Transcript of: Product – Market Fit

Presented by Dr. Kapadia on Oct 7,2020 Watch the Webinar

So I want to introduce our presenter for today's webinar, Dr. Fehmida Kapadia. Dr. Kapadia is a

commercialization expert who has supported over a hundred startups in the scientific space. As a

university professor, she has taught entrepreneurship classes as a mentor and has served startups

through the NSF iCorps program, and as a consultant, Dr. Kapadia has provided startups with such

services as market research, customer segmentation, value proposition development, go to market

strategy, and much, much more.

So thank you so much for being here today Dr. Kapadia and I'll turn the presentation over to you now.

All right. Thank you Sam. I wanted to start with a poll but since there are only two participants online

today I think I will go ahead and skip the poll and get into the talk directly.

If you were there for the last week's presentation, we talked about problem solution fit. And this week

we're going to talk about product market fit. In problem solution fit we talked about how to identify the

customers, so defining your customer persona, and then how to identify what problem they are facing

so that you can actually create a problem that will solve … create a product that will solve their problem.

Today we will talk more about the value hypothesis and the growth hypothesis.

So now that you have identified a problem that a customer faces and have a potential solution that can

solve that problem, you really need to start understanding what is the value that your product will add

to the customer and if you want to build a startup around this, how will you actually grow this startup,

what will be your strategy for growing the startup.

So why should you care about product market fit? And this is a quote from investor Marc Andreessen

who talks about product market fit saying that you know that the fit is not happening when the

customers aren't quite getting the value of the product. You're not spreading information about the

product by word of mouth. The product usage is not growing. You're not getting any press. It takes you

very long to close a sales cycle and many times the deals never close.

On the flip side, when product market fit is happening, you cannot make your product fast enough. The

customers are literally buying your product as fast as you can make it. They are actually putting down

money to buy your product. So you are getting revenue positive and you're really being in that position

to grow your team, hiring more sales and marketing people, et cetera. You're getting good press. You're

getting nominated for stuff. Your company becomes popular pretty quickly. Everything that you see

happening with really successful companies is happening because they have identified the right product

market fit. And often startups that struggle to launch or get off the ground are the ones who have not

established a good product market fit for their startup.

The thing is this quote by Marc Andreessen is you will see this only after you launch the product.

Whether customers are buying the product or customers are not buying the product, whether there's

buzz around the product, whether there's press around the product, et cetera, all of this will happen

only after you launch the product. But by that time it's already too late. So you need to work on your

product market fit really, really, really early in your product development process so that when you

actually launch your product, you are in the second set of startups where customers cannot wait to buy

your product.

So for you to establish product market fit, this is not something that you do at the last minute. This is

not something that you do five months before launch. This is something that you should be working on

from the very beginning because your product market fit should be built in to your product

development strategy.

We also talked about this infographic last time about the top 10 reasons why startups fail. And this is

published by CB Insights. This is from last year. And the number one reason why startups fail is there is

no market need. I linked that to problem solution fit last time and I also link it to product market fit this

time because the two are interrelated. You need to have identified the right problem in order for you to

have the right product market fit, because if you've not done your problem solution right, you will not

have the right product market fit.

Another investor Alex Schultz says the number one problem that he has seen is that startups don't

actually have a product market fit when they think they do. And this tends to happen often where we

tend to let our biases get in the way or maybe get fewer data points than required or might go out and

start validating our product and strategy before actually identifying the unmet needs, et cetera. And so

if, well, 42% of startups fail because of unmet product … no market need, that means that what Alex is

saying is possibly true, that 50% of the startups think they have a product market fit when probably their

product market fit is not the right product market fit.

So let's go back and let's talk a little bit about problem solution fit. We'll go through this stepwise

process. So how do you actually come up with the right product market fit? What is the process that you

go through to come up with the right product market fit? And then the process for identifying, the early

process for identifying the right product market fit is the same as what you would do for problem

solution fit. The difference is the questions that you will ask.

So let's talk about, let's start with problem solution fit. You want to start with a hypothesis. So let's take

a hypothesis that is close to all of us right now because of the pandemic, that doctors and nurses are

tired and scared in the current pandemic. That is your current hypothesis. When you're trying to do

problem solution, you take that early hypothesis and you test it. How do you test it? You go out and you

talk to doctors and nurses. And you want to prove it.

