Signs you’re confusing product-market fit with a niche market

Team

The most universal challenge of every startup—and for that matter, every new product—is finding product-market fit. There are lots of different definitions of this, but I like Marc Andreessen’s definition: “Being in a good market with a product that can satisfy that market.”

A big part of product-market fit is the market: if you are going for serious revenue growth, you have to make sure that your market is big enough.
 

Unfortunately, early revenue success can sometimes be mistaken for product-market fit, with companies falling into the trap of building a specialized product and go-to-market model to satisfy one or more niche markets.

Rapid revenue growth is the goal for most companies, and that happens when product-market fit is perfect. But revenue growth is a trailing indicator; a lot of hard work needs to go into finding product-market fit before you are growing like gangbusters. At Espresso, we sort in-market companies we finance into three main stages:

  1. Proving product-market fit.
  2. Proving the go-to-market model.
  3. Scaling the organization to support rapid growth.

A company needs to nail the first stage before it can move to the second stage, and the second stage before it can move to the third. Unfortunately, early revenue success can hide the flaws in your product, positioning, or go-to-market model, and failing to correct them early will hurt your ability to grow later. At worst, you will find yourself trapped in a niche market.

If you haven’t figured out stage one and two, you shouldn’t be investing in sales and marketing for growth. Unless you are profoundly lucky, you will need to work on the product—but the temptation is to sell like crazy because you need revenue, and that is seen as the ultimate validator. This instinct is not wrong, but it’s a matter of focusing the deployment of your cash resources at the early stages to build the right foundation for future growth.

Here are four key indicators that you haven’t nailed product-market fit yet (note: these are adapted from a great talk by Peter Reinhardt found here):

  1. Customers are interested in your product, but are not asking specific questions about the specific features they need right now. There’s a difference between a product sounding cool or interesting versus a product that solves a problem. That is the essence of product-market fit:customer urgency.
  2. Your customers are not recommending you to their colleagues, and adoption within your existing customers is not increasing organically. If your product is the best solution, it should spread via word-of-mouth inside of your customers. What you are looking for here is increasing revenues (or at least increasing usage if your revenue model doesn’t scale that way) from existing customers.
  3. You are in trial hell. Trials should be short and obvious: customers try your product and immediately get how it solves their problem. If they keep coming back and asking for changes to make it work for them, then you haven’t solved the problem. Scaling sales at this point is particularly bad because your customer acquisition costs are going to kill you.
  4. A huge amount of price sensitivity for your product. If your solution isn’t saving a lot of time or effort for your customers, you are going to have your margins squeezed in the future. But the key item price sensitivity indicates is that you probably haven’t solved all of the problem: people are more likely to throw down money for a complete solution versus a solution that only gets them part way there.

In each of these cases, there is customer interest and probably some engagement. This is a good thing: customers want something from you and by working through this process you can find product-market fit. But always be wary of falling back into the niche market trap—building something appealing only to that specific customer. A solution that solves 10 different problems for 10 different customers might generate some sales, but a solution that solves one to two problems for the whole market is something you can build a company around.

Coming up with something people will pay for is a big step, but it’s not enough. A big part of product-market fit is the market: if you are going for serious revenue growth, you have to make sure that your market is big enough. We’ve seen a lot of companies get trapped at about $3 million to $4 million in revenue because they kept building their product to make it more applicable to customers they already have. Don’t take your eyes off the bigger market. You’ve already sold to your existing customers, what do you need to do to sell to the customers you don’t have?

Photo via Unsplash.

Jim Laird

Jim Laird

Jim Laird is Espresso Capital’s Chief Data Scientist and was formerly its lead underwriter. He’s been with Espresso since 2012. Jim is a seasoned finance professional who started his career on Bay Street as an equity research analyst at Gordon Capital and HSBC Securities, before joining the investment team at Covington Capital, a Toronto-based venture capital firm. Jim also has extensive experience working inside start-ups and scale-ups growing tech companies as a CFO. Jim has an LLB from Osgoode Hall, as well as CPA, CMA and CFA designations.