From Idea to Product Market Fit: The guiding principles

Starting a business or new product is risky; statistics show that nine out of ten startups fail (Startup Genome). Among those that survive, most have endured a near-death experience. The primary reason behind these failures is the elusive concept of Product-Market Fit (PMF). ?Lacking a definitive playbook, PMF is also the hardest challenge for a Product Manager:

• Examples of traction: Early on, companies like Reddit faced a harsh reality – their users weren't engaging as expected. In response, they resorted to creating fake accounts and fabricated conversations, crafting an illusion of a bustling community. In contrast, Atlassian took a different approach, distributing free beers adorned with Atlassian stickers at engineering conferences to as one of the traction tactics to kickstart their PMF journey.
• Examples of innovation: Innovators like Elon Musk, advocate the first-principles approach, which involves breaking problems down to their fundamental truths and building from there. However, Daniel Ek, the founder of Spotify, deviated from the conventional PMF quest by applying a successful business model to what Napster had pioneered.

While no fixed formula guarantees PMF success, some guiding principles can help reduce the risk of failure.

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HOW TO START?

Every successful initiative is rooted in thorough research. While the "learn by building" philosophy has its merits, a more effective strategy involves combining research with iterative learning. Let's glance through two essential questions: "Where to search" and "What to search.

Where to Search?

?Today, there's a wealth of resources available for research, including books, blogs, articles, research papers, mentors, investors, and industry leaders and finally generative AI! Choice depends on context. For example:

• Radical Build: If you're building something innovative, seek insights from research papers, books, and industry experts. They can offer fresh perspectives on your subject. For instance, when exploring problems in wealth management, while typical blogs and articles may direct you to generic trends like robo-advisory or personalized financial planning, research papers might prompt you to ponder deeper questions on those topics such as, "How do you assign an advisor to a client, what factors beyond location and experience should you use? How may you select those factors?"
• Inspired Build: Most of the time, we're building on the foundation laid by others. Here, competition inputs (such as annual reports), blogs, articles, can be your guide. Learning about competitors is important. When doing so, broaden your definition of competition to include indirect competitors and adjacent industries.

What to Search?

?The context determines what to search for, but some general guidelines include:

• Industry Evolution: Study how the industry has evolved and identify key turning points.
• Competition Landscape: Examine both successful and unsuccessful competitors.
• Drivers of Change: Investigate the factors triggering changes in the industry, whether technological, regulatory, market-related, or related to consumer behavior.
• Expert Opinions: Seek insights from domain experts, but do this after developing a profound understanding of the industry.

AFTER RESEARCH, WHAT?

The subsequent step is to devise a strategy. Crafting a product strategy can be a rigorous endeavour, but simplicity can be advantageous when starting from scratch. At this stage, your strategy essentially forms a hypothesis to address six key questions:

Who is your user?

Identify segments, Goals, Problems, Alternatives and try to go deep. Goals can be divided by outcomes users are trying to achieve, motivation behind the outcome, and what success looks like. Problems differ by type, intensity/frequency, and alternatives used. These nuances provide vital clues to current and future business questions (how should we expand, how do we build a habit, etc.).

To reduce risk (and cost), the ideal approach is to target a narrow but clearly defined segment (early adopters with the highest intensity of pain and tolerance for low product experience). For Macs, even Apple chose to target the "Graphics Art Dept of Fortune 500 companies" before moving to marketing and sales teams. This is, however, a growth tactic. When interviewing to understand the problem space, it's vital to consider more segments (than you want to target initially) before choosing the right one.?

What problem are you trying to solve?

Often, the most apparent problems aren't the right ones.

In the book ‘Running Lean’, Ash Morya writes - our shift from cassettes to CDs wasn't driven by a quest for superior sound quality, but rather by the desire for convenient song access. Similarly, the transition from CDs to MP3 players wasn't due to sound quality improvements, but rather our ability to create our own playlists. Our migration to the cloud wasn't motivated by sound quality either but by the abundance of choices it offered. Likewise, the advantage of AirPods lay in their ease of use, not their sonic excellence.

To navigate this complexity, one tactic is to chart the Persona, Pain Point themes & customer journey (or even the entire value stream). This helps pinpoint the genuine pain points and tackle the most pressing issues head-on. On the other hand, adopting a solution-first approach often steers us toward addressing the apparent problems, leaving the most critical ones unattended.

