Product/Market Fit is a phrase you hear startups, VCs, and many PMs obsess over. It’s an important question, which is why a lot has been written about it whether long form essays (like this one from WP Engine founder Jason Cohen) or tactical advice (like the classic survey created by Sean Ellis, or Superhuman’s P/M fit approach).
Yet, before you go deep to try to refine your product to reach product/market fit, it’s a good idea to take a step back. Are you solving the right problem? Are you targeting the right audience?
What is your business’s value?
Over the last 15 years, I’ve seen a lot of startups. In that time, I’ve observed many companies that have survived and thrived, many flashes in the pan, and some that never really got going.
As I’ve observed these companies, talked about what works and doesn’t with friends and mentors, and learned the hard way firsthand, I’ve noticed some important patterns in what succeeds.
I call this theory, the “Hierarchy of Startup Business Value”, and use it to evaluate startup ideas and their potential.
Borrowing from Maslow…
This theory borrows from another hierarchy you may be familiar with: Maslow’s
Maslow’s Hierarchy focuses on the needs humans have in life, with each layer being less essential to your survival, but more emotionally fulfilling.
Introducing the Hierarchy of Business Value
I’ve taken the hierarchy and focused on how each level is more valuable than the last.
A few notes about using this hierarchy:
1) Higher is always better.
If you’re debating between two products you could build, or two features you could create, always defer to the one that’s higher in this hierarchy.
People always buy what they *must* before they buy nice to have things, and this is especially true in the B2B/Business world of SaaS software.
And if you’re evaluating a new startup idea, think hard about where you are in the hierarchy. It’s a lot easier to get people to buy something they know they have to buy from someone or invest in building themselves. Seeing what the alternatives cost and how they position themselves can help save you years of wasted time and effort.
2) “Nice to Have” is the danger zone.
Be really careful if you think you might be in the “Nice to Have” category. I put the Grim Reaper emojis in for a reason.
I know many, many startups that got a lot of free signups and interest, but it turned out to not have a truly painful problem they were solving. When it came time to ask people to pay for their product, they didn’t get the conversions nor growth they expected.
You can start here if that’s what it takes, but you should then be hyper-focused on graduating to a more important problem to solve that is higher up the hierarchy. Segment is a good example of this, because they started with a simple, free, open source tool that no one paid for and quickly learned what the market really wanted and would pay to have solved.
3) Start charging sooner than you think
One of the best ways to find out if your product is higher up the hierarchy of value is to ask for money:
- If you’re solving an important problem, then they should be willing to pay to solve it.
- If the ROI has been huge for them and obvious, then they should be happy to tell you about it, and pay you as well.
- If no one cares, it’s a low value problem, or they can’t tell if it worked, it will be hard to get paid.
Regardless of what you *think* your value is, until you cross the penny gap, you don’t know what you have. (Ed Note: Excluding social network apps and other free consumer products, of course.)
So be brave, and find out sooner by asking your customers to pay early on. This will help you avoid being years in and still not knowing if your product matters.
New rules in 2023
The fact is, the rules have changed in 2023. They started changing as the 0% interest rate phenomenon came to an end, and funding started to dry up.
This reality has a lot of companies facing the harsh truth of the hierarchy of business value:
But it’s not just that there’s less funding.
It’s also led to many tighter budgets, higher churn rates, new procurement and purchasing rules, as well as longer sales cycles. All of these make growing and sustaining your business harder.
It’s also raised the “Death Line” of the kinds of problems/value that is likely to succeed, which led me to make a slight alteration to the above chart:
That’s right, if you save a company money or especially time, there’s a good chance you could be on the chopping block when they cut their budgets, or you may never be purchased in the first place.
What does that mean in practice?
Looking at the market, what’s happened to other startups, and talking with friends, clients, and colleagues, I’ve noticed the following shifts:
- Employee discretionary budgets are down. If you’re used to being expensed easily, it probably just got a lot harder. Now you need to show value to their boss or IT, not just the individual employee with a low limit credit card.
