Product Market Fit: Growth In The Era Of AI

Overview

In this article, we investigate the concept of product-market fit, its significance to growth, and the challenges businesses encounter in achieving it – particularly as this topic evolves in the era of generative Artificial Intelligence (AI). We explore how AI will revolutionize offering and product marketing management, drawing from research, industry experts and our direct experience. This article gives insights for CEOs, Marketers and Chief Product Officers in early or later stage companies developing new offerings.

By reading this article, you will gain a deeper understanding of product-market fit, its role in early stage as well as established businesses, and how to navigate the complexities of achieving it in today's AI-driven world. This knowledge is instrumental in establishing your company's market strategy and ensuring continuous alignment with customer value and needs.

Whether you're a startup founder, product manager, marketing manager, or an executive business leader, this article will equip you with the knowledge and insights to steer your company towards achieving product-market fit and, ultimately, business success.

Understanding Product-Market Fit

Product-Market Fit (PMF) is an important milestone for any startup or established company introducing a new product or service. It signifies the alignment of a clear problem, a solution, and a buyer who is willing to pay money to solve the problem. However, PMF is not merely about having a great product or service. It's about having the right product for the right market at the right time. As Marc Andreessen, the co-founder of Andreessen Horowitz famously said, "Product-market fit means being in a good market with a product that can satisfy that market." That said, it is important to understand markets are also dynamic and can change for various reasons.

For emerging technologies, defining a problem can be a challenge, particularly for new offerings or services. McKinsey’s analysis shows that top product managers develop hypotheses about customer behavior and test their validity before committing significant resources to development. ¹ This approach allows for iterative refinement of product and feature ideas without requiring additional development resources. Drawing on customer data, market dynamics, and the surrounding competitive landscape to design features and products around underserved needs brings repeatable outcomes. The graphic below provides a framework for PMF, beginning with the target customer and taking a bottom-up approach.

It is important to also understand that some companies can have significant revenue, funding, and headcount while not having achieved product market fit. This can be attributed to a number of reasons, not limited to an incomplete product set, inadequate business case, dismal supportability, overconfidence from investors, industry vertical nuances and complexities, tech hype, etc. It’s often the reason why companies struggle over time. Lack of PMF presents itself through lack of revenue, product usage, low NPS, and high customer churn. A company will burn through precious resources when a sales team is chasing demand that’s simply not there. Sales teams are successful when companies have first established product market fit – their role is not to generate demand.

Educating the market on the problem(s) a solution can solve is part of generating product demand, and sits within the domain of the product marketing team. Depending on how companies are organized, product marketing can reside under product or marketing departments. Developing a continuous feedback loop which gathers data and market insights informs and strengthens the value proposition. When customers understand the impact of a problem, and that it is not unique to them, it opens a dialogue shaping market demand. This is necessary, especially in nascent markets that are not well defined. A variety of sources of stakeholder and user data is essential to understand the target market, customer needs, and creating a product that meets those needs.

In many scenarios however, too much focus is placed on the product and the cycle looks something like this:

• Let’s release an MVP (product) to see if people are interested.
• Not enough people are signing up? Let’s add features to the product.
• Still not enough signups? Let’s pivot and change the product.

As far as market fit, this is often stated a high level overview of their target customer:

• Our new CRM targets sales managers
• Our dev shop targets series A and B startups
• Our ecommerce store caters to millennial women
• My consulting practice offers copywriting services to small businesses that need copywriting

This is not good enough. The above statements are general target markets that do not capture which markets are serviceable by a specific offering.

How is your offering perceived by the market? These are examples of questions to ask in the pursuit of market fit.

• Who do customers think your product/service is for?
• What do customers think makes you unique?
• What pain points do they think you solve?
• How credible do they perceive you to be?
• Why does your solution solve their problem better than a competitor?⁴

Those who can effectively put themselves in the position of the customer, identify their needs, and provide value, will be steps ahead of competition. PMF aligned to a customer’s point of view is a dynamic where the solution provider and customer both have a seat at the table.

Understanding the stage of a company is also a factor in applying the concept of product-market fit. Each stage of a company's lifecycle presents unique challenges as well as opportunities in which the approach to achieving product-market fit varies depending upon whether a company is at an early stage or a later stage, striving to bring new products or services to market.

In early stage companies, PMF is often misunderstood, with companies sometimes mistaking initial traction or revenue for true product-market fit. Companies can be misled into thinking they have product-market fit, even with significant early stage revenue, especially if this revenue is driven by a dynamic, connected founder who excels at sales. Founder led sales is dominant in early stage companies, however demonstrating repeatability is the real test of PMF as it is centered on NPS, customer retention and revenue retention. A premature transition from founder-led sales to product-led growth is often a mistake in early company development where PMF has not been achieved prior to building a growth team.