What sets you apart from the competition??

In the book "7 Powers," Hamilton Helmer lists strategic powers that led companies to success, such as Scale Economics (Ikea), Network Effects (LinkedIn), Counter Positioning (Tesla), Branding (Nike), Process Power (Toyota), Cornered Resource (Pixar), and Switching Cost (Gmail). However, it's important to recognize that these powers are not conjured overnight but are meticulously crafted over the years.?

Therefore, a balanced approach involves forging short-term competitive edge while simultaneously cultivating a long-term unfair advantage. Short term advantage lies at the intersection of user and competition understanding (identify the underserved segments and needs overlooked by direct & indirect competitors).?

What value does your product offer?

The value proposition is derived from answers to previous questions. Let's take the example of Plaid, a company that offers banking APIs to financial institutions for a range of use cases such as payments, transactions, balance inquiry, assets, identity, etc. Their value proposition is "One integration, all of open banking. Plaid is a world-leading data network that helps you cut costs, onboard, and convert more customers”. While crafting value proposition, simplicity is a virtue; and if you are not able to distil value into 3 to 4 strong propositions, it indicates gaps in understanding of the problem space.

How will you grow?

In the early stages, startups focus on traction channels (remember, traction and growth are distinct concepts), and later, they select a growth channel for scaling up. Interestingly, teams in large organizations tend to overlook the importance of traction channels. Leveraging these channels can be a strategic move to persuade management to invest in your innovative idea. Further, rather than exhaustively listing various channels, a more effective approach is to begin with your target users in mind. Ask yourself: 'Which traction channels are most likely to help us acquire our first X customers?

What's your business model?

When contemplating the business model, it's vital to consider pricing, cost structure and unit economics. Determining the right pricing strategy is a discipline in itself. At this stage, we can anchor our pricing strategy based on our understanding of cost structure, competition pricing, customer segments, distribution channels & value proposition. When examining costs, precision takes precedence over prediction. For instance, neglecting an expense item in early stages can lead to severe consequences later on, even if the growth is exceptional.?

HOW DO I VALIDATE MY STRATEGY?

The importance of validation in achieving Product-Market Fit (PMF) cannot be over-emphasized. We are tasked not only with validating each component of the strategy individually but also collectively, considering viability, desirability, and feasibility. You'll discover that each validation techniques have their limitations, but if you identify the riskiest aspects of your strategy and apply validation methods accordingly, the process becomes more straightforward.?

Customer Interviews:

Compared to interviews concerning product expansion or enhancements, PMF interviews are more exploratory. Nevertheless, the structure has similarities, focusing on aspects like interview preparation, conducting effective interviews, debriefing, and integrating results into the overall narrative. Striking a balance between breadth and depth is crucial, with the objective being validation of all strategic pillars. When selecting your interview audience, consider both traction and growth channels. During interviews, gain a stack ranked understanding of broader problems (without leading the user) and then delve deeply into the most pressing issues using guided questions.

Here is a list of sample questions to validate each pillar:

• Problem: Can your describe a recent experience when you faced this problem (probing for details and outcomes)?
• Competition: What alternatives did you use to solve the problem (and why)? Why do you think [X] alternative is not useful?
• Value proposition: How did your life change after using this alternative? What goals did it help you meet?
• Growth: Which channels do you spend time in? Can you give an instance of something you purchased after seeing it first on that channel?
• Business Model: How do you decide to make the purchase? What is your budget for this problem??

Validation Tests:

No single validation method fits all scenarios. For instance, prototypes excel at testing desirability but fall short in assessing viability. On the other hand, smoke tests are effective for validating viability but do not provide insights into desirability. Similarly, while prototypes are suitable for evaluating the value proposition, they may not gauge willingness to pay accurately. Here's a concise guide:

• Surveys: Useful for validating problems, evaluating the value proposition, and assessing willingness to pay.
• Prototypes: Ideal for assessing the value proposition.
• Smoke test: Effective for validating problem, value proposition, and identifying the target audience.
• Landing Page: Great for testing value proposition
• Pre-order: To test willingness to pay.
• Product test: Suitable for evaluating value proposition, assessing competitive advantage, and validating the business model.
• Growth test: Test the effectiveness of growth channel.

HOW DO I SET GOALS?

