If you’ve heard about product market fit, then you’ve heard about Andy Rachleff, who coined the concept and formed a Stanford course around it — aside from using it to build his investment companies. If you haven’t, product market fit is simply this: do you have a market?
Are people dying to get their hands on your service or product? How much is the demand for your product, and to what extent would you satisfy that demand?
“If the customer doesn’t scream, then you don’t have product market fit.” – Andy Rachleff
When the biggest, best names in marketing get together, you can expect some gems. And that’s what I got. Andy Rachleff was on Mike Maples’s podcast, which was rebroadcast on the Tim Ferriss Show.
Tim Ferriss is an entrepreneur, famous for the 4-Hour Work Week, and Mike Maples is one of the biggest venture capitalists of Silicon Valley, founder of the Floodgate Fund, one of the early investors of Twitter, among others. And Andy Rachleff is a legend in his own right.
Listening to the demand
Andy Rachleff is one of the most successful venture capitalists of our time. In 2008, he built kaChing, the first iteration of Wealthfront (evolving from kaChing in 2013). Both platforms democratized investments. Instead of having to start with millions, people could invest with kaChing at $10,000.
But kaChing didn’t soar as Rachleff expected. When the kaChing team asked their clients where the service stopped exciting them, the answers were similar: they wanted wealth management. They wanted to hand over all their money instead of kaChing just managing a small portion of it.
Within its first year, Wealthfront had $100 million under management. By year two, it was $500 million. Today, Wealthfront manages $11 billion in investments, over 300 times what kaChing ever had.
Every business wants that kind of growth. And product market fit is one of the biggest elements that can take you there.
First, market. Always.
Artificial intelligence and its powerful capabilities in gathering customer insight is so important because it gives businesses information about their market.
What do they want? What are they itching to buy? What are they already buying?
Come to them with the right offer at the right time and you get their money. Fast. That’s product market fit. AI is all about offering the right product to the right segments at the right time.
Rachleff credits Steve Blank and Eric Ries who applied the scientific method to business/entrepreneurship. First you have to prove a value hypothesis, and only after you have done this can you test a growth hypothesis.
According to Rachleff, “A value hypothesis is an attempt to articulate the key assumption that underlies why a customer is likely to use your product. Identifying a compelling value hypothesis is what I call finding product/market fit.”
“A value hypothesis identifies:
- The features you need to build
- The audience that’s likely to care
- And the business model required to entice a customer to buy your product
Companies often go through many iterations before they find product/market fit, if they ever do.”
Here’s how product market fit helps you win every time.
Even with a lousy product or a lousy team, your market can pull you through. On the other hand, if you don’t have a market, no matter how great your product or team is, you won’t win.
But through insight, you can create a great product and form a great team to address a great market.
“When a great team meets a lousy market, market wins.”
“When a lousy team meets a great market, market wins.”
“When a great team meets a great market, something special happens.”
“If you address a market that really wants your product — if the dogs are eating the dog food — then you can screw up almost everything in the company and you will succeed.
“Conversely, if you’re really good at execution but the dogs don’t want to eat the dog food, you have no chance of winning.”
How do you know when you have product market fit?
The podcast goes on to talk about how you know when you have product market fit. A lot of businesses think they do, but don’t. This is also where marketing technology has evolved. A lot of tools now help you target and measure specific KPIs (key performance indicators) that show you whether you’re on the right track, or completely missing the mark.
But a lot of KPIs can be misleading, distracting you with useless goals that don’t matter to your business growth.
How do you know when you have product market fit?
You would see these in your consumers:
- Exponential organic growth
- Net Promoter score
People can game growth, and that can lead you astray, but your net promoter score can prove that growth: it’s word of mouth. If people are willing to recommend your products/services, it’s a good indicator of satisfaction and customer loyalty, and when people recommend you to others, that’s where your organic growth comes from.
What you can test:
- Measuring the sales yield
- The contribution margin of a sales team divided by the total costs to pay for the sales team. When it’s greater than 1, then you have product market fit.
- Proof of concept with a customer — that ends after 30 days
- If the customer doesn’t protest, there is no product market fit.
Targeting your market, from the early adopters to the laggards
Maple brings up a book, Crossing the Chasm, well-known and well-loved in the business world.
Both Maple and Rachleff think it’s still a very relevant book that more people should read and pay attention to. This book is also the source of frameworks we’ve used for both Wrench.AI (previously Crack the Crowd).
Says Rachleff: “The fundamental idea expressed in CTC is there’s a natural rate of adoption for every product…The basic premise is that there are different people willing to adopt at different rates.”
“The first people who adopt. These people are revolutionary, not evolutionary. They want to buy a product to solve their problem and all they need is a proof of concept in order to do it.”
“They want something that’s evolutionary not revolutionary. They’re not trying to get ahead in their jobs, they’re trying to not get fired. They’ll only buy if five people tell them to buy. It doesn’t matter how well you serve their needs, they’re not going to buy until they get references; they need social proof.”
The late majority. They only buy once it’s become the standard.
The laggards don’t buy.
As you can see, these types of adopters each have their requirements. Early adopters might only need to see a demo, but pragmatists need a lot of testimonials and case studies.
AI can help you track down buying patterns to identify what turns a laggard into a pragmatist or even an early adopter.
And even though the biggest market is composed of pragmatists, that doesn’t mean they’re easily captured. It takes time — or the right product — to go through the early adopters to pragmatists to the laggards. Shortcuts don’t work.
What do you change to achieve product market fit?
“Product market fit occurs when you’ve proven the value hypothesis, which includes the what, the who and the how, what are you doing building, who are you selling to. Your business plan.”
Was your business plan right on the nose? Have you tested it on your market and tweaked the business plan and the target market?
That’s called a pivot. The temptation to fiddle and change the product. As you’ve read above, Rachleff did a pivot when he changed kaChing to Wealthfront. But it wasn’t much of a change. They only tweaked the size of their wealth management.
Maple says, “Keep your insight. Keep your proprietary insight but then find the right customer for that existing insight rather than abandon your insight.”
Another important point on pivoting from Rachleff: “You have to be willing to fail. But you don’t pivot on the product. If you fix the market and pivot the product then you have no advantage because your original insight is gone. So what advantage do you have over anyone else?”
I want to go back to Rachleff’s succinct quote here: “If the customer doesn’t scream, then you don’t have product market fit.”
You have to start, and like what Maples said, you have to stick to your guns instead of giving in to the temptation of going “consensus,” doing what others are doing, just because what they’re doing works.
You want your customers to be desperate, and if you’re consensus, that means they won’t be desperate, since they are already being served.
Make sure you have that golden nugget of insight. Innovation and pivoting needs to be backed by insight and awareness — not only so you know what changes to make, but who your change would serve. It always goes back to your market — your product market fit.