Additionally, in the startup stage, the focus is on validating the business idea and establishing a market presence. As we touched on earlier, startups often face the challenge of defining problems that are not well understood, especially in emerging tech markets and particularly complex technology with many uses. The more disruptive a technology is to an established market, process, or even impacting many stakeholders in an organization, the harder it is to establish product market fit. As such, in this stage, it's important to gather data and educate the market about the problem and its value. Value messaging needs to be tested again and again, with expert guidance from industry experts and diverse viewpoints.

Sometimes, later stage companies understand that they have a viable product, but cast too wide a net and overlook the impact they can have to a distinct market. In April Dunford’s “Obviously Awesome”, she describes the challenges of Janna Systems, a CRM solution focused on selling into large enterprises as their target market. At the time, the enterprise CRM space was being dominated by Siebel Systems, who was driving over $2 billion in annual revenue. Janna Systems was stuck in a market where their competition was superior in nearly every category, and the market was willing to pay a premium to use Siebel's CRM instead of theirs.

Janna Systems’ story takes a turn when a large investment bank expressed overwhelming excitement about their unique relationship modeling feature, which solved a key problem for businesses within the industry. They quickly struck a deal. Janna Systems promptly repositioned to target the investment banking industry, spurring growth from $2 million to $70 million in just 18 months. With this new found revenue they innovated, began to expand into new markets, and became enough of a threat for Siebel to acquire them for $1.7 billion. This is the power of finding the right product market fit.⁵

In the maturity stage, the company has a stable customer base and consistent revenue. However, maintaining product-market fit can be challenging due to changing market conditions, competition, disruptive technology and customer preferences. Companies in the maturity stage need to continue to innovate and adapt to maintain their market fit.

When nascent markets become established, consolidation of markets also changes market dynamics. Consolidation, as well as maturity of partnerships, often change how companies compete, particularly with the emergence of cloud ecosystems over the last 15 years. This continuous tension and dynamics of markets is in one word - difficult - to compete, win, and to stay ahead of competition.

The Challenges of Achieving Product-Market Fit

Finding product-market fit is a complex process fraught with challenges. The market is dynamic, competition is fierce, and time is limited, making the journey towards product-market fit a difficult one.

The failure rate of startup companies to progress with each round of funding is staggering as demonstrated in this chart by Michael Dzik, an expert in growing organizations. Developing companies could benefit from the rigor of methods utilized by the most successful companies in the world to strike a better balance between speed and continuous pivoting.

In the HBR article,"Why Start-Ups Fail", Tom Eisenmann, a business professor at Harvard Business School who leads The Entrepreneurial Manager course. Having studied hundreds of companies, he describes the phenomenon, …’entrepreneurs are like sprinters who jump the gun: They’re too eager to get a product out there. The rhetoric of the lean start-up movement—for example, “launch early and often” and “fail fast”—actually encourages this “ready, fire, aim” behavior.’ ⁶

In smaller companies, mature offering management processes using proven methodologies and frameworks often do not exist due to lack of awareness, experience, or the idea that structure inhibits speed. Offering management is a governance process that defines a product or service from inception to market stability. The roles of Product Management, Product Marketing Management, and Sales are often blurred in companies in the early stages. When there is no clear concept of an offering management process, and everyone is doing “strategy”, this lack of governance can lead to confusion and inefficiency contributing to lack of ownership of something as critical as product market fit.

Organizations that utilize an offering management framework and processes, are able to drive alignment across an organization by tracking key milestones and KPIs associated with an offering. In smaller companies that do not have a dedicated resource responsible for this overall ownership of an offering, as well as driving the executive alignment process, product marketing management typically owns the function of product market fit. In the stage of an offering's product market fit, the KPIs are product usage, NPS and retention.

Product usage metrics are clear indicators if a product is solving a problem for a defined buyer and is providing value for that customer. Understanding the consumer experience is important and can be informed by product behavior and feedback from customers to inform customer value. Ideally as part of a sales cycle, particularly enterprise sales, the establishment of the size of the business problem can inform how much value the customer received from the product or service. This is an important metric for retention in addition to customer satisfaction.

Also, on the journey towards product-market fit, having the right support and customer success resources is essential to retain customers. Supportability is a key metric in user experience and often a key area that drives churn. Establishing processes to support customers in a way that is not consuming valuable resources from engineering is critical. In smaller organizations, lack of mature processes for services and support is one of the fastest ways companies burn through resources. Sound methods, KPIs, and establishment of roles and responsibilities for support leads to good customer experiences and retention.

NPS is a good measure of overall experience and can be balanced by understanding the NPS of the employee experience as well. Workday is famous for being both employee and customer focused with the idea that if employees are happy, so too are customers. A happy employee is more likely to go out of their way to help a customer be successful, which can be directly measured in retention and customer success metrics.

Misalignment across teams in understanding of who owns product market fit can also pose a significant risk to market success. Competing agendas within an organization on where to play and how to win can drive conflict and hinder progress towards product-market fit. Offering management methodologies provide immense value in helping companies define gates and flush out buyer hypotheses, as well as drive executive alignment, thereby reducing the need for constant “pivoting”. As the saying goes, time is money, in which these methodologies can help companies save both.