So in order to prove it, you have to make sure that you have gathered enough data from your

conversations to make a conclusive statement. One or two conversations is not sufficient. You need to

have spoken to a critical mass of doctors and nurses so that the data that you are getting is something

that is strong and that you can be confident about and say that, "Yes, this is. I believe that this is a real

problem." And then you want to iterate it.

So when you go out and test it, you might realize that the input that you are getting, maybe it validates

your hypothesis 50% or maybe it validates your hypothesis 80%. Whatever the differential in the

validation, you need to take that as feedback and refine your hypothesis based on the feedback that

you're getting. For example for the current hypothesis, doctors and nurses are tired and scared in the

current pandemic. Maybe you might hear that doctors and nurses are tired and scared in the current

pandemic. You might get maybe additional inputs, because, or they in some places they might say, "Yes,

we're very tired but maybe scared is not the right word," or, "We are scared but we have enough

capacity, we are not that overworked."

So this will also vary right from hospital to hospital. Some hospitals that have good capacity, you might

not really see doctors and nurses complain that they are exhausted. Whereas in other places where

they're low capacity, you might get a lot of doctors and nurses saying that they're probably really tired

with the current situation. So you'll take all of that data and then you will have to reiterate and redefine

your hypothesis. Sometimes when you go out and try to test your hypothesis, none of your customers

might actually agree with your hypothesis. You might not actually get them to agree with what you think

is the hypothesis.

This is a point where you really need to step back and say, "Okay, I think this is wrong and I need to

pivot," or, "I need to change direction," or, "I need to start over." Many people get so attached to their

ideas or their hypothesis when they hear opinions from their customers that do not agree with them,

they still somehow decide to push on by either refabricating or "hearing" what they want, et cetera. So

you have to be very, very careful to be extremely open-minded in this situation and take the input that

you're getting at its face value and not necessarily try and modify that input to actually match your

hypothesis.

So now that you have done this problem solution fit, let's talk about how you would follow the same

process for a product market fit. Again, you will start with the hypothesis, but now your hypothesis is

different because you already have identified a problem solution fit. You have already identified maybe

… Maybe in the first case scenario you identified, yes, doctors are tired and scared in the current

pandemic, and you have built out a solution to try and address that potential problem. And your

solution is a remote care platform. Now, for product market fit the hypothesis that you're testing is

doctors and nurses would benefit from a remote care platform because a) it would save them time, and

b) it would allow them to safely care for their patients.

So what question you are asking is extremely important to what input that you're going to get from your

customers. You will do the same thing. You will test this hypothesis. But at this point you will go out and

you will test your solution with doctors and nurses. You will actually show them the platform and get

their feedback, see what they like about it, see what they don't like about it, see how they would use it,

ask them if they would pay for it. Is this something that would make their life easier? What problems

would this help them solve? Get all of that feedback.

Similarly, make sure that you're getting enough data to be able to prove your hypothesis. So don't limit

it to one or two interviews with friends and family, but really go out and talk to people and get their

feedback so that you have an aggregation of data that gives you data that you can be confident about.

And then you iterate. So based on all the feedback that you get, you go back and modify the platform

and features so that you are developing something that your customer wants.

There are various steps to product market fit. This is your early, early step of product market fit where

you have developed a solution and you are trying to validate that the solution you have developed

actually a) solves the problem that you think the customer faces, and the solution that you have created

adds value to your customer, helps them solve their problems and really makes life easier for them.

So after you've done this, the next step that you want to do is create your value hypothesis. Now you

want to start asking questions around what value are you creating, so what value are you offering

through the solution you've created, who desperately needs it, and how will it solve their problem. And

then lastly, how can they buy or use this product. So we will go through this, through these three

questions next.

For the first two questions we're basically going to use the first two questions to build out your value

proposition. Remember, your customer wants to buy a quarter inch hole, not a quarter inch drill bit,

which means that when a customer goes out and buys a product, they're buying a product to solve a

problem that they have or to do a job that they need to do. They don't really care what your solution is

if it does not solve their problem. It doesn't matter how they create the job. As long as that job is done

effectively, that's all that the customer cares about.

