Success for startups and the venture community is all about execution. However, a key factor that drives success of startups even before execution gets critical is Product Market Fit; a key milestone to reach before one scales a company. So, how does one recognize when there is a fit and how to calibrate for this fit?
Following are five key factors of Product-Market fit that I gleaned from my conversations with Payal Kadakia, Co-Founder and CEO of ClassPass, and Josh Elman, partner at Greylock Partners. Note that these conversations are in context of consumer products but some of this should also apply to business oriented products.
- Repeated use – An early sign of your product achieving its market fit is when customers use the product repeatedly and organically, without prompting and marketing. As Josh says “What we really look at are cohorts of people who’ve started using the product some months ago and continue using it. And we like months. It doesn’t need to be a year but it shouldn’t be two weeks either.” Payal had a very interesting experience with deciding which repeated use was the actual PMF she was seeking. She said, “The first incarnation of ClassPass was Classivity, a booking engine like ZocDoc or OpenTable. When we first launched this, I knew it wasn’t working when people weren’t going to the class - that was my first signal something is wrong. Then, we pivoted and became more of a discovery product that was called Passport - it was a one month freedom trial pass of all the different studios in your local area. And that was a great product in the sense people started using it. They were going to class – in fact, they loved that first month so much that we actually had people buy the product over again with different email addresses, as the trial was limited to a month. That’s when I knew that a service like this could work.”
- Organic and Viral Growth – Organic growth and virality are early signs of products that have a good market fit. The product needs to be compelling enough to drive people to discover or distribute the product virally (through word-of-mouth or other means). Marketing can help magnify the growth but marketing-driven growth alone doesn’t substantiate product-market fit. ClassPass saw explosive growth in its early phases with very little marketing, which convinced the team to pivot to a subscription model, even though they had invested months of time and money in Classtivity. As Payal said, “We saw over 100% month over month growth - we had 35 users in June and had already 1000 in January. The growth was mostly organic and viral. Although we did promotions, one thing we didn’t do is discount the product. Our promotions were of the nature ‘buy ClassPass and we’ll send you a $100 gift card.’” As Josh points out, “You can spend on marketing to amplify the growth. However, organic growth means there is some growth vector where even if you stop doing that it would keep on growing at some level. And if we see great cohort retention and some vectors of why people are coming in, we tend to get excited. And if we don’t see those we get nervous and try to understand why not.”
- Implicit vs. Explicit Need – A key theme of most successful products is that customers rarely explicitly ask for the product or even express the need. As Josh explained, “A good example of this is Snapchat, where consumers didn’t look for or ask for “disappearing photos”. However, they were looking for ways to be more connected to their friends and share more moments and be more part of each other’s lives even though we’re not there; and Snapchat was able to build an ephemeral photo product that delivered on that.” In Payal's experience, customers showed love for the earlier product by continuing to sign-up under different email addresses. According to her, no one explicitly said give me a package of classes that I can use at different gyms but people did send in testimonials about how the one month free at different gyms was already changing their lives. A survey of the user base revealed 95% of the users would pay to get back to the studios – thus providing the insight and confirmation for the final pivot.
- Timing – The best products are reactions to what’s happening right now in the world and leveraging the technology in front of us. As Josh said “Musical.ly had a good response in today’s context where everybody’s already captured their lives on camera to show off what they’re doing via social media, but not having fun anymore doing so. Musical.ly was able to tap into that and the ubiquity of phones, and forward thinking record labels (which wasn’t the case a few years ago). None of these factors would have applied 5 years ago, and the same product wouldn’t have done well then.”
- Staying Lean and Nimble – Finding the product-market fit can take a pivot or two, therefore it is important to stay lean and nimble and responsive to signals you get from the market. One doesn’t want to build a large team because it’s expensive and worse, counter-productive. As Josh says “The bigger your team, the less flexible it becomes because people start doing their things. You have to be agile and willing to try new things - try radical new things. Sometimes you pivot the company but I think that’s the extreme form. I think most companies that do a really good job finding product market fit still have the same North Star.” Payal had similar advice – “I think what’s really important is making sure you’re OK with failing and I think I surrounded myself with the right team, the right advisors, the right investors who gave me that freedom to fail but then move forward. Because I think so many people get caught up in “Oh we spent money building this product. Why aren’t we spending more money building something else?” But they trusted my instinct. And we had cash in the bank to experiment.”
To Summarize the keys to product-market-fit, 1) look for repeated and organic use with little to no marketing effort, 2) look for organic growth resulting from viral distribution, 3) look for the implicit behaviors that may be driving stickiness (& test for monetization), 4) ensure technology fits market trends to make it compelling & easier to adopt your product, and 5) stay lean to have more shots at the goal of achieving your market fit (you'll know it when you've reached it).
Last but not least, I am also reminded of a quote by legendary UCLA basketball coach John Wooden: "Failure isn't fatal, but failure to change might be." In that spirit and in quest of product market fit, keep these factors in mind and as Payal suggests, have permission to fail, but don’t fail to change.
Disclaimer: BluePointe Ventures is an investor in ClassPass. Information contained here is for information use only and is not a solicitation for services.
