Prioritising to Product-Market Fit

Some thoughts on the steps taken to achieve product-market fit and how to prioritise your activities at each stage (also applies to product building, as well as company building)

Prioritisation is vital to startups. The adage, most startups die from indigestion, rather than starvation is true. When I founded Furrow, I struggled with this a lot. There's so much to do and everyone has an opinion on where you should be focusing and what you should be doing. In my opinion, the best founders are constantly asking for help and advice which can sometimes add to that confusion if you're unable to prioritise your efforts.

I was definitely overwhelmed at times and unsure on which way to go. Everything felt important and a high priority. I wasted a lot of time early on doing things that just weren’t important at our stage. In reality, there is one activity or initiative that is a higher priority than everything else at any one time. My job as a founder was to identify this and direct the team towards it.

Part way through our journey, I sat down and thought through all the different things we need to do to achieve PMF at Furrow and build a successful business, and then prioritised them. I found the process incredibly helpful as we now had a clear plan of action. Ultimately we weren’t successful, but the process informed how I think about building a company (or a product within a company) and focusing on the right things as you de-risk a business (or product).

This also helps with the growth story you provide investors. Each stage is roughly linked to a funding round and provides a useful way to reframe questions on later stages of the process from early stage investors (such as those angel investors asking about CAC and acquisition channels when you’re not even sure if you have a problem people want solving yet). As you tick these off, you will be able to go to investors and say "we have proven xyz (stage n) and we will use this round of funding to double down on that, while proving abc (stage n+1)".

Below is a slightly adapted version of an internal document I wrote for the team at Furrow. Rather than change all the wording from internal use, I have decided to leave most of it as is for the sake of simplicity and publishing this more quickly. The earlier stages are much more fleshed out and have more detail as these were the stages we got to at Furrow. Sadly, we never made it past Stage 2 (and arguably moved on from Stage 1 too quickly).

The four stages to PMF

1. Problem - Market Fit

Success Criteria: We know the problem customers want solving and the value proposition that attracts customers

Stage: Idea/pre-seed

Focus: Conversion

Firstly, we need to prove we have a really deep understanding of our value proposition and what customers want/the problem they want solving.

If we know this, we know we are solving a meaningful problem and can work towards solving it, even if all other metrics are on the floor. We can have awful retention or really high CACs if we know what problems customers want solving and can build towards fulfilling that demand effectively (which shows in retention/CAC etc). However, the inverse of this is not true. We can have the best channel for reaching our customers but if we aren’t solving their problems, we don’t have a business (and likely won’t have good metrics for these later stages anyway). There is no point optimising for Facebook reach or SEO when we don’t have any compelling content to fill it with. In Paul Graham/YC speak, are we building something people want? Do they have this problem and do they care enough about solving it?

This stage is also about message-market fit. As part of finding problem-market fit, we know what problems customers want solving and how they discuss it. We can then parrot that back to them in our messaging.

Metrics to track

For Furrow, this shows up in our conversion rates, but there could other metrics that are better at showing this depending on the business. This is a slightly tricky stage to measure and quantify and is a bit more anecdotal and qualitative. We are looking here at conversion rates once people see our message/value proposition and understand the problems we solve for them.

This is where message-market fit comes in. Once customers understand the problems we solve, do they care about them enough to convert? This is the conversion rate we should be measuring. Our initial messaging will be off the mark so conversion rates may feel low, but this is a consequence of a weak message that doesn’t convey the problem to the customer, not a weak problem. If we are solving a meaningful problem for them, once they understand what we are solving, they will be interested in trying our solution.

Note: This is different to CAC. Although conversion rates impact CAC; for me, CAC is more focused on finding effective channels to acquire those customers. What we are testing and measuring here is, are we solving a problem that customers want solved? There is also a challenge here around optimising for a small group that have/are aware they have the problems you solve compared to viewing conversion rates across the market. A small group of highly converting customers is better than a large group of medium converting customers, but it could show up as low conversion rates if you don’t segment your market effectively. This is possibly the hardest part and core part of being a founder - using your gut instincts to figure this stage out.

Other metrics that may be useful depending on the business:

• Click through rates on ads

• Email reply rates

• Waiting list sign ups

• Activation rates

• Basically anything that indicates people are interested in solving the problem you say you solve

2. Problem - Product fit

Success Criteria: Our product actually solves the problem for the customer and is able to meet their demand successfully

Stage: Seed

Focus: Retention

Once we've identified our value proposition to our customers, we can then focus on making sure we effectively fulfil it. At this stage, customers have a problem they want solving and believe our proposed product/solution will solve it. We now need to make sure it successfully does. The key question here is; are we giving customers something that solves their problem?

Metrics to track

From Stage 1, we know what people want and can now focus on providing it to them and satisfying that demand. If we successfully satisfy their demands, they'll keep coming back and starting to form a habit. This will show up in retention rates and is the core metric to track and improve in this phase. If customers aren’t retaining, we know we are not effectively solving their problems.

