The Basics of Product Market Fit – P3

An open notebook, glasses and a camera over a map

This is the third and closing chapter of the ‘Product Market Fit – Basics’. In the first part (here) we discussed what a product market fit (PMF) is, how to identify it and why it’s important.

In the second part (here) we discussed the Lean Startup Co. framework for PMF and where we should focus our efforts when working according to it.

In this last part I’d like to offer a complementary practical approach for tracking your progress towards PMF by focusing on the customers acquisition funnel.

 

Why another framework?

I hear you. Another framework, another thing to remember. I get it. Still, as I see it – The Lean Startup Co. framework is a high level one. It’s good for the discovery phase and until you have an MVP under your hands. In real life, this is the point when things get rough. This is the point in time where your hypotheses are finally meeting reality and… things stop going according to the plan.

In order to proceed from there, I found that the Lean Startup framework doesn’t provide a detailed enough set of tools for understanding where exactly things are failing and how to get back on track.

Focusing on the customer acquisition funnel fits exactly here. It’s very helpful to pinpoint the problem and understand what you need to do in order to get back on the horse – from my experience, at least.

 

Now, if you Google for customers acquisition funnel you’ll notice that there is more than one way to skin a cat. There are many variations of such funnels and each author can provide a thoughtful explanation as for why this is the best way to model the funnel.

The fact is that most of those approaches are legit indeed. However, when it comes to PMF – I personally prefer the funnel known as the ‘Pirates Metrics’, a term coined by Dave Mc’Clure in 2008. You can view the original presentation here.

 

The Customer Acquisition Funnel (Pirates Metrics version)

In short – this funnel describes six steps grouped under the acronym of ‘AARRR’. The steps are:

  1. Acquisition
  2. Activation
  3. Retention
  4. Referral
  5. Revenue

 

Let’s go over these steps briefly:

Acquisition

This step measures your ability to get new users/customers to hear you out. Whether it means a visit to your site, a meeting with your sales representative or something similar.

You are given a chance to pitch and hopefully you won’t screw it up.

Activation

Congrats. Your pitch was a success. The prospect would like to give you a chance by trying your product. Hence, a successful completion of  this stage means potential users/customers are trying your product.

Retention

The users/customers have been trying your product for a period of time. Do they stick? Do they keep using it? Or – do they leave?

A success here means that a great majority of the people who have tried your product are still engaged with it, and the churn is low.

Referral

Is your product good enough to make your users big fans to the level where they will spread the word, act as ambassadors and help you get more users/customers?

A success here means ‘hell yes!’.

Revenues

So you got happy customers and/or happy users. That’s awesome. But do they pay you enough to make this a real business?

 

How to use this framework to observe your progress towards PMF?

I love this framework because it’s simple to understand and yet very effective.

Before I tell you how to leverage those, I will just state that I believe that the ‘referral’ step is a bonus stage as I see it. I mean – we all want to get referrals from our customers. I also believe that if the engagement on the ‘retention’ phase is high enough – then the referrals will be implicitly included. For that reason – I tend to treat this phase as another signal that the product has a strong PMF, but I’m not yet convinced that the referrals need to become a ‘thing’ (a very strong amount) in order to get to a PMF.

Leveraging this framework for achieving PMF

The product fitness matrix

Let’s take the various phases of the funnel, excluding the referrals, and put them in what I call the ‘PMF matrix’ to help us understand our current status towards PMF.

A table representing the product market fit matrix

Now, I’d carefully say that if you achieved success on all the steps up to retention (including) then you have a PMF! 

I’m saying this because at this point all the indicators mentioned on the first post about how to identify that you’ve reached a PMF (The Netpromoter score, the survey, the low churn, the pilot test, etc..) would pass successfully.

But you now must achieve success in the ‘revenues’ phase as well – because only then you have an actual business.

When you don’t achieve success

Putting the ‘revenues’ phase aside (because it’s less related to our PMF discussion) – when the data shows that things are not progressing as they should – it’s important to identify the part of the funnel which is not performing well enough.

Failure in the acquisition phase could mean several things:

  1. A marketing issue with the initial messaging. The promise you made doesn’t sound compelling enough to potential prospects and therefore they won’t even stick around to hear the full story.
  2. A technical marketing issue such as bad SEO, or a badly designed site. The result is that you won’t be getting on people’s radar.
  3. An underperforming lead generation effort. Whomever managing this is in your company – might not be doing well on that front because they lack experience or whatever.
  4. Targeting the wrong persona. The customer/user profile you’ve identified as your target market is…. Wrong. They either don’t have the pains you thought they’d have, or the pains are not big enough. This is actually an indication of a real issue. Like Seth Godin said – “Don’t find customers for your product; Find products for your customers”. Meaning – don’t fall in love with a product and then try to find people who’d want to use it. Rather look for existing pains and how to remedy them using a product which is designed specifically to solve these pains. If you fail here this is very bad, but also very good – because this is the top of the funnel, and you’re still early in your journey to redefine your product. Anyway – you’ll probably need to re-run your discovery phase.

