“What Changes to Make After Finding Product-Market Fit (Part 2)”

Show Notes

Reaching product-market fit always means that changes are coming for your startup. The obvious changes are often in sales and marketing, but they aren’t the only ones. The entire company needs to change. This includes the user experience, the buyer experience, and even the way that you build your product. If the right changes aren’t made, you risk falling behind your competitors.

On the latest episode of the Midstage Startup Momentum Podcast, startup coach Roland Siebelink discusses some of the changes that come after tech startups find product-market fit. He explains how companies can make these changes and what happens if they are slow to adopt necessary changes within the company.

• Moving the focus from the available market to the serviceable market to the obtainable market.
• The change in mentality that every part of the company must make after product-market fit.
• Understanding the capacity your startup needs to capture the market and stay ahead of competitors.
• The difference between the user experience and the buyer experience.
• How to design products that will have built-in upgrades.

Transcript

Section number three of the five changes startups must make after reaching product market fit.

The section number three that is part of our products market dominant strategy is to capture latent demand. A lot of this is about starting your sales and marketing function. But I like to stress that sales and marketing and not just serving people who have already found you and are coming to you to get your product. It’s about trying to find those customers that could also have a need for your product and getting to them first. That’s why I’m talking about latent demand.

Moving your focus here from the total available market to your serviceable obtainable markets. If you’ve been pitching to angels and to VCs, you’re probably familiar with this model, the TAM SAM SOM model, total available market, which is the most important metric that investors look at to estimate the potential of your market over many years.

But part of that is which of those markets can you actually service? For example, if you’re selling a local product that requires local people to service it, and you say my total available market is all the biking stores in the world, then if you only have mechanics in New York city, then your serviceable available market is going to be far lower than the total available market just because of that requirement for having local mechanics available in the city where you’re at. And then even smaller is a serviceable obtainable market, and that’s the part that you could obtain being realistic about competitors you already have, capacity you have, et cetera. It’s the market share of your serviceable available market that you can obtain. Of course, these numbers are going to be way lower. But it also means you’re getting much closer to reality and actually starting to manage a real sales potential and sales funnel.

A lot of people struggle who have not yet gone through sales or marketing experiences. They think the product is so great, it’ll simply sell itself. And it’s true that there are some early adopters out there who actively go and find products and then buy it for themselves without much in the effort of marketing or sales taking place. But remember that that’s usually just 1.5, maybe 2% of your potential market. Just about everyone else needs some proactive marketing and maybe even sales to convince them to take a look, to convince them to try, and then to convince them to actually buy the product. Products, in general, don’t sell themselves anymore than they built themselves.

And that means that in your company, you have to start moving from a mentality of building a product and they will come to selling a product. And I stress the change in mentality that that takes because it’s not just an activity for marketing and sales people. It’s an activity for everyone in the company, especially now because we have so many companies working on product-led growth strategies. In other words, where the product itself is driving a lot of the sales and even the marketing taking place.

Let’s look a little bit at how these metrics come together from the total available market to the serviceable available market, and then the serviceable obtainable market. We have a hypothesis here of a company that is active in a certain population; 20% of that population is in the customer target group, so that’s your serviceable obtainable market. Then you go down and say, who of those actually experience the pain points we’ve imagined? Out of those, how much can marketing reach? Out of those, how many will sign up within a year or so? How many will show repeat usage? Therefore, how many will convert to paid?

I think these assumptions that you see are really realistic. But you also see how quickly that brings down a total population of a hundred thousand to maybe just 80 prospects that you can expect to convert to paid in a year. And even if you start making those assumptions a little bit more optimistic in the second year because of your learning curve, you see that while the targets may almost double, it’s still nowhere near the total population. That’s why it’s so important to start making a difference between the total available market and then your SAM and your actual SOM, which is the amount of people that you will actually sell to.

Then the bottom-up calculation is almost equally important because if you have that number of customers planned to convert during the year, then how much capacity are you going to need in terms of marketing campaigns and salespeople to actually serve that and have the people available? This is an example of that where a company would need three calls for a conversion, how many calls per sales rep they could expect - that’s a low number here, but just for the sake of argument - and then also how many business days do you sales reps typically work per year, which would mean that for now, you would just need 0.2 and in year two, a little bit more, one quarter of a salesperson. These are really early numbers, of course. In many cases, you will need to build up a lot bigger capacity for the number of salespeople you will actually need.

