Finding product-market fit is one of the defining moments in the lifecycle of a successful startup. It’s the moment you and your team realize that you have built something that has a defined audience and it delivers them a clear value-prop. But how do we measure product-market fit? In a world where software has become so commoditized that simply trying or signing up for new tools to see how your team likes them, a simple user number can no longer be the meter stick to determine when a startup has found PMF.
There is a new metric, or really a combination of metrics, that a few startups we have worked with have experimented with a new approach we helped experiment with and it involves cohorts.
We are all used to seeing revenue and customer cohorts to understand your customer retention and your ability to retain and expand revenue from your existing customers. But what happens if you take your key product usage data points and map them out over the same cohorts? Product adoption is rarely instantaneous, product adoption and thus usage takes time. The idea for most SaaS/Recurring Revenue startups is to solve for a specific value prop, adoption increases, and you either upsell more licenses/seats or cross-sell them additional features that solve for another pain point.
If we look at this trend and how it plays out across the data, your best customers should increase product usage while maintaining customer counts and maintaining or increasing revenue over time. Simply put, if you super-impose the cohort product usage data over your customer and revenue retention cohorts there should be a linear relationship. If revenue stays the same or even increases over time and product usage doesn’t increase with it, that can be a sign that you have a leaky bucket, and over time customer will churn as they realize that they are not getting adoption and value from your product or service over time.
The real power from this metric comparison comes when you segment your customer and then look at these cohort maps by various segments. This is also another error many startups make, product-market fit isn’t an all-or-nothing proposition for startups. Startups are desperate for customers and revenue by nature (survival, future funding, etc.) so in that mad scramble for customers, you take whatever business you can find. Typically this leads to startups having a mixed bag of customer profiles, especially early on.
If you separate out these segments and compare their retention and product usage cohort maps the customer profiles will jump off the screen. This gives startups the energy they need to focus operations on these customer profiles and begin to drive strong customer acquisition and product adoption that increases the ability for a startup to be successful.