So you need to identify for you to create your value proposition, you need to understand what is the job

that your customer is trying to do. Hopefully you should have a pretty good handle on this if you've gone

through the problem solution fit exercise correctly and you have done your early stage customer

interaction for your product market fit. What are the problems and pains that they're facing and what

are the expected benefits that they desire from a solution? So the top three questions: what job are

they trying to do, what problems are they facing, and what are the expected benefits is something that

you should be able to have derived from your problem solution fit exercise.

Then you're talking about how your product or service allows your customer to do the job that they

need to do, how does your product help solve the problems that they're currently facing, and what

benefits does your product offer. If you can articulate this properly, you can articulate the value

proposition of your product. This part is extremely important because unless and until you can clearly

communicate the value proposition of your product, you won't really have or you won't really get

customer buy-in because they need these three questions answered if they're going to buy your

product, if they're going to adopt your product.

Another aspect that you have to know at this stage is who your customer is. And the who is extremely,

extremely important because your product might be able to appeal to multiple customer segments at

the same time, but when you actually introduce your product into the market first, you will be

introducing it only for one customer segment. You will not try and go after five or six customer segments

at the same time because then you're going to have a very hard time creating a targeted message, one,

for your customer segment, two, creating a product that meets the requirements of all customer

segments, because every customer segment might have different requirements. There might be small

tweaks here and there to your existing product, but you have to make sure that every product that you

introduce into the market for a given customer segment meets their requirements. So it's very, very,

very important for you to identify which customer segment are you going to go after first, who is going

to be your first adopter, who is going to buy your product first.

So you need to really understand where the problem is highest, which customer segment is telling you

give me this product yesterday. When you go and talk to your customers and your customer … The first

question that your customer asks you is, "Oh, do you already have this on the market?" That is a

customer segment that is dying to have your product. Let me give you an example.

When I was working with a researcher that was trying to develop a product, the initial hypothesis it was

a biomedical device for identifying a particular population of stem cells. And the initial hypothesis that

they had was that this product would be valuable for companies that are working with mesenchymal

stem cells, and it might be valuable for them to have a device that could help them identify the stem cell

population that would be faster growing than a population that is slower growing so that they could get

there faster and inject less stem cells at the site, et cetera.

When I started talking to my customer to these customer segments, I realized that the mesenchymal

stem cell companies did not care about isolating their stem cell populations at all, because it was a soup

of cells and they just, it was easy for them to collect a soup of cells and inject a large number of cells

because it was relatively easy for them to get a large number of cells and have a small percentage of

stem cells actually be the working cells.

So I talked to a lot of mesenchymal stem cell researchers and companies and no one seemed to be

interested in the product. And that told me that that initial hypothesis was wrong. The product market

fit was not there. So I started exploring multiple different segments. I started talking to others. I started

talking to companies that were doing cord blood stem cell differentiation. I started talking … I identified

about six or seven potential customer segments where this product could have value, and I happened to

talk to researchers that were working with induced pluripotent stem cells in the lab. It's a type of stem

cell. I don't need to get into technical details around it. When I talked to them, they asked me. The first

question that they asked me as soon as I told them what we were trying to do was, "Oh, do you already

have this on the market? This is really hard for us. If you have this on the market, we will buy it."

And that response right there is when you know you have your product market fit. If I was going to

market with that product, that is the customer segment that I would likely go after first, provided that

it's a big enough market opportunity. With everybody else that I spoke with, they told me it's a nice to

have, it's not a must-have, except for this one group of people that I spoke to where they were like, "No,

this is a must-have for the work that we are doing." They had a very, very strong problem pain point that

nothing was solving. Nothing in the market was currently solving their problem, and they needed a

solution for it. And that is how product market fit works, and that is how you need to know that you

have the right customer segment for the product that you are developing.

The other thing that you need to do in your value proposition statement is be able to clearly articulate

how you differ from your competition. So once you've identified what is the pain point that your

product is solving and what is the value that your product is adding, you also need to add how you're

different from your competition because this question will come up pretty often, more often than you

will think is, "Oh yeah. There's this company that's already doing that. Why do I need your product?" So

you have to have a clear differentiator from how your product is different from the existing competition

in the market.

Once you have this, your value proposition built out, you need to make sure that you do traditional

market research. You need to identify what is your market, how big is your market and what is the share

of your market. This is the most basic way for you to do it. So let's talk about the market for diabetes.

