Product/Market Fit for SaaS

by Trevor

FEATURED_Product-Market-Fit-For-SaaS

Most SaaS spend quite a lot of time agonizing over product/market fit. It’s not surprising really, we all know it’s important, yet everyone has their own opinion on what exactly it is and when it has or hasn’t been reached.

Are you a premature self-declarer of product/market fit? There are some commentators (and yes, they have some evidence of this) who claim that this is a rife condition among SaaS. We all know what happens when you’re prematureyou don’t reach the goals you’re really meaning to hit when it comes to growth.

Marc Andreessen is the guy largely credited with posing the term “product/market fit.” His definition: “Product/market fit means being in a good market with a product that can satisfy that market.”

The three main components which fall into the equation for any SaaS are their team, their product and their market. If you agree with Andreessen, market will always win. For example, a terrible team can still do well in a buoyant market, an excellent team with a top product which has no demand in the marketplace will fail, while good teams with an amazing product who have nailed a market demand will do extraordinarily well.

Everyone has an opinion, so let’s look at a few prominent ideas on product/market fit.

Ben Horowitz – Myths of Product Market Fit

ben_horowitz

Ben Horowitz – Source: Salon.com

Ben Horowitz is of course a partner and co-founder of the Andreessen Horowitz venture capital firm, along with Marc Andreessen. Together they also founded the hugely successful Loudcloud and Opsware, both of which were sold for large sums of money. So, you know, Ben brings solid experience to any discussion about SaaS and product/market fit.

The “myths” we’re talking about here were actually from an excellent article he wrote back in 2010 to debunk some of the popular notions of product/market fit. Largely, what he’s saying is that a popular view of “find product/market fit then raise a stack of cash to build a big company” is often not that simple, even if it would be nice!

What simple tools can you use to test SaaS concepts? Grab our free guide here!

Here’s why:

Product/market fit is often not one big event

There is such a thing as getting only a partial fit and perhaps getting to a more complete fit in stages:

“By the time it got acquired, Opware had achieved product market fit for a category of software called data center automation.But it wasn’t at all obvious that was going to be our destination while we were getting there. We actually achieved product market fit in a number of smaller

Sub-markets…”

We’ve known dozens of other SaaS with similar stories, where they’ve had to “tweak” to find an overall fit as they went along.

Briefly, here are Horowitz’s other three product/market fit myths:

  • “It’s obvious when you have product market fit.” What measure do you use? How do you know? It’s not obvious for most.
  • “Once you achieve product/market fit, you can’t lose it.” Not true and Horowitz experienced this with changes in the cloud services market.
  • “Once you have product/market fit, you don’t have to sweat the competition.” Hey, some of the best markets to be in are the hottest for competition. You’re always going to have to be on your toes.

Product/market fit might happen in a nice tidy line for some SaaS, but for many it is not linear at all. Sometimes it happens in a more circular fashion as SaaS discover that true market fit as they go along.

At the same time, you’re always going to have to be monitoring the market and your competitors. Things can change in the world of technology in a heartbeat, so a good fit today doesn’t mean that won’t change next month!

What If You Don’t Get It Right the First Time?

Many SaaS don’t get product/market fit right straight out of the gate. Joel York suggests adopting “try, try again” as a motto in this instance, though of course you may need to rustle up another funding round.

You don’t want to be in this situation as outlined by Marc Andreessen:

“…you see a surprising number of really well-run startups that have all aspects of operations completely buttoned down, HR policies in place, great sales model, thoroughly thought-through marketing plan, great interview processes, outstanding catered food, 30″ monitors for all the programmers, top tier VCs on the board — heading straight off a cliff due to not ever finding product/market fit.”

There’s often a lot on the line for a SaaS, so if you haven’t quite got product/market fit right, systematically try things based on better customer alignment is a good way to get closer to your fit. As Joel York says:

“In other words, you need to create a continuous loop of SaaS customer feedback and SaaS product development that increases product-market fit on each iteration: listen, build, deliver…listen, build, deliver…try, try, try, again.”

rsz_116

How Do You Know You Have It?

Brad Feld posed some interesting points in his article “The Illusion of Product/Market Fit For SaaS Companies” last year. In his experience, many SaaS are prematurely declaring that they have product/market fit without really having a clear science around the concept.

It’s definitely a buzzword term which gets tossed around Silicon Valley boardrooms a lot, though Feld argues that what many perceive to be product/market fit is merely the illusion of it.

He proposes a hypothesis of product/market fit based upon MRR (monthly recurring revenue), which builds upon the myths identified by Horowitz. See what you thinkwould you agree with these parameters?

$0 MRR: You have no product/market fit. Can’t argue with that!

$1 to $10k MRR: You have the illusion of product/market fit. Someone is paying you for your product but Feld proposes that this level is a long way from true product/market fit. This is where you should keep going with you customer feedback loop and systematically testing.

$10k – $100k MRR: This is the point where raising a series A isn’t so difficult. Feld does warn that if you’re not growing at 10% per month compounded, you haven’t quite got it right just yet.

$100k – $500k MRR: Sweet! However, don’t think you’ve nailed it just yet. According to Feld this is where you can be in danger of thinking you can’t lose product/market fit (myth #3), whereas you could just be one bad sales hire away from doing damage.

$500k – $1 million MRR: Eureka! You have product/market fit, though you are never out of the woods as far as maintaining it. Keep an eye on your growth rates, changes in the market and what your competitors are doing. If you are at this level, there will always be someone else gunning for you.

Feld describes the search for product/market fit as a never-ending quest. Every time you put work into developing a new feature, you are searching to remain relevant, to build that incremental product/market fit.

In other words, like any other business, SaaS cannot afford to rest comfortably, secure in the knowledge that their product/market fit is stable. Remember what happened to American railroad companies in the early 20th century?

It was the classic case of believing that they were in the “railroad business”, therefore automobiles were not a threat. The thing was, really they were in the “transportation business” and developments such as trucks for moving freight and cars that were not stuck to set tracks sent many of them bankrupt. Always be monitoring and innovating!

What simple tools can you use to test SaaS concepts? Grab our free guide here!

Final Thoughts

Ok, there’s a lot to consider when it comes to product/market fit. Those who don’t recognize that perhaps they’ve declared product/market fit too early or only have the illusion of it, can be in danger of a severe wake-up call.

Product/market fit is almost never a linear process; SaaS need to have strong customer feedback loops and be able to systematically test features to reach that fit.

Even if you’ve reached the heights of $500k+ MRR, that’s not a sign to sit back. Keep monitoring the market and your competitors so you don’t go the way of the railroad companies!

Kill your churn. Keep more of your customers. Get an invite to Retained.

Comment on this post