How to measure Startup Success with Product-Market Fit

💸 Fundraising
Jul 1, 2021
How to measure Startup Success with Product-Market Fit

Measuring Startup success includes easy-to-track numbers such as revenue, website hits, and the number of Likes on social media. Getting a business off the ground as an entrepreneur is no easy task. But how can someone tell whether their firm is getting traction even after they've been in the trenches for a couple of years? How does someone know that the Product idea in which they've put everything they had is going to last?

The number one reason why startups fail is due to misreading market demand — this is found in 42% of cases. (via Embroker)

Product-market fit refers to the point in a company's development when it has effectively identified a target client and is providing them with a product that fulfills their demands. According to Marc Andreessen, product-market fit is described as "being in a good market with a product that can fulfill that market."

Product Fit is most common in the first two to three years of a company's existence. Due to a shortage of funding, a firm that fails to establish Product-Market Fit during this stage is generally forced to pivot or shut down.


How to optimize your Product-Market Fit?

The greatest worry many entrepreneurs throughout the world have is that their products will die due to client turnover.

Successful Products are those which keep up with their consumers. Those who can't keep up or fail to broaden their present offers are doomed to obscurity, if not death.

The best way to avoid flattening your growth is to continue developing your product to suit fresh use cases for your Potential customers.

Furthermore, because you're enhancing your product's capabilities, you'll be able to tap into new market sectors. Improving your product-market fit is a gradual process that can be done with the help of a Great Marketing Team. However, you may make it better by tracking the metrics like Net promoter score (NPS) and customer churn.

Scaling 

Scaling is the next phase in a startup's lifecycle after establishing product-market fit. Scaling before a firm has achieved product-market fit can be disastrous.

Scaling is a popular method of expansion for many business entrepreneurs. They believe that by doubling the number of people, they would be able to double the rate at which goods are released. They then extrapolate this double/double/double assumption to predict that their revenue or client base will quadruple.

Scaling is frequently the death knell for startups because a startup's financial flow is drained by scaling. Your startup will fail if you don't have enough money flowing in to cover the expense of your Product Team.

On the other hand, scaling so slowly that your firm is entirely caught off guard when PMF begins to emerge. You could discover that demand for your product is rapidly increasing and that you're negotiating more partnership and sales arrangements than you can keep up with.

Getting into a PM fit is like clutching sand in your hand—it'll be gone tomorrow. As your startup's effect radius grows, it's a vanishing illusion that you'll have to keep pursuing. Only through evolving with your consumers can you maintain your product in step with the market along with your Product Team. Make them your growth compass—create new product roadmaps, prioritize feature releases, or roll out new offers based on their feedback.

Many marketers attempt to quantify PMF as a statistic that helps companies grow, but many of them do it incorrectly. Yes, PMF is a watershed moment—but it's also a fluid concept that adapts to Product Updates. 


The Product-Market Fit Journey (via Adam Fisher)



Here are some Financial Metrics to Measure Startup success:

It's important to remember that cash flow is paramount. Your business won't be considered viable if you aren't earning money. That begins with keeping a careful check on how much money is coming in and whether it is increasing or decreasing.

Revenue is a straightforward metric: it's the total value of your sales or invoices for a certain time period. However, the time range you employ is determined by the nature of your business. 

If you sell high-value items or services, have a tiny customer base, or operate on long-term contracts, it'll probably make more sense for you to concentrate on quarterly or even yearly income. Otherwise, you risk having numbers that are deceptive or unhelpful, making it appear as if you're suffering when you're working on a large contract that won't be invoiced until the end of the year and you will end up losing a viable product. 

Client Acquisition Cost (CAC) is a startup growth metric that determines how much it costs your company to acquire a new Potential customer. It's calculated by taking total sales for a certain time period, deducting marketing expenditures (salaries, tools, spend, etc.) for that same time period, and then dividing by the number of potential customers you gained during that time period. You must cross-reference this measure with your Customer Lifetime Value for it to be relevant (LTV). The LTV informs you how much money you make from each client throughout their relationship with you.


Finally, your LTV must be significantly greater than your CAC for your company strategy to be profitable. It is a Key Metric to measure growth.

As it costs so much more to acquire a new client than it does to resell or upsell to an existing one, keeping track of (and increasing) retention is critical.

This means that concentrating on keeping and upselling to your existing client base is more important than recruiting new ones.

Formula Used:

 A = How many customers you have at the start of the period
B = How many customers you have at the end of the period
C = How many new customers you onboarded during the period
Customer Retention Rate (CRR) = ((B-C)/A) x 100 


The ratio between your selling, general, and administrative (SGA) expenditures and your sales numbers is calculated here. It's crucial since it simply indicates if your business's operating costs are comfortably greater than the income you generate. There are several methods for calculating this (more on that here). The easiest method is to divide the sum of all your outgoings by the entire revenue for any particular month.

Gross Margins and Burn Rate are two related measures.


Conclusion

Finding your target market and obtaining a group of consumers who are satisfied with your offering is rarely enough. This is a challenge that every startup faces in its early stages. Adding new features or lowering your rates won't help you keep existing customers or attract new ones.

Keep in mind that keeping track of how these elements interact is just as essential as keeping track of them individually. When you compare them, you'll get a full view of your company's health.

Simply said, while this may increase client acquisition in the near term, it will not benefit you in the long run. The only thing you can do is strive to provide genuine value to your consumers daily. Because this is where it all comes to an end. If you do that, you won't have to worry about determining product-market fit.


Amit Khanna - 7startup Advisory
Amit Khanna, Founder, 7startup



Amit Khanna is the founder of 7startup.vc and has 19 years of experience with Startups and the Enterprise, holds an MBA, focusing on Growth and Investments. Amit supports entrepreneurs with every aspect of their business including concept and product development, investor presentations, fundraising, and scaling up.



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