There's a compelling argument for not fixating on outcomes during this phase of the product lifecycle and instead concentrating on 'learning only.' On the other hand, an alternate perspective advocates setting a clear target and working backward. This divergence is can also be a matter of organizational culture. If you find yourself leaning towards the latter approach, here's a conceptual guide (annualized for simplicity):

1. Begin with a revenue target, let's say $100,000.
2. Presume an Average Revenue Per User (ARPU) or refer to industry figures, e.g., $10.
3. Calculate the number of active customers, in this case, 10,000.
4. Estimate signups, assuming a 10% conversion rate, leading to 100,000 signups.
5. Estimate and calculate the number of visitors, considering a 10% conversion rate, totaling 1,000,000 visitors."

You may choose to convert these figures into a monthly perspective, but the fundamental concept remains unchanged. Nevertheless, this quick estimation, while simplistic, provides valuable insights. First, it prompts us to question – are we realistic?. Second, it leads us to consider whether pricing our product higher might be necessary. Third, it encourages us to evaluate whether our growth loop aligns with our business model. Fourth, it helps us to establish optimization benchmarks for critical metrics like churn rate, conversion rate, and acquisition rate.

It's essential to emphasize that we're not using these outcomes as commitments to stakeholders, but rather as instruments to validate our business model and establish benchmarks.

HOW TO MEASURE SUCCESS?

When it comes to measuring success, there's a multitude of advice out there, ranging from 'Net Promoter Score' to 'You'll know it when it happens.' While none of these methods are inherently wrong, a more grounded approach involves assessing user satisfaction, retention, and growth with statistical significance. In simpler terms, it means your customers are content, a significant portion of them has formed a habit around your product, and your user base is expanding rapidly.

Now, let's delve into these metrics:

1. Growth: To measure growth effectively, start by monitoring general trends with a focus on new users. It's crucial to analyze the data by source as well. Depending on your growth model, whether it's Paid or Viral or Content-driven, consider factors like Lifetime Value, Customer Acquisition Cost, and Payback Period. (We'll discuss growth further in the next section.)

1. Retention: Often, we rush into creating retention cohort charts and presenting them to stakeholders without answering a critical question: "How do we determine the optimal retention rate?" Instead, begin with a fundamental question: "how often are they likely to use the product?" These insights come from customer discovery and vary from product to product.Thereafter, build and analyze the retention cohort chart. The analysis should start with an overview of the curve's general trend, with the ideal scenario being a flattening curve over time. If you observe a gradual decline, the next step is to segment the retention chart, identify differences among segments. However, if the curve consistently and rapidly declines across all segments, it's crucial to revisit your initial hypotheses. You can further segment the retention cohorts to uncover more underlying trends.
2. Engagement: Take a step back and consider what type of engagement suits your product and which engagement metrics statistically correlate with retention and monetization. Metrics like views, comments, posts, saving/pinning, and time spent are valuable for products like Facebook, Pinterest, and Netflix. However, for payment products, metrics related to efficiency, such as reduced checkout times, are likely to correlate more with retention and monetization.

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HOW TO GROW?

Before we delve into channel strategy, let's clarify two fundamental concepts. First, it's important to distinguish between Traction and Growth. Traction indicates evidence of demand, while Growth is proof of demand. While short-term tactics are suitable for gaining traction, sustainable growth requires establishing reliable channels. Second, sustainable growth relies on compounding, often referred to as a loop. There are four ways to capture value from customers: money (revenue), content, data, and referrals. By reinvesting these assets into acquiring new customers, you create a growth loop.

Traction Channels:

1. Internal Network: The easiest starting point is your own network, whether it's existing customers (for organizations) or friends, family, investors, and mentors (for startups). If your reach is limited, consider leveraging references from your existing customers or personal network to amplify your reach.
2. Community: This traction channel is often underutilized within organizations. Today, communities extend beyond social networking sites, encompassing Q&A platforms (e.g., Reddit, Quora), tech communities (e.g., Github, Stack Overflow), personalized communities (e.g., Nextdoor, HackerNews, meetups), and various localized communities (e.g., gaming, fitness, parenting, travel). Additionally, some companies explore offline community-building, a path exemplified by Facebook's early beginnings at Harvard.
3. Content: Creating the right content for your target audience on the appropriate platforms, with a focus on quality and consistency, demands expertise and resource investment. Content marketing follows a set of rules concerning format, length, language, type, and platform selection, and it cannot be mastered within a few months. Therefore, it's essential to approach content marketing with careful consideration.
4. Press: While press can be a potent traction channel in certain cases, such as when introducing a novel concept, product, or offering, it can also be strategically used for tactical activities like fundraising, launches, achieving business milestones, or forming partnerships. Like content, effectively leveraging press requires a degree of expertise.
5. Others: Events, Influencers, etc

