What is the both the earliest and best indicator that a company has a future?
Is it the napkin where a great idea is first sketched out? Is it the bank confirmation of your first paying customer?
Those are important milestones to be sure, but a powerful indicator for proof of life – and one early financial backers like to see – is evidence of your product-market fit (PMF).
The concept of PMF was first introduced by Wealthfront CEO Andy Rachleff, who wrote, “First you need to define and test your value hypothesis. And then only once proven do you move on to your growth hypothesis.” Both qualitative and quantitative indicators contribute to your assessment of how well what you want to provide will fit in the market.
One of the most common mistakes entrepreneurs make is the thinking that their PMF is the same as their commercial opportunity. Too often entrepreneurs use initial positive customer response and early adoption is equates to commercial viability. What makes these commercial assessments either misleading or incomplete is because they often do not incorporate pricing and willingness to pay. Bringing pricing into the mix, not only expands any conclusion of PMF, but stress tests core assumptions about the product, the customers and the value proposition.
Benefits of Pricing-Driven PMF Research
When pricing is integrated in the PMF validation process, the results are more robust. Pricing research discovers not only whether customers will adopt a product, but adds more real-world context by incorporating customers decision-making. In other words, what parts of the product has enough value that customers willing to pay?
There are two common disagreements with integrating pricing into PMF research – (1) the product is too early for customers to properly assess the value; and (2) we don’t know the right price to test against.
These are both fair arguments for why PMF research omits pricing, so let’s examine each.
Product is too early: Yes for many companies searching for PMF the product is early and may be far from the final product. Yes the core proposition – the why customers care – often does not see huge variations. At the very least, when pricing is brought into the discussion, customer feedback is often more honest and realistic; because you’re asking whether or not they’d pay for what they see.
But it’s not just whether or not they’d pay that’s insightful, but more for the reasons. This helps companies to assess whether what they’re building is worth continuing to build. It also helps companies to assess if the features that are currently under development should be built at all or whether other feature builds should be high priority. This can save not only time, but the precious resource (e.g. money) that would have been used on building something that did not materially increase value for the customer.
We don’t have a price to test: Not to be overly cheeky, but many companies often don’t have a well-defined price even at launch, but let’s assume for the moment that the company will go eventually through the necessary pricing process to design the right pricing structure and level.
It is fair to say that the price being tested at the PMF stage is not ‘right’, but what bring pricing forward is the opportunity to test some of the assumptions that the company will use to build future pricing such as competitor benchmarks or variable costs. This is also a safe environment to test assumptions on what will or will not increase willingness to pay. There is little downside, and far more upside.
Even if the company’s business model is built around a market share strategy where the objective is to gain as much market share to push out the competition, gain economies of scale to reduce costs or be first to market, this is again an opportunity to test how much pricing power the product has to gain the benefits of this strategy.
Many recent ‘success’ startups have gained considerable scale, insufficient pricing power amongst other factors raising considerable doubt as to whether these business model will ever be sustainable, let alone profitable.
If there is an opportunity to test your company’s business model assumptions in a real world context, do it. You may discover other potential revenue sources that can complement or replace revenue from the company’s original value proposition.
PMF for New Products Development (Pre-launch)
Do customers really want the products/services you want to sell? Are they willing to pay? These early stages of development is a great opportunity to shed light on the commercial unknowns and find direction. This means building a more structured methodology to how pricing and customer response is tested and assessed.
Like any good experiment, you’re creating hypotheses that you want to test and designing tests accordingly, rather than testing blind. This means you’re starting to explore success objectives – particularly around pricing and commercial goals – for the product. You’re asking early on what drives value in the product. What are assumptions made by the team, and what is more reflective of what customers value. Finally you’re looking identify your customers, who value the product in its current and future forms.
The goal at this stage isn’t to find absolutes but greater direction to make more informed decisions, manage the consequences of future product (read: development) and commercial (e.g. pricing, business model) decisions. This should be an on-going and iterative process, and not a one-time event. Those that stop this part of the iteration and testing process is where decisions are increasingly made blind.
PMF for Those Already in the Market (12 Months or Less)
If you have newly launched but still have not found the path to significant traction, don’t give up. Now is the time to do the research you did not have the opportunity to do earlier. It’s one step backward, but you’ll move 10 steps forward.
This research is focused on identifying your benefits and value drivers – the reason why customers will use your product, potential friction points, who these customers are and what these value drivers worth (or not). This doesn’t have to be a global research study, but it needs to be expansive enough to give you the directional guidance to make decisions on your price, your product, and your marketing. You read about some research methods we’ve recommended for your research.
PMF for Those Already in the Market (More than 1 Year)
A year or more on the market is a great accomplishment. Although estimates vary greatly, the SBA estimated that 3 out 10 business fail within 2 years, so you’ve made considerable positive strides overcoming important hurdles to get to today.
You have probably gained some traction as customers get comfortable with how the product works and feel positive about your company. After your first anniversary, turn your attention to running quick pricing sprints.
Test the strengths and weaknesses of your pricing by assessing why customers use your product as well as how much more they’re willing to pay for it. Discover that’s changed in what you knew before and what is actually happening today.
Investigate alternative strategies to monetize your product, such as changing the pricing structure, differentiating your price and offer to different customer segments, or how you handle payment arrangements.
This research has to be well structured, planned, and scheduled for periodic reviews, but the results can be extremely valuable and can set your company up with more strategic and tactical opportunities to win customers and grow.
There’s an old saying that nothing is really possible until it’s practical. The halls of invention are littered with the relics of great ideas that went nowhere. PMF is about understanding how your customers get through the day in the real world and what they consider valuable in a rapidly changing world.
You may only have a short window of monetization before your basic value proposition has to evolve and offer them something more relevant. PMF is really a business survival tool that you should master and keep close at hand as your business matures.
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