“Product-Market Fit” is the idea that a company needs to 1) create a product that 2) fits a need in the market – a need that is 3) poignant and sustainable enough to generate continued interest by customers, and 4) thereby generate revenues (or other benefits) for the company. By relying on the term “market” in this definition, we are forced to start with the concept that a buy-sell process pre-exists – that a market’s needs can be defined and addressed. What if you’re developing a product that is creating a new market? How does a product owner evaluate whether his efforts are worthwhile, or headed in the right direction?
What are the steps involved in evaluating whether you’re developing a product that the market may want or need in the future, when the market isn’t currently mature enough to express its needs? I think it’s these 10 points:
- BUILD FOR THE PROBABLE FUTURE. Hypothesize the future that you would like to see built. Hypothesize multiple futures. Evaluate these possible futures against what you think is the probable future. What is your preferred future?
- COMPARE SIMILAR PRODUCT LINES. Look at the evolution of other product lines in other categories. Evaluate their market impact, their rate of adoption, the relative rate of technological advancement. Do some predictive mapping of your proposed product line to these external similes.
- LOOK FOR MOVES BY LARGER COMPETITORS. Look at the current biggest players in the (nearest related) market – but ones that have shown some interest or ability to move in the direction of your new market. Evaluate their near-term and long-term strategic needs from a product line and revenue perspective. Think in terms of those companies’ pro-active developments as well as defensive positioning. Evaluate how your proposed product might fit into, or counter to, those strategic drives. Will those strategic drives:
- facilitate market awareness of or applicability of your solution?
- destroy value created by your solution?
- lever your solution into bigger market shares?
- make your solution an acquisition target?
- WHEN POSSIBLE, BUILD YOUR PRODUCT OUT OF STAND-ALONE COMPONENTS. Evaluate the development roadmap for your proposed product. Are there milestones or product building blocks that you can use in other product lines as well, or to create new opportunities? In other words, is the new product salvageable in any way if the new market does not ever emerge? Closely evaluate this roadmap to optimize for later scaling requirements if the future product is successful.
- BUILD A BRANCHING PRODUCT LINE. To minimize being early, spend extra time developing those building blocks in Item #4 into peripheral revenue sources and/or products. You are not creating a direct line of product development towards the future product, like stops on a subway. You are creating a river delta where the future market is the sea, and the building blocks are the rivulets branching outwards towards it. Prioritize building blocks and derivative products that are themselves critical components of the new proposed product. Prioritize blocks/products that strategically support 1st) customer development, 2nd) revenues, and 3rd) corporate brand-building & marketing.
- IDENTIFY A TIME RANGE OF OPPORTUNITY. Specific attention must be paid to timing. A common refrain you’ll hear from investors is that it’s just as bad to be early as it is to be late. But “market timing” is a false premise. If someone (or you or the investor) could perform accurate market timing, then you shouldn’t be an entrepreneur – you should be a billionaire money manager. Instead, focus on establishing a “time range” of when things can go right in the market, based on the above analysis (principal and secondarily enabling technologies, customer identification, investment industry trends that will help fund future expansion, strategic partnership developments, etc.), as well as smaller time ranges for when things could spin sideways or your operating funds disappear. Where those ranges overlap – which will probably be 75-90% of the time – establish Plan B’s that revolve around the building blocks in Item #4. Early is harder to manage than late because early is harder on cash flows.
- EVALUATE COSTS OF EDUCATING YOUR CUSTOMERS. What are the expected costs of customer education about the new market? Are any of the players in Item #3, or any other market forces, already doing this, or will be doing this for you? How easy will it be for you to get the attention of the first customers and get quality feedback so that you can iterate on your first version faster than any subsequent market entrant? The customer education piece is particularly expensive in new markets. Overestimate this expense in your budgets and assessments.
- EVALUATE YOUR AVAILABLE BUDGET IN LIGHT OF THE ABOVE. Evaluate how much investment will be required to develop the proposed product, bring it to market, and educate the market on the problem/solution. Do you have enough to cover this and does this amount represent a barrier to entry for followers or fast followers? If any of these answers are negative, you might eventually have a market, but no sustainable product, therefore no fit. Refer back to the last sentence of Item #7.
- WILL YOU BENEFIT FROM MONOPOLISTIC FORCES? Is there a natural monopoly available in the new market? How hard will it be to successfully fend off well-executed “fast followers” in the market that try to capitalize on your hard work of establishing a beachhead? Is the market set up as a “winner take all” where the first-mover will secure 70%+ of the market because customers typically can commit to only one option due to network effects, or is it likely that the market will require constant iterations?
- COMPARE FIRST-MOVER VERSUS FAST-FOLLOWER STATUS. Take a critical look at how important it will be to have first-mover access to early customers, versus the relative benefits of being second or third to market. Do you gain more from early access to customers than you would from learning from the mistakes made by another first-mover? Considering your budget versus the potential monopolistic returns, is it more cost-effective to follow fast and iterate than it is to do your own original market research and education?