The ability to narrowly and precisely identify your customer is a critical signal of product-market fit. The more detailed a description you have of your target customer, the better. You can use a variety of quantitative and qualitative insights and data to better identify your customer. For example, identifiers could include demographic characteristics (such as age, gender, income, geography or occupation), as well as psychographic and behavioural factors (such as attitudes, opinions, values, and usage of other products).
Regardless of the defining characteristics you use, be as specific as possible when describing your target customer. Without a specific and narrow customer segment, you risk delivering a solution that is too broad or generalized and, as a result, is insufficiently developed or is incomplete for any particular user. In sum, a solution that is too general or broad may not solve a specific problem faced by anyone, and will be unlikely to succeed. For early-stage startups, it is important to have this specificity for early traction; the number of segments served will increase once the company establishes a foothold and can manage the complexity of addressing diverse needs.
Standalone mobile money agents serving more than 150 customers a day.
This is a narrowly-defined target customer segment that can be used to calculate a specific total addressable market. The problems faced by members of this segment are likely quite similar in nature and form, so you will be able to tailor your solution to their particularities.
Importantly, the definition allows you to exclude users whose needs might distract you. For example, knowing the type of locale (standalone) and number of customers (150+) allows you to exclude other types of agents who won’t find your service useful. These criteria also have the advantage of being observable and verifiable.
Gig workers facing an emergency.
While this example is a bit specific, this target customer segment is still too broad. The range of all gig workers would include too many kinds of users, each with their own preferences and problems. Trying to solve all of their problems and address all of their preferences will leave you without a clear target profile.
Improve your description by narrowing in on a specific type of this increasingly broad segment so you can target a particular type of gig worker with a specific problem. For example, delivery drivers who own their own car would be a more precise segment
Qualified users with access to instant credit checks.
This target customer segment is much too general and broad. Solving everyone’s problems is a bad idea, since, once you zoom in, you will find great diversity in the problems they face. The idea that everyone needs a loan is a truism and won’t allow you to craft a meaningful value proposition that resonates with any user in particular.
Now try describing your target customer. Is your description sufficiently specific so as to allow you to target them quite precisely? Can you tell a story about their existing experience when it comes to the problem you’re looking to solve? Do you know where they are and how to reach them? Does your description allow you to exclude users who may not be a good fit for your value proposition?
USER RESEARCHVALUE PROPOSITION
Knowing who your customer is will get you halfway to an impactful value proposition; understanding their pain points will get you the rest of the way. More specifically, it helps to know how profound your users’ pain is and to what lengths they are willing to go in search of a solution. Do you have an evidence-based picture of the frustrations they experience with existing solutions in the market? Are they actively trying to solve the problem? Will they take any ‘painkiller’ that you can provide? How much are they willing to pay to solve this problem?
A painkiller is a solution that successfully solves a profound pain point for your target customer and is likely to generate real traction. In this case, the problem being solved is important and meaningful to users. Furthermore, their current solution is decidedly sub-par; it barely solves the problem and creates a number of risks and costs in the process.
A vitamin solution is a dangerous category – it gives the illusion that it is solving a problem but doesn’t solve a problem enough to become a real business. In most cases, the problem isn’t sufficiently felt by users or is only solving a small portion of the problem without addressing the full picture. The bottom line is that vitamins are not salient or compelling enough to serve as the foundation for a business.
In contrast to a painkiller, candy is a solution that is nice to have, but that doesn’t solve a problem that users feel particularly profoundly. It may be that the problem is not so meaningful to users, or that their current solution works fairly well. In this case, a slight improvement may not be enough to get them to make the switch.
In many ways, these questions can be answered by undertaking additional customer research or by digging a bit deeper using tools like customer personas, customer empathy maps, or by mapping customer pains and gains as outlined in our user research guide.
Migrants need to get remittance to their families in rural areas or across borders, and are currently using runners for the job, exposing themselves to risk of theft.
With a specific, keenly-felt problem, your solution is more likely to be a painkiller— successfully solving a pain point for your target customer. This means users will be more likely to pay for the solution and to use it repeatedly.
In this example, the problem being solved is important to users as their families probably urgently need the resources. Furthermore, their current solution of informal transfers or runners is risky and probably expensive.
Low-wage workers need a place to save money for emergencies and currently store cash in their homes.
This is a real problem, but it is poorly specified since the problem described is actually a symptom of a more generalized lack of access to financial services, which is the true underlying problem.
Moreover, it is not clear that the current solution that users have is a bad one. Storing money at home has advantages, so your solution will need to be a significant improvement.
