Finding a product-market fit means to identify a compelling value hypothesis. Value hypothesis is an attempt to articulate the key assumptions why a customer is likely to use your product. A value hypothesis identifies the core features you need to build, the audience that is likely to care, and the business model required to pursue a customer to buy your product.
Companies usually go through many iterations before they find their product-market fit if they ever do. Steve Blank created the customer development process based on the idea that companies need to apply the scientific method just like scientists do. Start with the hypothesis, test it, prove it, move on, and further iterate it until you have a winning formula.
You can always feel when a product-market fit isn’t happening. Customers are not grasping the value of your offering, word of mouth is not spreading, usage or customer base is not growing so fast, and press reviews are not impressive. Usually, the sales cycle takes too long, and many of the deals never close.
The opposite thing is also true, and you can feel when product-market fit is happening. The customers are buying the product as fast as you can make it or you even need to increase the capacity to service your clients. You’re hiring more people to maintain a growing number of clients again, reporters calling you because they have heard about the hot new product or service and want to talk about it, you win different business awards, and clients are referring you to other people.
To sum it up, finding the product-market fit describes the moment when a company finally finds a broad set of customers that resonate with its product.
This blog post is also available as a podcast, part of our Build Your Sales Machine series.
6 steps to the process of defining your product-market fit
First, you need to define a problem for which you’ll then create a solution. To pay for a solution, the users should face a challenge that they want to solve, even though some of them might not yet acknowledge that. Talk to friends around you who are in your target vertical, read industry reports and follow active members of the industry on social media to find out what their pain points are.
Talk to people who face the problem and get as much insight as possible from them.
The second step is to create a value hypothesis – a value hypothesis trying to articulate the fundamental assumptions that underlie why a customer is likely to use your product. A growth hypothesis is your best thinking about how you can scale the number of customers attracted to your product or services. It addresses both the features and business model required to entice a customer to buy a product.
Next thing you need to do is to test the hypothesis with your market. Talk again to these people, share your value proposition, discuss with them the hypothesis points you have written down, and validate them.
The fourth step is to make them commit. Confirm that your product is a real solution for the problem by getting your first clients. That’s the highest level of trust too and a great sign that your product lives up to the promise it’s made.
Even though your offering can be heavily discounted, you still need a confirmation that they are willing to invest money to solve this problem.
If you’re doing B2B, get your users to commit with implementing little milestones with specific outcomes after each one. If you’re in the B2G segment, make sure the municipality or city you’re selling to is open to have a pilot, free or paid based on your business model, and also make them part of the process, setting small steps to achieve these goals together.
The fifth step is to create a sales process.
And the sixth step is to never stop selling.
What is the role of outbound sales in all of this?
Let’s say that you have created your value hypothesis through talking to industry experts, visiting conferences, or getting your information through industry reports. Your product solves problem X and is going to be used and paid for by company Y. To validate this value hypothesis, you need to talk to people from your target vertical and identify a pattern when talking to these potential customers.
First, define an ideal client profile taking into consideration – company type, company size, target location, and pre-qualification criteria like revenue and technologies or tools used.
Second, define who the people you need to talk to are – is it C-level executives or someone from the middle management of these companies? Or you need a champion who is an executive in the company or someone who is just doing the day-to-day operations of this organization.
A third step here is to validate whether they’re facing the problem you’re addressing, and if not, is there another problem which is addressable and related to the initial hypothesis you have? Fоur step defining whether they’re looking for a solution to this problem and how urgent and important it is, and of course, you need to establish whether they’re willing to pay for it. The definition of value hypothesis and its confirmation or denial is an iterative process.
The outbound sales approach allows you to talk to potential customers who are not biased – they are not your friends or acquaintances. You outreached people you don’t know. Suitable channels for this are emails, phone calls, LinkedIn, or face-to-face or video meetings.
One of the VCs I recently talked to said “Having three paying customers shows a clear pattern that you might have found your product-market fit. Now you need to scale up the process and confirm it by adding a few more. Once you do, then invest as much as possible in client acquisition and operations to serve these new clients.”
One more thing – first prospect talks should not be in the direction of making the actual sale but getting the context of your customer needs. Through these customer interviews, you have to extract all the possible information from them. You can create the list of many hypotheses you can go through during this first conversation and confirm or deny them through this process.
As a founder, time is your most valuable asset so visiting online conferences or meetups where you’re going to have a group of potential customers to talk to is one of the best things that you can do. Then, become a speaker. Look for opportunities where you’ll have the chance to speak to a broader audience on a topic that you’re expert. Quite often, your customers will be in the audience, looking for your advice once your session is over.
And don’t forget to leverage potential partners. Think of other companies whose product or service is complemented by yours. Partnering with them will grant you access to a client base, which is used to pay for getting their problems solved and are semi-qualified to what you’re offering.
A lesson learned from a customers
A tech company that was our client was targeting the insurance industry and had a value hypothesis that was confirmed on a regional level for Central and Eastern Europe. They reached out to us to help them scale up their efforts and confirm if there is an acknowledgment of this problem across Europe.
After a few months of working together, we confirmed it to be true. Most insurance companies were facing the problem, so we scaled up this effort and started reaching out to insurance companies, not only in Europe but also in Latin America, Australia, and Africa. In their case, we confirmed the value hypothesis and that there was a problem in their target vertical. The solution our client was offering was covering the exact pain points their target clients had, and people were willing to pay for it.
Unfortunately, our client didn’t invest in building their internal sales organization and didn’t follow up on most of the conversations already started. Unfortunately, only a few of them closed.
Lesson learned: not only you need to validate a product/market fit, but also invest in building your internal sales organization and your sales process to ensure that you follow up properly with close maximum deals with your leads.
How Theo, Out2Bound CEO, found the product/market fit for our company following the 5 steps we outlined in this article
Identifying a need
When I was a sales executive, I identified a market niche for a professional and highly skilled sales representative in the IT industry. There was a great beginning, but of course, I had no idea what our value proposition is going to be and if customers will be willing to pay for it.
Forming several hypotheses and testing them with a profile of ideal customers. I did 5 to 10 interviews, met with different founders, and asked them, is this a problem that you’re having? Is this a solution that you think could work for you? Are you willing to pay for it?
The next step was making these first customers commit with payment and testing the business model. Once people and companies started paying for our services, I told myself, “Okay. There is a niche here, and we have to explore it.”
Step number four was creating a repeatable sales process that was, of course, outbound centric and had this critical number of continuously paying customers. Once we hit 20 paying customers monthly, we figured that we are onto something here, and we have to invest all of our time to make it even bigger.
The last step is never to stop selling. Zdravko and I realized that for the last three-and-a-half years, we never stopped selling. We were selling every day, every week, every month, every quarter, and every year to make Out2Bound what it is nowadays and our efforts are still ongoing.