- IT is regaining control and influence. Much of the last decade was “product led growth” and “bottoms up SaaS” where IT was forced to go along with what employees liked using. Now, IT is consolidating purchasing and requiring everyone to use the same tool. Where a company had 5 tools before, they’re now buying 1 master license (with volume discount), and 4 companies are thus experiencing major churn.
- Budgets overall are much tighter. Sales cycles are longer, and it’s common for businesses to go through a buying cycle only to choose nothing. Why? It’s too risky to choose something when you have less budget to spend. Also, when you want to buy 3 things and have budget for only 1, there are 2 product lines that never get purchased even if they’re considered.
- People may cut in one place to save another. If your customer’s budget has been cut, you may find yourself losing a deal, because they needed the money spent on you for something else. If the choice is cutting your product or laying off an employee, your product is going to lose unless it’s at the very highest point in the hierarchy.
These factors make building a business harder than it used to be, but smart PMs are able to navigate this challenge. With the right approaches and mindset, you can navigate these changes and any others you’ll face when market dynamics shift.
How should product managers react to these changing rules?
Knowing the rules have changed and handling those changes well are obviously two very different things. If you’re staring down a tidal wave of these kinds of changes challenging your business or product, start here:
- Make sure your problem REALLY matters to people with budget. When budgets are tighter, there are often more approvals needed to buy something. Make sure you know who your buyer is now, and deliver the most value for them.
- Build tools that your buyer will love (not just end user). The days of buying a tool simply because your team says they really like it are over. If you’ve been putting off any integrations, administrator tools, reports, or other functionality that the buyer or key decision maker will like, now is the time to deliver it, even if that means cutting back on your end user roadmap.
- Find your must have features and double down. Often, a product will have a mix of features that range across the hierarchy. While it’s always a good idea to focus on the highest value features, now it’s even more important. Any low usage, nice to have features should get little to no attention.
- Understand your value and rise up the hierarchy. As Jason Cohen explains well in his post, “figure out how your product creates value in the way your customer already measures value, and position your product as a way to accomplish that.” You may be able to raise your prices significantly if you can reposition the value your provide to be better than save money or time.
And how do know what these things are for your company? By seeking out the answers.
Product Value is a Conversation.
Great product managers recognize the importance of sourcing information and data as many places as possible. Yes, analytics helps, but it’s talking to others that helps you really understand the nuance and context of your numbers so you make the best decisions.
These conversations come from a variety of places:
- Customers: Obviously you need to talk to your customers. Yet, it’s important to make sure those customers include everyone in the decision making process from end users to buyers to administrators. Any one of them could sink your deal if you don’t deliver what they need.
- Sales Team: While some sales people are too coin operated and script following to help, every sales team I’ve ever worked with has had a few stars who really understand their customers. These people are golden because they can share useful insights on deals won and lost, and provide valuable intros to have detailed interviews with the right customers and leads.
- Support/Success & Account Management: Much like sales, they can often provide insights about key customers. Again, not every team member may be as good at helping and providing insights for you, but there are usually a few who understand what you need. Build relationships with them, and lean on them for intros when you need them.
The other benefit of this approach is that you engage much of your team in the process of solving your problems. Nothing improves stakeholder relationships quite like listening to them and engaging them in your processes of learning from and talking to customers.
Product Value changes over time.
As I just outlined for you, with the markets heading for a recession, and funding capital a lot more scarce, the rules have changed. What worked in the those good old days of tons of capital and low interest rates doesn’t work now, so you’re only hurting your business if you keep operating as if they still do.
At the same time, when the economy comes roaring back in the future, the rules will change again. At that point, an austerity focused approach would leave a lot of opportunity on the table.
That’s why it’s important to always be communicating with your customers and watching the market. The companies that can adapt to changing dynamics the fastest and most effectively are the ones that win the most.
How are you adapting to the changing dynamics of the current market? How do you think about the hierarchy of product value?
Share your thoughts in the comments.