Do people need your offering? This is the most important question you must ask yourself as an early-stage startup founder. If the answer is no – then long-term success is almost impossible. If the answer is yes, then growing your business feels like swimming with the current.
Finding out if you are on the right track to product-market fit is where you should concentrate your efforts in the early stages of your startup project – the validation phase.
Of course, understanding if you have PMF or not is harder than it seems. A lot of the time you would be receiving mixed signals from the market, which means that it is a crucial skill to be able to differentiate between proper signals and noise and even to weigh the importance of the different signals appropriately.
In this article we’ll give you a couple of tips on how to do that:
1. Growing Customer Base
Naturally, the biggest indicator that you are providing something valuable to customers is traction – growth in your customer base. If your current customers are bringing in new customers (this is called a high net promoter score – NPS), this is an extremely strong indicator that you are very close to PMF.
If your customers aren’t bringing in new ones this might be a bad sign, but it also might be expected for your offering or industry. Some products and services are much more conducive to a high NPS compared to others, so in many cases, you need to invest in active promotional and sales efforts to see a growing customer base.
2. Low Customer Acquisition Costs (CAC)
If you are investing in promotional campaigns, it’s vital to evaluate how much effort and resources it costs you to bring in new customers. Unless your barrier to entry is naturally high, then having PMF in addition to competitive advantages compared to other similar offerings should help you bring in new customers for a lower price compared to the industry standard.
3. High Customer Retention and Repeat Business
Keep in mind that it might be possible to brute-force a growing customer base – either through big marketing spending or through great sales skills. Moreover, if you are offering something innovative, you might be able to bring in new business because people are willing to give your innovation a try at least once. This is why the growth metric could be deceptive by itself. You need to combine it with retention.
Are the customers you are bringing in staying? If so – this is a great signal, it means they are deriving value from your product. If not – this is one of the strongest signals indicating lack of PMF.
If this is the case, make sure to interview your leaving customers in order to gain a deep and detailed understanding of their reasons for leaving. This feedback would be invaluable for making the most crucial changes in order to iterate your offering and move closer to PMF.
4. Growing Revenue
Of course, you need to find strong signals that people are willing to pay money for your offering. It is possible to give people something they want but to be unable to provide it for a price they are willing to pay.
While you can survive this problem by burning investor funds, this is a situation you need to fix as soon as possible. If your offering isn’t economically viable, then your project wouldn’t be able to turn into a self-sustaining business.
5. Positive Customer Feedback
We already mentioned the importance of customer feedback related to customer retention, but it is worth keeping it in mind in other contexts as well. Direct customer feedback is crucial in the early stages because quantitative metrics can indicate with a high degree of certainty if there is a problem, but they don’t give you a good idea of what should be done to improve the situation. Talking to your customers is the best way to get a realistic idea of what you should do to move closer to PMF.
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