Product-market fit is overrated
Too much hype has gone into the idea of product-market fit over the last 5-10 years. The skill of identifying it by VCs before others did and pre-empting Series A financings was a big driver in the go go times of 2020-2022.
I believe startups need to find 3 “market fits” in order to be successful and oftentimes Founders and investors (including myself in the past) aren’t focused enough on the other two. The harmony between all three is what truly leads to success.
1. Product-market fit
2. Channel market fit
3. Pricing market fit
Marc Andreessen popularized the term product-market fit in a 2007 blog post, where he wrote that it “means being in a good market with a product that can satisfy that market.”
The key to this statement is a “good market”
What makes a good market aside from the obvious things like large TAM and strong macro tailwinds?
1. The ability to reach your customers efficiently and predictably
AKA Channel-Market Fit
Do you have the ability to build a strong top of funnel in a repeatable and cost efficient way? Does the channel convert at a high rate? Will it work in one channel or many? What is the depth of that channel?
2. The customers will pay enough money and on the right payment terms to enable the business to scale in a capital efficient manner
AKA Pricing-Market Fit
You can have an incredible product, but if your customers aren’t willing to pay enough for it you’re in trouble. Payment terms can be sneaky here as well because it can create a cash drag on the business making it less capital efficient to scale, which can make things more challenging from a fundraising perspective. Markets with long paybacks are tough to raise for today.
The harmony between these three things is critical.
You can have a great product, but if you can’t reach your customers effectively or cheap enough then the business won’t work.
However, if the perceived value of the product is incredibly high and people are willing to pay a lot of money for it you will have more margin for error to test additional channels of acquisition.
Meanwhile, if you’ve found incredibly strong and cost-effective channels you will be able to charge less for the product and potentially be able to scale even faster to land grab the market.
Finally, plenty of companies have had good but not great products early on but figured out both channel-market fit and pricing-market fit and been able to scale fast and continue to improve their product over time.
VCs have a saying
First time founders think about product, second time founders think about distribution.
The point I’m trying to make is be sure to be super thoughtful about how you’re going to get your product in peoples hands and what are they willing to pay for it?
1. If you can figure out industry benchmarks for CAC by channel before you go all-in on starting the business then do it
2. Make sure you talk to customers about pricing before you launch
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