There are 100 million people in the United States that the CDC says are either diabetic or pre-diabetic.

That right there, if you are developing a diabetic product, that is your total market. But of those

diabetics, 88 million are … Well, only 34 million are diabetics. The rest of them are pre-diabetics. And

with pre-diabetics, many of them can keep their diabetes in control if they lost weight, if they increase

their activity, if they exercised, et cetera. So maybe they're not your target population. So now you

narrowed your market to your total addressable market of 34 million people. And maybe your product is

really valuable to diabetics who have to undergo an amputation, a limb amputation because of non-

healing wounds in diabetics. That is 44,000 people in the United States. So that is the niche that you're

going to go after.

Often people make the mistake of saying their total market is their market. If you're developing a

diabetes product and you say, "Oh my, there are 100 million diabetes patients in the United States and

this is a very large market," you will be shot down by every VC in town because they need to know

which diabetic population will actually benefit from your product. So it's important for you to identify

the niche for your product and know what is the value of that particular market, and then what percent

of that market or what percent share of that market will your product be able to capture say in the first

five years.

You also need to think about your total addressable market. So maybe your initial market might have

been diabetic patients that are undergoing amputation, but when you look at the product, the product

might also have applications in other diabetic patients that are susceptible to getting wounds and now

you need to start looking at your total addressable market which is at 34 million patients.

So you have to not only think about your niche which is going to be your first market segment, but then

how will you expand from that niche of this target population into a larger market further down the line.

Because unless and until you have plans from going from one market segment into the other, if you're

banking your entire startup strategy on a single market segment, you will have a very hard time, well,

getting investors to invest in your company. So you not only need to know what is your first adopter and

what is the first market segment that you're going to go after, but also have a strategy for after you've

captured that market segment, how will you go into subsequent markets.

All right. So after you established your value hypothesis, the next thing you need to look at is your

growth hypothesis. The growth hypothesis is basically how will your customer be able to buy your

product, how will you reach your customers. This is effectively your channel strategy. What channels will

you use to get to your customers? Let's talk about three major ones.

One is the sticky engine growth strategy which is that you have a few existing customers. They are

pretty large customers. They're very good business and your strategy is to retain those customers. This

works well for products that are high value products, biological products, tech products, et cetera, which

are extremely high value products. So having one or two large clients might sometimes be sufficient to

keep your startup not only get off the ground but keep going.

If this is your strategy, then in addition to customer retention obviously you can't just say, "Okay, I have

three customers and I'm going to keep them." You still have to have a strategy for recruiting more

customers, but the recruiting more customers is going to be a slower process because your product is an

expensive product and you're going to have longer sales cycles into recruiting new customers into

buying your product.

The second is the viral engine growth strategy. This is basically what HubSpot was built … No, this is …

Yeah, what HubSpot was built around, where you are creating enough of a social media presence or

your product is that good that you are getting customers to come to you. You're providing content.

You're active on social media. You're providing value through things like what we are doing right now, a

webinar or a workshop or something like that that is educating people and allowing your customers to

actually come to you and say, "I like the product that you're selling. I want to buy it." It can be a product

or a service.

So this, the viral engine growth happens by word of mouth. Or maybe you might be using a product for

application x and you might find some other use for it that was not advertised and now you go around

telling your friends about it and now everybody is suddenly using it for that. Viagra is a great example of

that.

For you to be successful in the viral engine growth strategy, you have to have a perfect product market

fit. If you don't have a good product market fit, it will be very difficult for you to be successful using the

viral engine growth strategy because you are banking on your customers coming to you, which means

that you have to be able to really speak to them and they have to identify that, yes, this is a real

problem that I'm facing that I need to solve. So for the second method to be successful you have to have

an excellent product market fit.

And then the last one which most of us are familiar with is the paid engine growth strategy which is

outbound marketing where we are cold calling people, we are advertising, we are going to trade shows,

conferences, et cetera. We are actually paying to put our product out there for the customer to be able

to see that product, get familiar with that product and say, "Yes, this is something that I might be

interested in buying."