In many cases, smaller companies cannot afford top talent from larger, more established companies. This is where the experience of fractional executives who offer their skills on a part-time basis can bring enormous value for organizations getting their footing. These executives bring knowledge deploying capital and building teams, coupled with battle tested experience over long careers, to help mitigate costly mistakes common in newly formed companies. In some cases, the right resource can advise companies on specific markets where experience matters. Additionally, their understanding of how to leverage specific technologies - particularly emerging tech - significantly speeds up the process of finding product-market fit.

The Importance of Identifying the Ideal Customer Profile

Identifying your Ideal Customer Profile (ICP) as quickly as possible is a critical step in achieving product-market fit. An ICP defines the attributes of your most valuable customers, developed through qualitative and quantitative analyses. It's not just about who is likely to buy a product, but who will derive the most value from it, which leads to higher customer satisfaction and retention rates. Studying current customers and gaining insights from their use of the product or service is critical in moving from hypothesis of a market to formalizing the ICP.

The process of identifying your ICP involves several key aspects, including the creation of personas, pricing strategies, enablement processes, value propositions, and sales & marketing materials. Each of these elements plays a role in understanding and catering to the ideal customer. This is part of the offering management framework.

Identifying the ICP is a critical component of product market fit. Unit economics improve with PMF, setting the stage for growth. When product market fit is achieved, customer acquisition costs decline and drive other key metrics for retention and supportability.

Many elements of the offering management framework, including ICP, can utilize AI to accelerate research and content across the development of the product or service as well as materials for sales and marketing. It is not advisable to use AI in these processes without a background in best practices for offering management methods as well as best practice use of AI, which we explore further in the next section.

AI in Offering and Product Marketing Processes

Generative AI and data services are revolutionizing the field of product marketing management, offering unprecedented opportunities to streamline processes, enhance customer understanding, predict behavior, and drive more effective marketing strategies. AI can be leveraged in product marketing management in several ways, including AI-powered market research that can analyze vast amounts of data to identify market trends, consumer preferences, and competitive landscapes.

AI can also enhance customer segmentation. By analyzing customer behavior, it can identify distinct customer segments and tailor marketing strategies to each segment. This level of personalization can significantly improve customer engagement and conversion rates.

Campaign management is another area where AI can bring significant benefits. It can automate various aspects of campaign management, from scheduling and tracking to performance analysis for hypothesis testing of value messaging. This automation frees up time for marketers, allowing them to focus on strategic decision-making and creative tasks. AI-powered analytics tools can track a wide range of metrics and provide real-time insights into campaign performance to help marketers adjust their strategies and find product market fit.

With new AI tools flooding the market, it is important to understand the details of the capabilities so you understand the limits of the service. Many new AI tools are simply UI wrappers on Large Language Models (LLMs). Companies may gain benefits from learning how to work directly with the AI models, versus buying purpose fit AI tools.

Innovating in Offering and Product Marketing Management

In the dynamic and competitive business landscape, achieving product-market fit can be a complex and challenging process. This is where StartStak can make a significant difference. We offer a range of advisory, consulting, and fractional services designed to assist companies on this journey. With a team of experienced professionals and industry experts, StartStak brings a wealth of knowledge and experience to the table. We understand the technology market and the many issues companies are confronted with in finding product-market fit.

StartStak's advisory services provide strategic guidance to help companies navigate the technology landscape. We offer insights into trends, customer behavior, and competitive dynamics, enabling companies to make informed decisions and develop effective strategies.

Our consulting services provide end to end offering management solutions and also help companies reposition when they fall out of product market fit or help redefine their partner ecosystems. Defining the Ideal Customer Profile is a key step in order for sales teams to be effective. StartStak provides comprehensive solutions that are tailored to the unique needs of each client.

In addition to advisory and consulting services, StartStak also offers fractional services. These services provide companies with access to executives on a part-time basis who are experts in strategy, revenue growth and product marketing. This allows companies to leverage the expertise of industry professionals without the full-time commitment, providing a cost-effective solution for companies with resource constraints.

Achieving product-market fit is a major goal in a company's growth journey. With the right support and resources, companies can successfully drive their offering towards product market fit. StartStak provides the expertise and resources companies need to achieve this milestone, to compete on the market edge.

References

¹ Mckinsey: “What separates top product managers from the rest of the pack”, cited in June 2023 (Source)

² The Product Manager: “How To Find Product-Market Fit Quickly And Cost Effectively”, cited in June 2023 (Source)

³ Executive Leadership: Running A Better Company, Michael Dzik, Pavilion CRO School, 2023

⁴ Grow & Convert: “Positioning Is the Part of “Product Market Fit” You’re Likely Ignoring”, cited in June 2023 (Source)

⁵ April Dunford: “Obviously Awesome: How to Nail Product Positioning so Customers Get It, Buy It, Love It”, cited in June 2023

⁶ HBR: "Why Start-Ups Fail", cited in June 2023 (Source)

⁷ Developing A Theory of Enterprise Value, Sam Jacobs, Pavilion CRO School, 2023