RVNU #004: Achieving Product Market Fit
AI Audio Discussion of this Newsletter:
Introduction:
At RVNU, we understand that after achieving Idea Market Fit (IMF), the next critical milestone in the growth of a startup is Product Market Fit (PMF). This is the phase where your product moves beyond the initial idea and begins to resonate with real customers. It’s no longer just a concept or a prototype—it’s something that people are willing to pay for because it solves a meaningful problem in their lives or businesses.
The Product Market Fit phase is where the rubber meets the road. It’s about validating that there’s a substantial demand for your product and that it delivers real value to your target market. This phase is crucial for setting the foundation for scalable growth and ultimately achieving sustainable revenue.
There are many definitions out there for PMF, but most of the scientific ones are related to B2C. We’ve stress tested our definition in B2B SaaS dating back 20 years. Crucially it combines both product and go-to-market characteristics.
In this article, we’ll explore:
Concise definitions of the stages within the PMF phase, including exit criteria.
Common anti-patterns that this framework prevents.
1. First Client Acquisition
• Definition: The first stage of Product Market Fit is all about getting your first paying customers. This isn’t just about making a sale; it’s about finding customers who align with your ideal customer profile and who genuinely see the value in what you’re offering. Early adopters are crucial because they provide the first real-world validation of your product. At this stage, your goal is to convert prospects who are willing to take a chance on your product and can provide critical feedback.
• Wayne’s take: “There’s debate about whether these early adopters should be ‘friendlies’ from the founder network, but that misses the point. What’s key is that no matter where these customers come from they must meet the ideal customer profile in order for the startup to provision the value exchange initial hypothesized. Anything short of that and they are vanity customers and vanity revenue guaranteed to churn”
• Exit criteria: Successfully acquiring the first few paying customers who match your ideal customer profile and are willing to provide constructive feedback. These customers should also be willing to discuss their positive experiences, which can be leveraged for future sales.
• Anti-patterns: Focusing on any sale rather than the right sale. Early customers should not just be anyone who will pay—they need to align with your vision and provide valuable insights. Chasing short-term revenue at the expense of long-term fit can lead to misalignment and product issues down the road.
2. Proof of Adoption and Usage
• Definition: Once you have your first customers, the next step is to ensure they are actually using the product and finding value in it. This is where you move from selling to sustaining. Monitor how these customers are engaging with your product, gather data on their usage patterns, and look for signs that they are integrating it into their daily operations. It’s not just about having customers; it’s about having engaged customers who rely on your product to solve real problems.
• Wayne’s take: “I’ve done cohort analysis of startups where I discovered that 90%+ of users had never logged in, which presented a multi-million $ churn risk to the startup. That might sound extreme, but trust me, it’s not. Go a level deeper and even with strong login data you‘ll discover the users of the tool are not the folks who have the heaviest influence over a renewal or expansion. Go one more level of depth and you’ll discover no-one is using the high value features that justify the investment. These are all major red flags that in my experience many founders miss and fail to control, especially in enterprise B2B SaaS.”
• Exit criteria: Demonstrable evidence that early customers are regularly using the product and deriving value from it. Key metrics might include daily or weekly active users, retention rates, and frequency of usage for core features.
• Anti-patterns: Mistaking sales for success. Just because someone buys your product doesn’t mean they’ll use it. Without solid usage data, you may find yourself with a product that’s selling but not sticking, leading to high churn rates and a lack of sustainable growth.
3. Proof of Value Exchange
• Definition: The third stage is proving that your product delivers measurable value that justifies its cost. It’s not enough that customers are using your product; they need to believe they are getting a return on their investment. This is where you work closely with your customers to quantify the benefits they’re experiencing—whether that’s saving time, reducing costs, increasing revenue, or any other tangible outcome.
• Wayne’s take: “In one of our early client engagements at Guidebook, we worked hand-in-hand with the customer to quantify the savings and efficiency gains they achieved using our software. That data didn’t just validate our pricing; it became a powerful case study that helped us close future deals. It’s one thing to say your product delivers value, but it’s another to show it in black and white.
Here’s a link to the case study”
• Exit criteria: Clear, quantifiable evidence that your product is delivering value that exceeds its cost. This could be in the form of case studies, customer testimonials, or data showing improved metrics in areas that matter to your customers.
• Anti-patterns: Failing to quantify the value your product delivers. If customers don’t see a clear ROI, they may be reluctant to renew or recommend your product, even if they’re using it regularly.
4. Realization of Value (in Fair Contracts)
• Definition: The final stage of achieving Product Market Fit is ensuring that the value you’re providing is reflected in fair and sustainable contracts. This means negotiating agreements that not only cover your costs and provide a profit but also align with the value your customers are receiving. It’s about finding the right pricing model that works for both you and your customers—whether that’s subscription-based, usage-based, or another model.
• Wayne’s take: “In our early contracts at Maxymiser, we were flexible but firm. We knew what our product was worth, but we also understood the need to adapt our pricing to the realities of our customers’ budgets - especially as initially this was unbudgeted spend.
I recall a low cost airline wanted to work with us to make the business case for a long term agreement. So we agreed a price that would fit within their budgets for a limited time. In return they would help quantify the value exchange and work with us proactively to agree fair value based pricing with the intention of a multi-year agreement post year one.
Striking that balance allowed us to secure contracts that were fair, sustainable, and reflective of the value we provided. As a result, we not only grew our revenue but also built long-term relationships with customers who felt they were getting a fair deal.”
• Exit criteria: Contracts that are fair, sustainable, and reflect the value your product delivers. These contracts should provide a solid foundation for scaling your business and securing predictable revenue streams.
• Anti-patterns: Undervaluing your product in negotiations or locking yourself into unsustainable pricing models. It’s important to ensure that your contracts are not just about closing a deal but about building a sustainable business that can grow profitably over time.
Conclusion:
Achieving Product Market Fit is the phase where your startup moves from concept to reality. It’s where you validate that there is real demand for your product, that it delivers value, and that customers are willing to pay for that value. It’s the launchpad to a serious investment into sales, one of the seminal moments for any startup, so it’s critical not to cut corners.
Throughout this phase, it’s crucial to remain focused on the right metrics—acquiring the right customers, ensuring consistent usage, proving the value of your product, and negotiating fair contracts.
Remember, Product Market Fit is not just a milestone; it’s a continuous process of learning, adapting, and refining your product to meet the evolving needs of your customers. You may spend years in this phase of growth, iterating your original hypothesis until you are certain about the market opportunity you are going after. This is why keeping capital burn under control is so critical during this phase. Operating at break-even or minimal capital burn is highly recommended during this phase in most cases.
By adhering to the principles outlined in this phase, you’ll be well-positioned to build a product that not only meets market demand but exceeds customer expectations, paving the way for the next stage of growth.
Thanks for reading folks 👊🏼
Next week, we’ll begin our deep dive into the most capital intensive phase of startup growth. The phase where the majority of startups face existential threats: Go-to-Market Fit.
Wayne