 

Failing in the activation phase means that prospects are unwilling to properly evaluate your product or give it a true chance. However, they did like the story – since they showed up to the sales call, clicked on the lead-form, entered your app store page or whatever.

It means that you are up to something here, since the pains are probably real. Most likely you got the ‘why’ right, but something is still missing on the ‘what’. Possible reasons could be:

  1. The product is interpreted as too complicated to use
  2. The product is interpreted as something different than originally advertised (for example – advertising a free product, where only a small feature set is actually free)
  3. The migration costs from the existing solutions the customer are currently using seem to be too high compared to the value received
  4. The potential user/customer is not convinced that the product will actually deliver on its promise, once they see a demo of it.

 

There could be other reasons, of course, but whatever it is – you must first focus on properly identifying the reason, or you risk wasting your energy on fixing the wrong problem with your product.

If you are not sure what the reason is, and there is no easy way to obtain this information – run several small experiments with the sole goal of understanding where the problem is. Now it’s not about making the sale, but rather understanding why it fails. If you are in B2B – a tool like Gong might be helpful. But anyway – stay focused on pinpointing the problem even at the expense of reduced sales for the time being.

 

Failing in the retention phase means that your story was great, and the demo of the product was great as well – but once your users are actually using your product – they don’t like it.

A failure here will be reflected by high churn rates, low number of active users or whatever engagement metrics you decided to use for your product. This is the place to note that it’s important that you’ll agree on these metrics in advance with all the relevant stakeholders. Otherwise, you are risking that your subconscious or other stakeholders will decide to focus on the metrics that are actually performing well, and not the ones that you actually need to watch.. 

Anyway – once a retention problem is identified it needs to be treated, of course. But again – identifying the exact aspect of the product which is failing may be easier said than done. Things that can help you:

  1. Embedding tons of analytics and in-app events in your code to make sure all the user journeys are properly documented and can be easily queried and visualized for analysis. Ideally, this would have been done prior to launch… but from my experience – it’s often overlooked or lacking.
  2. Since the data can’t tell you why the users or the customers are not using the product often enough, the in-app events you embedded in your product may not be enough. There is usually no escape from interviewing customers and actual users. I recommend reading my series on how to interview like a pro, starting with this post.
  3. If you’d like a more quantitative approach to complement your interviews – consider sending a questionnaire to your current users/customers using Google Forms, or something similar. If you have a huge amount of users (when you are B2C, for instance) – then it may be more challenging. Consider sending to a highly targeted segment in this case.
  4. First impressions matter a lot. Consider recording your users when it’s the first time they are using your product. I’ve done it myself several times – and I tell you – it’s gold! You wouldn’t imagine how big are the gaps from how you envisioned users interacting with your product to how they actually do… Anyway – I recommend being present on this first interaction when possible, but regardless, there are tools out there that can record live interaction and archive it for you for later analysis, and of course it doesn’t have to be the first impression, though the first interactions hold a unique value which is hard to extract later.

 

By going through all these steps you should have a much better understanding as for what needs to be fixed in your product. Fix it and watch the analytics and whether they improve. If you don’t – it could indicate more than one problem, or that your fix didn’t treat the actual problem. Be agile – iterate fast & release.

 

And… we’re done! (well, for now..)

Those were the basics. If it sounds like it’s not an easy journey – you are correct. It’s not. Yes, as I’ve noted before, I know companies which have nailed PMF on their first release – but this is more of a luck & intuition and super rare. Most companies will need to iterate quite a while before they nail this.

 

One last word of warning – don’t focus on growth before you nail PMF. This deserves a post of its own, and I’ll probably do one in the future, but I wanted to put it here for the time being because it’s a common mistake. Focusing on growth or burning big marketing budgets for getting mass of users to try your product before you are positive you have a PMF is very risky, as your company may burn all this money & time in vain. If your product is not tuned for high engagement and satisfaction – the users & customers you worked so hard to bring on board – will leave…

 

That wraps up the post for today and closes down this series.

If you found this post/series useful – feel free to let me know in the comments. If you think others can benefit from it – feel free to share it with them.

 

Thank you, and until next time 🙂

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