And the key question then becomes how much capacity do you really need to capture your market quickly enough? And how much can you afford? Do you say, “I just don’t want to spend more than one, maybe two sales reps.” But if that means you can only capture 25% of your available markets, then there’s a competitor who says, “I invest some more,” then they will capture 75% of the available market, which means they’re on track to become the gorilla, you’re not. How does that make you feel? It’s precisely because of this race for dominance in your market that many people seek funding from venture capitalists to go to market faster than your competitors.

The conclusion of section number three is you have to target not just the people that come to you but the latent demand in the market. Get to the customer before they realize that they need your product. That will make you dominant in your market.

Section number four in our workshop about what to change after product-market-fit is to also design your product for sales and more specifically for what I call no-brainer upgrades. The company that has just gone beyond product-market-fit will often have very much a usage orientation. “We just want people to use our products and we want to learn from that.” And that’s a very good discipline to have. But on top of that, you have to start building a buyer orientation. How do we not only improve the user experience but also the buyer experience? From this self-service coffee situation to all the variety and the price list that a more fancy coffee shop will offer.

The difference between the two I’ve outlined a little more. In a pure usage orientation, you see product and engineering departments building user experience, promoting it on social media to get signups, building new features based on the user requests of the people who have signed up, and then very often they struggle or hesitate to build a paid product, or they have very little differentiation between the paid product and the free products, often because they’re somehow afraid that it will lead to too little usage or that they won’t learn much from it anymore. What this means overall is a low effort to revenue your user.

The companies that have gotten a little bit more experience will say, “We have to add that buying orientation.” And that means that products and engineering will start building not only a user experience but also a buyer experience. It means that marketing starts employing paid marketing campaigns, advertising at scale to sign up users at scale, even if they don’t pay right away because it will be the product itself that drives people toward using it more and more and toward then reaching certain paid upgrade limits so that it drives people toward signing up for the initial premium product or maybe even to a higher level. And that means that the salespeople you have or the salespeople you need can actually focus not just on transactional sales in just signing up people for very low revenue deals but focus on the biggest opportunities that they can see in the database based on who is using it most, who has the most users on the platform, and/or who is actually requesting special services that only the most advanced customers will request and would be willing to pay for it.

When you design your product for upgrades - and especially for no brainer upgrades - it helps to think through the funnel from a product perspective as well. We often think there are free users, and that’s our real user base. And then we have - kind of hate it - there are these paid users, who we need to just pay the bills. And I think of it as the goal is for our free users to be converted into our paid users because not only does that pay the bill, it also validates that your product is truly worth it. And that’s what you’re really going for.

Free users are still very important. But I see them as leads for actually building your funnel for those who will ultimately become customers. The way I see it, the initial sign up helps people experience that the pain point they have can actually be solved. Then if they keep using it, that’s proof that they’re serious about solving this pain point. And your first sale happens when the client is recognizing the value of solving the pain point. In other words, it’s cheaper for them to just buy the product rather than to hack together a solution for themselves like they used to do. And then when they start using it even more, or they need more advanced features, then it’s time for an upgrade and move from the bronze to the silver level or whatever you call it.And what that typically means is a setup of several tiers in your product where you split across dimensions the allowances you will give people.

Here’s a theoretical example. I won’t go through every single line item, but you can differentiate on the number of records allowed, disk space, changes, saves, how much support people get. And my recommendation is to find as many dimensions as possible. Just like in this table, differentiate on as many dimensions as possible. Always give people multiple reasons to upgrade because the chances that you catch them on at least one of them are pretty high. When you catch them on two or three, it becomes a true no-brainer for them to upgrade.

And as an example, we have here the table from Airtable. This is one of the best examples of a great upgrade path, where they do start with a free product but have limited records per base, limited attachment space, limited history. You can see, what they offer is very similar to the table that we just discussed.

And ultimately, the goal here is that the upgrades become so much of a no-brainer that most transactional sales can just be done without people involved so that your salespeople can actually focus on important relationships, new upgrade opportunities, and maybe even enterprise deals that involve some specific custom service. That’s where you’re going to get the high-margin deals, the big enterprise deals, and let your sales people focus on that.

That’s the conclusion for section number four out of this workshop. What to change after product market fit is to design your product for no-brainer upgrades.

Roland Siebelink talks all things tech startup and bring you interviews with tech cofounders across the world.