So you have to identify based on your startup which is the right strategy for you. You might be able to

use more than one strategy and you might be phasing which growth strategy you will use depending

upon where in the product lifecycle or sales lifecycle your startup is. For example, if you are in the sticky

engine growth strategy where you are working on customer retention and trying to recruit one or two

new customers, you might combine your sticky engine growth strategy along with the paid engine

growth strategy to get the word out there to more customers.

If you are in B2C market spaces as in business to customer where you're selling your product not to

another business but directly to a customer like retail, like Uber, like Airbnb, you absolutely need to

have a viral engine growth strategy because your sales and your value is going to be in the number of

customers that you are recruiting, because your product is not a very high value product. The markup on

each product will be low. The price that a customer is paying for each product is low. And so you need a

lot of customers to be profitable, which means you absolutely need a viral engine growth strategy. And

then you might couple that with a paid engine growth. So along with making your product go viral,

you're also paying for advertisements and other things so that your customers hear about your product.

So you have to decide based on your customer or based on your startup, based on the product that

you're selling, based on where on the sales lifecycle you are to decide which is the right growth strategy

for you.

Once you have these three things that we discussed which is a very clear understanding of what is the

customer's need and what is their problem and what job are you helping them do, a clear understanding

of what is your market, how big is your market, what niche of that market belongs to you and what

percent of that market share will your startup be able to capture, and how will you get to your

customer. Once you have these three things in place, you will be able to come up with your revenue

model for your company as in really understand how your startup will actually make money and become

profitable and sustainable and scalable in the long run.

So in this session today we talked about these five things related to product market strategy. We talked

about how to define and test your value hypothesis. We talked about how to build your value

proposition, how to define your market size and target customer, how to define and test your growth

hypothesis, and then lastly how to build your revenue model. And once you have these five things in

place, you will have a good product market fit or at least you should be confident that the product

market fit that you have is solving a real problem, is a need, and that when you go to market you will

have good adoption for your product fit.

I will put this up again, the quote by Marc Andreessen, to remind you that you want to be in the second

group of startups. When you launch your product, you want to be that startup where your product is

flying off the shelves which means that you have the right product fit identified early on and you have

developed your product to solve a customer need that will allow customers to buy your product.

With that, I will open it up for questions. You can reach out to me and contact me if you want to talk to

me more. That's my email, my phone number, as well as you can schedule a time to talk with me

through the ScienceDocs website. Thank you so much for your time today and I would be happy to take

any questions that you would have.

Thank you so much Dr. Kapadia. If you have any questions, please feel free to unmute yourself and you

can ask her directly, or if you don't feel comfortable talking, feel free to put it in the chat and I'll pitch

the questions to her. But I guess to just start off, how do I know that I have the right customer?

I think I actually kind of touched on this a little bit in the example that I gave which is if you have the

right customer, your customer is going to be demanding your product yesterday. They will be excited

about what you are selling. They understand that you're solving a clear problem that they have and that

they want to buy your product. You know you have the right customer when the customer is willing to

open their wallet in order to buy your product.

I guess to follow up with that is, how do I know which growth model should I use if I'm a startup?

I'm sorry. Can you repeat that again?

Yeah. How do I know which growth model I should use when doing the product market fit?

Oh okay. What growth model you use depends on you have to first understand whether you're a B2B

startup or a B2C startup. If you're a B2C startup, you need to be able to talk to your customers directly,

the customers who are going to be using your product. If you are a business to business startup where

let's say I am a biotech company that is going to be selling to doctors and nurses, the person, the entity

that's going to buy my product is a hospital. So I as a business am selling to another business.

Often I will use the advertising model or the customer retention model for it. If I am in my … It is very

hard to get the viral strategy going. So often you might want to start off with the paid growth strategy

early on in yourself, if you're early on in your startups, in your product launch process. Because typically

if you have been working on a viral growth strategy, it will typically take about a year or year and a half

for the inbound marketing effect to actually hit, which means that you need to have another strategy in

that time. And going to trade shows, going to conferences, paying for advertisements, putting out

articles and publications, all of those would be good early strategies versus till your viral strategy hits

and becomes … starts bringing customers in through the door for you.

I don't see any questions coming in, but did you want to give any last minute advice or remarks to our

attendees before we end the webinar?

At this point I think I would say I would be happy to talk to any of you if you have any other questions, or

would like to talk about problem solution fit, product market fit, or any of your other commercialization