At WeBC, we work with a lot of entrepreneurs who have great ideas for new businesses. Usually, these ideas come from identifying a gap in the market, or a problem they think needs to be solved.
But how do you know if your business idea will translate into an actual successful business?
In today’s blog post, I am going to discuss product-market fit; or, in other words, how to prove that there is enough demand for your product.
What is ‘Product-Market Fit’?
There are a few components to product-market fit:
- It means there are enough customers out there who want to purchase the good or service you are producing.
- It means you are able to offer that good or service at a price that allows you to earn a profit.
- It means you and your team are the right people to start the business, and that the idea itself is feasible.
- It means you have found a solution for a problem that people will pay to have solved for them. This may seem obvious, but sometimes people create a solution in search of a problem. They have developed a product that they love, and work backwards to try to figure out how to make people want it.
Why do I need to prove product-market fit?
First and foremost, you should want to prove you have product-market fit for your own sake.
If you’re about to invest a lot of time, effort, and probably money into getting your business started or launching a new product, you want to make sure there is enough customer demand to justify the effort.
Or, as I like to say, “Is the juice worth the squeeze”?
Now, there are plenty of people who will start a business without doing this step first. Does it work out sometimes? Sure! But sometimes it doesn’t.
If you’re going to need some financial help for your business, it becomes even more important to take the time to confirm product-market fit. Whether you’re looking for a loan or trying to convince family or equity investors to take a chance on you, they will want some confidence that people want to buy what you are selling.
As business lenders, this is one of the key things we will ask about during our loan assessment process, and it’s difficult to be approved for a loan if we don’t have confidence in the demand for your product.
How can I demonstrate Product-Market Fit?
Conduct primary market research
Reaching out directly to your potential customers can be a great way to gather information. When you conduct research yourself and gather information from your target market, this is known as Primary Market Research.
This is distinct from Secondary Market Research, which is information that you find online or through other publicly available sources. Secondary market research can tell you high level things like how many Canadian women aged 25- 45 purchased clothes online in the last year, but it can’t tell you how many women in the same demographic purchased clothing at a boutique in your town in the last year.
If you’re opening a bricks and mortar boutique, what level of information do you think will be more valuable to you? For that level of detail, you’re going to have to ask the questions yourself.
Three common ways to conduct primary research are:
- Customer Surveys: I have seen many clients conduct surveys to learn more about the demand for their product. You can distribute the survey through your social media channels, as an online link, or even as a paper copy! I once saw a man with an iPad on a busy street asking people in his target demographic to fill out his survey in return for a gift certificate for a small treat. Not a bad idea if you are that kind of person! For a few hundred dollars you can gather valuable data from people who might not have otherwise participated.
If you’re going to do a survey, however, make sure that you do a deep dive into good survey design so you get your questions right. If you ask dog owners a question like, “Would you be interested in a service that takes care of your dog when you’re away?” You’re likely to get a lot of “Yes” answers. But this question tells you very little about the demand for your particular product.
Instead, you should ask about things like product attributes, price, and location. For example, you could ask, “How much are you willing to pay for one night of dog boarding within the city of Vernon?” That will tell you much more about if your service has demand.
- Observations: Another great primary research method is to simply go out into your community to observe and collect data that is relevant to your business.
If you are looking to open a boutique, for example, you could observe other boutiques in the neighbourhood to see how many people enter the store, and how many of them make a purchase. This can be a great way to confirm your expectations for your own business. If you do this, make sure to observe the store at different times of the day and different days of the week. This can help you confirm busy times vs. slow times.
You can also observe the behaviour of customers to learn more about their needs and how they make a purchasing decision.
- Interviews: The idea of conducting interviews with potential customers can be scary, but it is a really great way to confirm that your product or service has hit the mark.
This can be a short but targeted conversation with a potential client, or a more formal sit-down where you go through a questionnaire. Either way, you’ll find that people are often happy to share their thoughts. Just make sure that you can be as objective as possible. Do not be too married to your idea, and be ready to hear open and honest feedback without reacting to it. If you are showing a negative response to their answers, they may stop providing honest answers to avoid an awkward situation.
You should also make sure you are prepared for the conversation. Whether your interviews are formal or informal, take the time to prepare a short interview guide that lays out the questions you would like to ask.
Measure testimonials and engagement
If you have a social media account, it can be a great way to demonstrate demand for your product. Find ways to incentivise your customers to engage with your social media content (liking, following, subscribing, commenting), and to leave detailed reviews.
As a lender we like to see social media engagement, especially for brand-new businesses, because it shows that you have an audience and you are able to amass a following even in the early days. If your business isn’t a fit for social media promotion, try collecting client testimonials from your favourite clients instead.
Monitor client retention and return rates
Understanding your ability to retain clients and how often they return to you is another good way of demonstrating product-market fit. For some businesses this is easy to track, especially if you track your clients through a central system. However, you can also estimate client retention and return rates based on your knowledge of your customers (it can be easy to spot your regulars over time), or you can gather this information by simply asking people if they’ve used your business before.
Encourage and track referrals and word-of-mouth
Similar to client retention and return rates, understanding where your clients found out about you can help show product-market fit. If current customers are telling other people about you, it means they value your offering and think others will enjoy it as well.
You can gather information about this by setting up a referral program, and by getting into the habit of asking new customers how they heard about you and tracking that information somewhere.
Measure growth rate (Market Traction)
Your revenue growth rate will tell you how many new customers you are acquiring over time—and/or—to what extent existing customers are purchasing more from you. If you have a consistently positive growth rate, this means that there is ever-increasing demand for your product and is a great way to show product-market fit.
Capture pre-orders and mailing list sign ups
For many products, having potential clients sign up for pre-orders can be a great way to show demand. Platforms such as kickstarter have even created a way to raise funds by having supporters contribute to your campaign to help you get your product launched.
If you can show a list of people committed to purchasing your product, that’s a great sign of product-market fit. Similarly, it can be valuable to set up a mailing list and have potential customers sign up to hear about your updates. A large mailing list before you’ve launched your business demonstrates demand.
Have an open mind
Above all, when you’re working on demonstrating product-market fit, it’s important to be open-minded. You need to be able to take honest feedback from your potential clients, but you also don’t want to let one or two people make you lose faith in your business. Using the above approaches, you can get a more well-rounded view of the demand for your product and can hit the ground running!