When selecting a traction channel, consider factors such as audience size, engagement level, return on investment, alignment with your brand, your product roadmap and the stage of your product lifecycle.

Growth Channels

Growth loops typically fall into three categories: Viral, Paid, and Content-driven. These loops can further subdivide, for instance, sales can be either offline or online, inbound or outbound, manual or automated.

While experimenting with multiple growth loops is necessary, it's advisable to master one before adding another. The selection of the right growth loop for your business is a crucial decision:

• User Fit: Different demographic segments have distinct preferences regarding communication channels. For instance, Baby boomers and Gen X may prefer face-to-face interactions before committing a significant portion of their investment, making offline sales a primary loop for these segments. In contrast, millennials and Gen Z are comfortable with digital investments.
• Product Fit: The complexity of products often dictates whether they require offline or online support during onboarding. While digital-only players have disrupted certain aspects of the banking sector, complex products such as wealth management or credit primarily remain within the domain of traditional banks due to the intersection of high-value transactions and complexity.
• Business Model Fit: Each channel comes with its costs, and it's crucial to understand factors such as customer acquisition cost, customer lifetime value, cost scalability (LTV/CAC ratio), and payback period. The selection of a channel should be based on expected returns, and there must be a solid rationale for investing in high-cost channels when the returns may not initially meet ideal benchmarks.

INDUSTRY NUANCES

Let's explore the example of finance to illustrate the critical importance of regulations and operational considerations. Even if you've meticulously executed the preceding steps (including strategic planning, validation, proof of traction), disregarding regulatory compliance and operational intricacies (not to be confused with DevOps) can lead to your endeavours being dismissed outright.

There is simply no substitute for a profound understanding of regulations, which can encompass both generic aspects like KYC (Know Your Customer), AML (Anti-Money Laundering), and data protection, as well as those specific to your problem area, such as regulatory guidelines governing risk management, reporting, licenses, permissions, and more. This necessity arises from three compelling reasons:

1. Cost of Risk: Between 2005 and 2015, the 25 largest financial institutions collectively paid penalties exceeding $285 billion (research paper on Science Direct). Danske Bank was fined a substantial $2 billion for breaches in anti-money laundering (AML) protocols and inadequate transaction monitoring.
2. Guidelines Serve a Purpose: At the core of the finance industry lies the foundation of "Trust." The primary objective of the industry (regulators included), is to safeguard this trust. The entire financial system is iteratively designed over the years with this goal in mind. Profit-making is secondary to preserving trust.
3. True Innovation: Surprisingly, a deep comprehension of regulations can serve as a potent tool for identifying genuine innovation opportunities while filtering out superficial ones. A truly innovative idea is one that takes into account all the nuances of existing guidelines and presents opportunities within those constraints.

We hear/ read less about banking operations because most of it happens behind the scenes. Let's consider the example of cross-border payments. Before embarking on the quest for fast, transparent, and genuinely affordable cross-border payments (not as a mere marketing ploy), numerous operational considerations must be addressed. These include customer onboarding (where stringent KYC and AML constraints come into play), management of FX treasury (which extends beyond mere currency conversion to managing currency risks), scrutiny of payments (to align with local guidelines), adherence to global standards in reporting, understanding of taxation on FX, understanding the role of payment rails (such as Swift and their respective messaging structure), forging global partnerships (that align with regulations on both ends), and a myriad of other operational facets.

Similarly, every subdomain within finance has an extensive list of operational intricacies that demand attention, leaving no room for oversight.

FINAL WORDS

Lastly, building a business from scratch is no easy feat. Most of what's written, including this, covers less than 10% of the journey. Majority of the time is spent executing under severe constraints and uncertainty. Success requires a blend of courage, focus, patience, creativity, drive, and humility. However, satisfaction of achieving success in this journey makes it worthwhile!

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