When I talk to entrepreneurs who are developing cloud solutions for business, I am regularly asked about how to define product-market fit for business cloud companies. The ability to identify if you have product-market fit is imperative to the success of your company, and the sooner you can identify which state you are in, the faster you can lay the groundwork to move to the next level.
I put a short quiz together to help you define how close you are to achieving product-market fit. Wherever you fall in terms of product stage, it’s important to recognize where your company is and make those critical adjustments that will drive growth.
Select the answers below that best describe your company.
1. Diversity of customers: how many customers do you have that you DID NOT KNOW before starting the company?
a) All my customers are fellow startups in my incubator class. I’m really excited that over 30 percent of the class are customers.
b) All my customers are other tech companies in Silicon Valley. I’m a customer of some of their products, and they are customers of my product.
c) My customers span the country and they responded quickly to our cold calls. They seem to have a strong need for my solution. We got their attention really quickly as they were searching for a solution to the problem.
2. Engagement: How core is your product to your customer’s business? How much pain would they experience if the product is removed? Will they care if your site goes down?
a) The users of my product log in once every month or two for 10 minutes at a time, and it’s really helpful in those quick sporadic bursts.
b) The users of my product use it several times a month. In some periods there’s high engagement, and in some periods they don’t need the product.
c) The users of my product use it daily to get their job done. If we removed the product, they would suffer a major loss in productivity.
3. Churn: Are you measuring churn, and what is the rate at which you are losing customers?
a) We have not really started measuring churn yet, though we estimate about 4 percent per month in churn, which equates to about half of our customers stopped using our product over the last 12 months. We need to determine why we are losing customers and are assessing our pricing, service, competition, uptime, etc.
b) We are experiencing 2 percent month dollar churn, which equates to 24 percent a year. We just hired a head of customer success, who will help us get to under 10 percent over the next year, while customers are actively giving us unsolicited feedback on how to improve the product.
c) We are experiencing 0.5 percent monthly dollar churn, which is about 6 percent a year. We have a well oiled customer success organization and look at our metrics daily.
4. Commitment level: Do you have customers on pilot programs?
a) My customers have committed to three-month pilots, and they say they will consider long-term agreements after the pilots are completed. I know they are testing other products in the same market, too. Fortunately these are paid pilots. For instance, a Fortune 500 company is paying us $5,000 for the pilot.
b) My customers are committing to my product on a month-to-month basis. We are starting to talk to them about committing to an annual contract.
c) My customers have committed to one-to-three-year deals. Several Fortune 500 companies have committed to six-figure annual deals.
5. Word of mouth and virality: How are you acquiring new customers?
a) All of our sales require outbound cold calling, and we are paying for leads.
b) Our sales are mixed between outbound cold calling and inbound leads. People are starting to search for solutions in my market.
c) Most of our sales are generated from inbound leads and customer referrals, which is shortening our sales cycle. We need to ramp our go-to-market efforts to handle the volume.
Give yourself one point for all “A” answers, three points for “B” answers, and five points for “C” answers.
0-9 points: You are at the product testing stage and are still defining what business you’re in. You are using the laboratory of your local tech community to test your idea before it’s ready to solve needs of companies you didn’t already know. The next step would be to start working with customers outside of your immediate network to validate your product and get real market feedback. Don’t hire any sales people at this point, as it should only be the founders trying to secure customers. The founders have the best perspective on the problem and shouldn’t have much difficulty getting early-adopter customers if the pain point is strong enough. You may eventually decide you need to change the product or market you are tackling.
10-17 points: You are getting early validation that your product solves a potential pain point for a defined period of time. Spend as much time as you can with potential customers, get feedback on the product, and tweak it until it solves a meaningful pain point where there isn’t a satisfactory alternative solution available on the market. It’s time to hire two sales reps. If they both perform well, then your product resonates with the market and you should consider hiring more sales reps. If neither perform well, then it’s probably a sign that the product-market fit isn’t quite there yet. If one performs well and one doesn’t, then it’s likely a sales rep performance issue; make a quick change.
18-25 points: In all likelihood, you have achieved product-market fit. You are solving an important recurring pain point for five or six customers who didn’t previously know you and who are parting with real money. Annual contract values (ACVs) are meaningful for the size of customer you are selling to: at least $100,000 for enterprise, at least $50,000 for mid-market companies, and at least $10,000 for small businesses. Now you are ready to invest in go-to-market efforts to accelerate growth of what’s starting to work.
Sean Jacobsohn is a venture partner at Emergence Capital. Follow him @sjacobsohn.