In this situation, your solution is most likely a vitamin—while it appears to be solving a problem, the value isn’t enough to build a business case and generate traction.
Workers need to keep track of their income and expenses; some use a notebook.
In this case, the problem is not keenly felt by users, and, in fact, they seem blissfully unaware of it! In these instances, your solution will be candy— nice to have, but doesn’t solve a real pain point. This pain point in question is too shallow, and there isn’t sufficient evidence that users are actively looking for a solution.
Workers may find it difficult to keep track of their complicated financial lives, but they don’t feel the need to do so keenly enough to search for a solution.
Moreover, the current alternative (notebooks) is quite effective, so your solution would need to be stronger. For example, tracking expenses in an app is probably too much effort for users unless the data is captured automatically. If they need to input data, they would need incentives and value at each turn to become active users.
Describe your users’ problem. Does your description indicate a clear understanding of their pains, to what extent they are actively looking for a better solution and whether your solution is one they actually need? A strong pain point description will explain the problem your user faces as well as the pain they face in solving it, in terms that truly matter to them.
USER RESEARCHVALUE PROPOSITION
Once you’ve identified a specific target customer and a valuable solution to a particular pain point, the third step to achieving product-market fit is ensuring your product is accessible to users and getting it into their hands. Good ideas and products can fail because startups cannot hack customer acquisition fast enough or because the incumbent (or a competitor) gets there first. Do you have a way to get to critical mass without having to break the bank on CAC (customer acquisition costs)?
Determine which go-to-market strategies make the most sense for you to reach the highest volume of target customers in the shortest amount of time. For instance:
Can you offer your product to existing customers of adjacent companies via B2B partnerships? If so, what is the added value you are bringing to the table for that business?
Does it make sense to leverage field agents or mobile money agents to reach customers that may require face-to-face interactions in order to begin using your product? How will you train and compensate these agents?
To what extent is a tech-plus-touch strategy necessary for building trust among prospective users? Will you need to build a robust call center to answer customer queries and support the sales process?
To what extent will you be able to leverage digital marketing or social media marketing to acquire customers? How digitally savvy is your target audience?
For purely digital companies that rely on a network effect, one way to reach virality quickly is to leverage a referral strategy that involves a k-factor, a term that describes the growth rate of a customer base. K is calculated by multiplying the number of referral invites sent by each customer by the percent conversion of each invite. Put simply, it tells you how successful your referrals are or how “viral” the product is. With a k-factor distribution method, new customers are automatically on-boarded by existing customers. This model describes solutions like Dropbox or WhatsApp, in which using the solution itself propels user acquisition. For example, when you share a file with someone, they get to experience Dropbox (and get onboarded).
K-factors are not feasible for many business models, but startups still need to be intentional about how to acquire customers. For many, partnerships with employers may be a good route (B2B2C), but challenges of activation will still be present and should not be underestimated. Which of the three cases below best describes your approach?
For further reading, check out “Don’t bring a knife to a gun fight”.
You can use Chipper Cash to send money to a friend for free. To receive the money, your friend also needs to download and register for Chipper Cash.
Chipper’s customer acquisition tactic involves a k-factor in which usage by existing customers drives acquisition of new ones, eventually leading to a tipping point toward exponential acquisition.
The next best acquisition strategy is an easy-to-use and attractive referral program in which users recruit other users for some benefit. There are two aspects to a good referral program: (1) social capital – the motivation a user has to refer your product is to look good in front of their friends; (2) incentive-based referrals, where the user and their referee get a discount or bonus for signing up. The second aspect is very commonly used to acquire users.
Employers will provide employees with our service, and we will communicate with the employees to recruit them.
Partnerships are a moderate acquisition tactic as they give you access to potential customers, but still require significant work to acquire and then activate those customers.
A moderately strong acquisition strategy usually means that either the channel is right and the messaging isn’t, or the other way around. Remember when it comes to partnerships, value also has to be clear for the B2B partner, and they need to be equally bought in for it to be successful.
Our customers use Facebook, so we will use social media ads for a purely digital acquisition strategy.
A weak acquisition strategy often means there isn’t one. This happens when founders take a “Build it and they will come” approach.
Similarly, while it can help in raising awareness and bringing in volumes of leads, a solely digital marketing approach can be a weak strategy if it’s not built out properly. Targeting (and re-targeting), messaging and the full user journey, from ad to landing page to product introduction, must be precise and relevant in order for this channel to bring quality leads.
