Product/market fit is necessary. You need to get to product/market fit before you accelerate growth. But it is by no means all that matters!
What good is product/market fit if you do not find a predictable and scalable distribution channel through which you can sell your products on attractive economic terms. Without product/channel fit, no high growth or unnecessary cash burn. Game over!
Before you accelerate growth, make sure you have generated product/channel fit.
Product/channel fit is not only relevant at the very beginning of your journey. Product/channel fit is a topic relevant throughout the lifecycle of your company. At the very start of your venture, you must find a first distribution channel. If customer preferences change, you may need to adapt and switch channels. If you want to accelerate growth, you may have to add channels to the channel mix. If you want to be an innovative company, you may need to find new channels through which you can sell new products and services.
In this blog post, I share some of my insights with regard to generating and measuring product/channel fit.
Generating Product/Channel Fit
Creating Cross-Functional Teams
In connection with generating product/market fit, you should have already clearly defined your key target customers. You understand their needs and preferences. On this basis, you can now start working on generating product/channel fit in terms of distribution channels through which you can sell your products to your key target customers on attractive economic terms.
In my experience, it helps to create cross-functional teams that brainstorm potentially relevant channels, prioritize channels, and ensure that relevant channels are being tested and deployed.
Cross-functional teams make sure your teams do not work in silos and do not come up with channels that only work from their functional perspective.
For instance, there is no value in using a channel that the marketing and sales teams prefer if the product and tech teams cannot adjust your product so it fits this particular channel. Likewise, you will not be able to scale a channel successfully if your product teams want to build highly complex products that your marketing and sales teams cannot distribute successfully.
Cross-functional teams look at potential channels holistically. If you want to test and deploy channels highly explored and studied, and based on input from all constituencies, involve marketing, sales, product, tech, finance, and customer success.
Prioritizing Distribution Channels
Your cross-functional teams must then explore all potential channels through which you could theoretically access your key target customers. However, as the term ‘product/channel fit’ indicates, not every channel fits your products and your products do not fit every channel. You therefore have to prioritize channels. When you prioritize channels, you need to identify the channels that already fit your products and those that you could use if you adjusted your products accordingly.
As Brian Balfour, the CEO at Reforge and former VP of Growth at HubSpot, rightfully stressed: “Products are built to fit channels, not the other way around. Channels do not mold to products. The reason for this is that you do not define the rules of the channel. You define your product, but the channel defines the rules of the channel.” For example, chances are high you cannot tell Facebook how Facebook must adapt so you can sell your products through Facebook. But you may be able to develop your products so they can be sold through a specific channel like Facebook.
Testing Distribution Channels
After you have prioritized your channels, you can start testing them. You test the channels and measure their effectiveness and efficiency. How many leads can you generate, at what cost, and how do such leads convert into customers? What does the conversion funnel look like, especially compared to other channels? What are your customer acquisition costs in this channel? Also, in connection with generating product/channel fit, you go through the 'build – measure – learn feedback loop'. Learn from the results and adjust product and processes so the channel performance improves.
Working In Parallel On Product/Market and Product/Channel Fit
Your cross-functional teams need to work in parallel on generating product/market fit and product/channel fit, and not consecutively. Both generating product/market fit and generating product/channel fit may require your teams to adapt and adjust the product, the product features, your processes, your key target customer definition, or your team composition. You do not want to generate product/market fit just to realize that you need to adjust the product and product features again in order to be able to sell it through a specific channel. Generating product/market fit and product/channel fit go hand in hand.
Measuring Product/Channel Fit
How do you know you have found product/channel fit? As it is true with regard to measuring product/market fit, product/channel fit is not binary either.
You cannot say you have achieved product/channel fit if it costs you X dollars to acquire a customer. The absolute dollar number depends on many factors like the channel you use but also the complexity of your product and the characteristics and pains of your key target customers. While spending $10,000 on acquiring an enterprise customer with a high customer lifetime value can make sense, this amount may be prohibitive if you want to sell to small business customers or consumers with a very low willingness to pay.
Product/channel fit can range from ‘not yet found’ through ‘weak’ all the way to ‘very strong’. And product/channel fit is relative. You need to analyze your channels assessing whether the customer acquisition costs you incur using a specific channel make sense in light of the customer lifetime value you can extract from the customers you acquire through this specific channel. For instance, is it worth $10,000 to acquire a customer who will spend $25,000 over the next five years?
In a nutshell, you need to make sure that your customer lifetime value reasonably exceeds your customer acquisition costs and that your payback period is reasonably short. If you sell to customers with a high customer lifetime value you may be able to use channels that lead to high customer acquisition costs, often high touch channels that require intensive human touch. If your key target customer lifetime value is rather low, you will have to use channels through which you can acquire customers in a less expensive manner, many times low-touch or no-touch channels in which digital touch replaces human touch.
Measuring product/channel fit therefore goes hand in hand with calculating your unit economics. While you certainly always want to find ways to reduce your customer acquisition costs, you need to find and prioritize channels through which you can acquire customers on attractive economic terms, which means that your customer acquisition costs must be sufficiently lower than your customer lifetime value.
Product/market fit is by no means all that matters. If you want to create a massively valuable high growth business, you also need to find product/channel fit.
Your cross-functional teams need to explore, prioritize and test potential channels to your key target customers. Then, you need to measure product/channel fit. You need to assess whether the customer lifetime value of the customers you acquire through a specific channel reasonably exceeds the customer acquisition costs you incur to acquire the respective customers.
Always keep in mind what Peter Thiel said in his book 'Zero To One': “Most businesses actually get zero distribution channels to work. Poor distribution — not product — is the number one cause of failure. If you can get just one distribution channel to work, you have a great business."
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In my book FastScaling, I explore all relevant high growth drivers and dive deeper also into the topic of how to generate and measure product/channel fit.