the last newsletter using the SATISFY framework mentioned in the same.

It’s too early to share the results as I don’t have enough responses to reach the required sample size, i.e. in 100s. However, the early responses always give a sense of direction.

Makes me happy to share that 13 of 15 respondents (85%) said they would be ‘very disappointed’ if they could no longer receive Growth Catalyst (GC) newsletter every week :)

My focus for now stays at the last question

How can we improve GC newsletter for you?

Most of the responses to this question have one of the two things

  1. Adding real-world examples/case studies

  2. Adding specific assignments for readers to practice what they just learnt.

I have tried act immediately on the 1st one in this post. I would research more about the second one before adding it.

Keep me honest by sharing your feedback HERE.

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Take care,

Deepak