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What is product-market fit? An investor’s breakdown

While ideas come easily to some entrepreneurs, others have to work a little harder in order to dream up products or services that are going to change the world. One way to do that is to focus on product-market fit, which is when a company develops a product or service that its users will pay for. It’s seen as a precursor to growth, and something that demands companies to focus deeply on what will satisfy the market that they’re in before spending time, effort and money on its development.

Earlier this year I sat through an excellent presentation given by Capital Enterprise CEO and investor John Spindler at the Barnsley Digital Media Centre. There he gave his take on product-market fit, breaking it down into three parts while throwing in a few metrics to use for good measure. At its most basic level, he said that product-market fit is about ensuring that a product works and does what it says on the tin – a pizza delivery company being able to deliver a product to a customer quickly and for the price that they want to pay, for example. This does not mean that a product should only meet the minimum standard, he stressed – it’s about having one that’s best-in-class.

The second part of product-market fit is providing evidence of creating customer value. Spindler gave the example of a B2B company showing investors that their product will make a return on investment, generating or saving money – “or preferably both”. This can be demonstrated through a Proof of Value Trial (not a Concept Trial) to show that the product is working. A B2C startup would look at funnel metrics to see why customers love their product, which if taken away would “make customers cry”. The aim there is to create a dependency culture where customers rely on a company to create value, Spindler said, and that comes down to measuring retention and virility. “I would prefer to have 10 customers and five come back and repeat that every month, rather than having 100 and only 3 per cent return,” he added.

With little money to spend on marketing and driving sales, Spindler advised startups to focus on proving that they have a product that generates value. His third part of product-market fit, therefore, is the business model. Here he highlighted two metrics to live by – Cost of Customer Acquisition (CCA) and Life Time Value (LTV). CCA is the cost of the process of finding new customers, typically accompanied by a low conversion rate in the beginning that may see one in five customers spending money, for example. It could be measured as the average cost it takes to acquire new customers in a one-year period. LTV, on the other hand, is the value of a customer over time – it increases when somebody keeps coming back to buy something every month or year.

That concluded Spindler’s presentation, and if you’d like to know more about product-market fit and other startup topics, then take a look at Digital Business Academy by Tech Nation that offers 54 interactive courses.

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