The key to success for a new business or startup is finding product/market fit. What is product/market fit? Generally, it is when you have found a combination of the features and benefits (captured in a product/service) and a set of customers (market) who match. That means that customers are willing to pay for your offering. When product/market fit occurs, selling gets easier because customers respond to your product offering and message. Essentially, you’ve found a value proposition that the market agrees they want and are willing to pay for. That means you’ve worked through three big ideas: 1) a target market, 2) a product offering, and 3) a business model.
Until you find the right combination of these three ideas, you will likely need to “pivot” as you explore hypotheses about the right combination. A pivot is a structured course correction as you test a series of hypotheses about how to create value.
Let’s consider a few examples. We all know PayPal as the electronic payment startup acquired by eBay. Paypal originally wanted to transfer payments in person between PDAs (personal digital assistants) for people on the two ends of a transaction. They discovered that people didn’t really need to do that (checks worked just fine in person). So they had to figure out who needs to electronically transfer funds over distance, a target market pivot. They focused on eBay power sellers and then sales took off. Taking the same basic product to a new target market worked.
The very successful venture Slack serves as an example of a major shut-down-and-relaunch pivot. The founders of Slack actually developed it as a tool that the coders on their gaming platform Glitch used to communicate with each other. They could not turn a profit on Glitch, though it did have a strong following. But they found that the tool developed for team communication and coordination offered a strong value proposition well beyond coders. They shut down Glitch and started Slack as a separate startup. They pivoted on all 3 ideas—a tweak on the product for project management, a much broader vision of the target market (not just Glitch coders), and a different value proposition with a new revenue stream.
On a smaller scale, a local bike shop in an active mountain biking recreation area opened in the closest town nearby. After a year, they found they were hidden in the downtown and moved closer to the recreation area. And they changed from just fixing bikes to also renting bikes. Sadly, they discovered their new store was too costly – the bigger space, the bikes, and lots of different parts because there are so many different kinds of bikes . First, they pivoted on product offering. Then they pivoted on business model – bike rentals. But neither was enough.
In two of these examples, the lack of initial product/market fit led to a successful new or re-envisioned startup. The third resulted in business failure. You need to figure out how and when to pivot to avoid the latter fate. The key is to be thoughtful and strategic in your pivots. Remember, you are trying to find the right combination of product, market, and the way to generate revenue.
How do you know when one of these three components isn’t working?
Target Market
The key to finding the right target market is to be focused. You have to figure out which possible customers have the highest need for your product. If they are already searching for a solution, they will be easier to sell to. Here are some indicators that you haven’t found the right target market:
- Current targets say “This is nice to have.” But they don’t buy.
- Customers you didn’t expect to buy, do. A company was building solar phone chargers. They thought the product was designed for apartment dwellers. They found that people in home were buying them. They then pivoted to target homeowners.
- You get low responses to advertising efforts. You have trouble with people raising their hands from your ads because they don’t have a need.
Product Offering
Once you are talking to the right customers, you still have to be offering them the right product. One indicator that the offering isn’t right is that they try it, but don’t adopt or they don’t renew. That means that it seemed right, but when they actually used your offering it wasn’t enough. Another indicator is that prospects say they are interested, but they have “reasons” not to buy right now:
- Time isn’t right
- Someone else is the decision maker
- Always asking for new or different functions
The figure below illustrates the product/market fit challenge. There are three possible market segments (e.g. Market 1). The vertical axis shows three product options (e.g. Product 1). Startups often start by thinking about all the possible combinations of product and market that might work. We call this the “We Can Also” phase. But to get real traction, you need to focus on ONE combination of product and market, as shown in the purple square at the combination of Product 2 and Market 1.
Business Model
Once you find this combination, you need to figure out how to create a viable and sustainable business model, or way to extract dollars from customers. Will this be a one-time purchase, or a monthly or yearly renewable purchase (known as a recurring revenue model)? Will service be bundled in—or an add-on element for a separate fee? Will you start with a freemium model, where a base offering is free, but for more functionality customers must buy an app or pay a fee? The best business model may vary based on the product and market you end up addressing. How do you know if your business model is not working?
- Customers do not pay beyond a free pilot
- Renewal rates are low (e.g. 50% or more of customers do not renew)
- “Freemium” customers do not upgrade
How do you pivot systematically and effectively? Make sure each of these decisions—the product to offer, who to sell to, and the business model—is determined based on educated guesses or hypotheses about what will work.
Then, use an “A/B” test to make choices when you are uncertain. What is an A/B test? It is a test between two options to see which gets better traction or response. For example, if you are testing two different market segments (segment A and segment B), send 100 emails to both and see which gets a better response rate. If you are testing two different products, pitch both to the same market and see which one is preferred. The trick is to be intentional and strategic in how you test and to vary only one element—i.e. don’t vary both product AND market in the same test. Use these experiments to learn and move forward with purpose.
The pivot is a powerful tool for getting traction in a startup. But it’s critical to understand how and when to pivot effectively to keep your startup from sinking as you navigate uncertainty.