Depending on the level of digital sophistication your customers have, a digital marketing strategy can work well in combination with other strategies such as referral programs or partnerships.
A good acquisition strategy will include a plan of exactly how you will get your first 10, 100, 1,000 users and so on.
Describe your customer acquisition strategy. Are your users or your partners helping you to acquire more users or do you need to spend a great deal of effort to acquire each one? How much does it cost you in time, money and effort to acquire new users? Do your current tactics for customer acquisition need to be refined to lead to better conversion?
SEGMENTATIONCUSTOMER ENGAGEMENT
When you introduce your product, do your customers stand up and say, “I needed this yesterday”? The ability to communicate your solution easily and clearly is key to getting to scale quickly. Being able to simply and quickly articulate what the product is and the value it provides, in a way that resonates with your target audience and the pain point they feel, will be critical to generating traction.
For example, when M-Kopa hit the market with their PAYGo solar solution in Kenya, they described their product as “smart technology for clean cooking”. This resonated with their audience immediately. The solar-powered stoves were a simple solution that addressed very real pain points related to dirty and expensive coal or wood-burning stoves. This powerful articulation allowed them to sell 1,000 units a week within their first year of operations.
Clear communication, however, needs to extend from the awareness stage (immediately and effectively conveying the product offering and benefit), through to onboarding, a user’s first experience, and ongoing milestones, renewal reminders and upsells. If a customer understands at a high level what you’re trying to sell, but becomes lost when attempting to sign up or take first steps, your onboarding process is unclear. Requiring a user to take too many steps before they receive any value is also a good way to lose them.
Similarly, if a user’s first experience is a shaky or negative one, you may not get them back. Consider what’s necessary to ensure they see value as early and as easily as possible. Will they require support from customer service? How easy is it for them to access that support? Will they need small nudges or encouragement to ensure they take all necessary steps and see value? For products that can be upsold or that require renewals, consistent and drip-fed communications with customers to introduce additional benefits or remind them why they should renew with you are key to ensuring you remain top of mind. Good communicators are able to leverage data insights they have about each customer to make communications feel as personalized and relevant as possible, while concisely and clearly reminding customers of the product’s value.
Get some of your salary before payday.
A quick, clear one-liner should both explain what your product is and illustrate the benefit it provides, either implicitly or explicitly.
In this case, we know that incomes among this particular target audience (low-income salaried workers) tend to be inconsistent, and that expenses are similarly unpredictable. Given these tendencies, access to liquidity (especially low-cost, earned liquidity) will be extremely valuable. Therefore target users can easily understand what’s being offered, and it speaks to a pain they feel every month. It’s also written in language they use themselves, and indicates an action vs a static offering.
Insurance for malaria treatment.
After a lengthy explanation about your solution, your prospective target customer goes, “Aha! Now I get it.” You may get there in the end, but it takes some time (probably more than you have when trying to sell quickly). This is an indicator that your messaging strategy may need work.
In this example for malaria treatment coverage targeted toward low-income Nigerians, some target users may not understand what insurance means (or might have negative reactions to this term based on prior experience) or understand how the product works. Furthermore, they may feel they already have adequate solutions for treating malaria (a common affliction in many emerging markets), so there isn’t a clear benefit. Good communicators understand why users are feeling particular pain points.
In this case, highlighting the product’s price point, savings potential (vs self treatment) and relative ease of use would be welcome additions that might go farther to catch the attention of their users.
A supply chain solution for conscious consumers.
Communication is weak when a quick explanation isn’t enough to convey your product, its benefits or how it works, when it takes too long for users to see value, or when the lead needs a demo to understand it enough to want to sign up.
This example is from a product designed for farmers but only speaks about consumers at a very high level. What it is and what it offers are not clear. Furthermore, the use of jargon like “supply chain” is likely to dissuade smallholder farmers to whom this pitch is aimed.
Does your solution have a sharp pitch that will immediately resonate with users? Is it simple and straightforward? Can your users explain your product to other users? Is communication clear and accessible from signup, through onboarding, first use and ongoing interactions?
SEGMENTATIONCUSTOMER ENGAGEMENTEXPERIMENTATION
Customer retention refers to the ability of a company or product to continue serving its customers over time; that customers use and/or purchase the product multiple times, or renew subscriptions. High customer retention means adequate (thresholds vary by sector and in accordance with the financial model) volumes of customers continue to buy or stay engaged with the offering without defecting to another product or sliding into non-use entirely.
Reasons for low retention or high churn can be related to bad product experience, poor communications, poor customer support or even a misalignment with initial expectations or needs.