Note: This is the stage we got to at Furrow. Customers were interested in our product (kind of; I should have spent more time in Stage 1 before progressing) but ultimately we couldn’t deliver a satisfactory experience that solved their problems and met their requirements.

Other metrics that may be useful depending on the business:

• 30-day repurchase rate

  • Depending on this business, you may choose a different time-scale to track active, repeat usage

• Number of orders from each customer (smile curve); number of orders from each customer scaled to length of time they've been a customer

• NPS

• Word of Mouth acquisition

3. Product - market fit

Success Criteria: We meet the demands for customer so well, they form a habit and their engagement increases

Stage: Series A

Focus: Engagement/NRR

Note: This stage could be where you say you have product - market fit, since your product is increasing engagement with its market (your current customers), and that everything after this is marketing/sales to find cost-effective channels and drive more customers into the top of the funnel. If you want to avoid calling it PMF, you could call it solution - market fit.

Once we've built something customers want and can give it to them, we can then focus on increasing customer engagement with the product. This shows up in increased usage as the habit strengthens and they spend more time engaged with your product. We have solved their problem so successfully, they can’t live without us.

Metrics to track

For Furrow, this will show up in order frequency and average order value growth, but for other products, this will show up in different metrics.

Note: There is a difference between retention and order frequency. Retention is about whether they come back in the first place. Order frequency is about whether we are their #1 provider and they are engaged customers - this is similar to a weekly customer vs a monthly customer; both retain but one is much more engaged with our product

Other metrics that may be useful depending on the business:

• Positive Net Revenue Retention (ideally overall, but positive NRR for specific segments is a good sign and worth exploring)

• DAU/MAU

• Free to paid conversion rates

4. Channel - market fit

Success Criteria: We have found scalable and cost-effective acquisition channels

Stage: Series A/B

Focus: CAC/channel

Now we've got engaged customers, we can shift our focus to finding cost effective ways to acquire them. In my opinion, it doesn’t matter if you are not acquiring customers cost effectively early on, you are not focused on that. You are de-risking the business and focusing on the earlier stages. Focusing on acquisition channels too early is putting the cart before the horse. There is no point doing this if you do not have a product that people want. You can build with a channel in mind - and it is useful to have a cheap-ish way to acquire customers to test the above priorities - but it is not essential to de-risk the business. Optimising your channels to reduce CAC before this stage is premature. Once you’ve found a channel that gives you a reliable stream of customers, pump a regular amount of spend/activity through that and focus on the other stages.

Note: Channel-market fit is finding a channel where people don’t realise they’re being sold to or don’t expect to be sold to (think Facebook ads in the DTC glory days before your feed got swamped with ads, influencers before the creator economy or webinars before they became saturated and used by every B2B company to generate leads under the guise of “informing customers about industry trends”), but that’s probably an essay for another time.

Metrics to track

This will be when we focus on CAC and sales/marketing funnels. How are we adding people to the top of the funnel and moving them through the pipeline? What channels are most cost-effective?

Other metrics that may be useful depending on the business:

• Word of mouth

• Referral rates

• Other product-led growth metrics

A note on marketplaces

Furrow was a marketplace enabling anyone to buy from any farm. This means we needed to go through this process for each side of the marketplace. We initially focused on the supply-side of the market as our customer conversations indicated that they wanted a minimum range of produce available before they'd make a purchase. At the time of writing this memo, we hadn’t fully proven out steps 3 and 4 with our supply-side, but we had enough retaining supply to switch our priority and focus to the demand-side of the marketplace.

Depending on the constraints of your marketplace, you will need to figure out if you sequentially go through each stage for each side of the market, starting with the side that you are constrained on, before moving to the next stage (i.e. stage 1 for supply, stage 1 for demand, stage 2 for supply, stage 2 for demand), or complete several or all stages for one side before moving to the next like we did.

Going back to earlier stages

Once you’ve “completed” a stage (if you can ever do that), you are able to go back and improve the metrics. However, I believe the focus of your strategic initiatives should be on your current stage and improving those metrics, whereas BAU / tidy up work should be on improving the earlier stage metrics. That’s not to say you can’t continue improving conversion or retention but as you think about moving between each stage, and if you raise investment, how you plan to spend it, the majority of the focus should be on de-risking the business. Going back to earlier, you can use this as a growth story for investors. A % of the round will be to double down on what’s worked so far, and the rest will be used on de-risking the business and proving out the metrics for this stage.

Applying to product building

Just as this sequence of stages can be followed at the company level on a macro-scale, they can also be followed at the product and feature level on a micro-scale. As you think about building new products or new features and allocating investment towards them, you can de-risk the build by following these stages (skipping out 4 if you are building for an existing customer base). The cycles and feedback are much quicker but the same process applies.