Ultimately, retaining your customers goes back to targeting the right customers (question 1 above), effectively demonstrating and communicating your value proposition (question 2 above) and effectively engaging your customers from their first experience and throughout their time with you (question 4 above).
If you are not sufficiently targeting users, you’ll likely see a lack of initial acquisition despite high lead volume and/or a clear drop-off point somewhere along the initial customer journey. When there is too much complexity in your user base, it will skew your data and make it hard to understand what is going on. If you are targeting the right customers, and they are signing up but they are not returning, then you have problems with your value proposition, product experience, communications or customer support.
Look at the data to determine where you’re seeing customers disengage throughout their journey. Is it during the onboarding process? Is it after their first product use? Do you see an influx of customer support requests related to a particular issue? Lack of product ‘stickiness’ also indicates lack of product-market fit. This may be the case if customers onboarded, and their first experience was positive, but the value they saw wasn’t sufficient enough for them to come back. If this is the case, you need to revisit your offering.
If you have reached the flat part of the graph above, and can accurately predict what percentage of clients will stick around, then you have cracked retention.
It’s important to define what an ‘active’ customer is for your product in order to properly evaluate retention levels. Some products require users to engage on a daily basis for the product to really provide value, while some may only require interactions once in a while, and still be considered useful.
Typically, adequate retention means that between 35-60% of your clients use your product regularly and predictably.
A startup gaining ground in terms of retention either has very low but rising retention (on the blue line, but the blue line represents an inadequate proportion of overall customers given acquisition costs), or sees customers using their product in unpredictable fashions, making business planning impossible.
If only a small percentage of your users are returning, but those that do are super active, speak to them and figure out what is driving their behaviour, so that you can replicate it. It’s possible that your offering may be too specific and only appeal to a small segment of users.
If a significant percentage of customers use more than once, but without consistency or in an unpredictable fashion, think about how to make usage more regular via new features.
If users are onboarding and using the product once, but returning again afterwards, retention is a problem.
For instance, if you see a spike in acquisition due to a financial incentive or prize, or due to a particularly successful campaign, but retention remains low, there is an issue with the product experience, communications or support. This is an indicator you have not achieved product-market fit.
Similarly, if your analytics are not strong enough to indicate which customers are returning and which are new, then you are shooting in the dark. In order to begin to tackle retention challenges, proper analytics and an understanding of your user base are imperative.
The holy grail for any startup is when customers not only stick around, but also help you to acquire new customers via referrals and recommendations. When active users become your champions, you can use them to get further insight into how to serve others like them, and to drive referrals. Does this describe your business? What does your customer retention look like? What percentage of clients stick around and tell their friends about your business?
Customer retention is one of the most important metrics indicating whether you have achieved product-market fit. There are several ways you could measure retention, for example via qualitative tests like the Sean Ellis 40% P/M Fit Test, or for B2B startups, via VC Christoph Janz’ criteria for evaluating PMF. But as your company starts growing, and the volume of users increases, a more reliable method to measure retention is via quantitative tests such as Brian Balfour’s The Never Ending Road To Product Market Fit, which helps you analyze the retention rate of a cohort over a period of time.
DATAPROBLEM VALIDATIONEXPERIMENTATION
As a founder, why are you doing what you are doing? If you had the option of doing anything in the world, is this what you would choose? Being clear about why you are doing what you are doing isn’t truly about product-market fit, but it is certainly a good indicator that a startup will eventually get there. In fact, it is an important question on every investor’s mind and may have an impact on your ability to fundraise (which is truly critical to PMF).
A strong indicator of alignment in values is when the startup’s mission reflects the founder’s experience, and the founder has an in-depth understanding of users’ problems. To effectively demonstrate this alignment, when you tell your startup story, explain why you are highly motivated to solve a meaningful problem experienced by users or even experienced by you directly if that is the case. Show deep understanding and connection with the problem at hand.
Many talented entrepreneurs build businesses that succeed, but don’t make a significant impact. Even more build businesses fail because they aren’t solving a real problem experienced by users. If you are passionate about your specific skill set – great. But make sure you match it with a problem worth solving, perhaps by bringing in a relevant co-founder. Learn to articulate your why, and it will help you hire the right people and pitch to investors. Those that are in it for the wrong reason (e.g., making a lot of money very fast or gaining quick fame) may sometimes end in success, but rarely.
As such, it’s worth figuring out how to describe your motivation and developing a compelling answer. Watch Simon Sinek’s start with why.