How do you know you have product-market fit?
How do you know you have product-market fit?
Many European brands – even household names – will be unknown to American customers. Your list of European references will carry little to no weight with Americans, who in many cases think of even international operations of the same company as different businesses.
Customers will expect you to prove that your product addresses a local pain point. Doing this will also help you understand how to position, localize and in many cases, redesign, your product for the US.
To be successful it is not enough to have good technology—you also need to overcome your prospective US customers’ reluctance to buy from non-US firms: risk and politics. This means being hyper-focused on target prospects that you can impact more significantly than the local competition.
Given differences in the retail industry in the US, Conversocial’s success with retailers in Europe did not translate to the US; instead it found traction with telecommunication companies among other sectors.
Before you take your product to the US, do your research and find out if your customers like what they buy. Do you have significant inbound requests from customers? What do they want your product to look like? Just as you did at home, you’ll need to test your value hypothesis. What are the features you need to offer in the US? Who is the audience that is likely to be interested? How will they buy your product?
The US is BIG… and that can be misleading
The size of the US market, and its consequent share of “innovator” customers, who want to be at the forefront of new technologies, allows for companies to hit millions in revenues without proper product-market fit – and that can be dangerous.
Your company might be lulled into believing you’ve found a repeatable formula for scale, right until renewals slip, churn increases, and growth slows.
A study conducted by Startup Genome concluded:
“Startups need 2-3 times longer to validate their market than most founders expect. This underestimation creates the pressure to scale prematurely… In our dataset we found that 70% of startups scaled prematurely along some dimension. While this number seemed high, this may go a long way towards explaining the 90% failure rate of startups.”
More importantly, if you don’t have product-market fit in Europe, moving to the US will compound your problems, not solve them. What “tells” can you see that demonstrate that fit is real? Is your product growing in the US with no marketing?
“ We took recipes from the UK and things like curry and lamb just didn’t translate, which we quickly adapted.” Ed Boyes, US CEO, Hello Fresh
Case Study: Spotify
In Spotify’s case, customer demand for a US version was evident. European adoption had been explosive and soon after, there were “breathless blogs and fan sites dedicated to discussing the service’s US potential.” But even this demonstrable demand—and growing knowledge of US music listener preferences—was insufficient in justifying a US move.
Who – The customer
• Customer preferences: What are the US customer’s preferences? Is my customer’s behavior aligned with her preferences?
• Customer acquisition: What is the CAC in the US market?
• Competition: Who are the domestic and foreign alternatives? What is my competitive advantage? Spotify’s business model relied on securing the music rights held by the major US record labels. This would require building the right relationships within the US music industry. The company’s decision to expand ultimately hinged on the reality of securing these relationships and aligning them with their knowledge of customer preferences.
What – The Product
• Product value: What value does the US customer extract from the product?
• Product features: What features of my product are context-specific and need to be revised for the US?
• Product economics: What is my predicted ROI? What are my projected costs, revenues, and breakeven point in the US? What new revenue-generating opportunities exist in the US?
In Spotify’s case, though its value in Europe—free, legal access to vast amounts of music—was indispensable to success in the US as well, it made negotiations with US record labels particularly slow and challenging. Critics within and outside the labels expressed skepticism at the company’s ability to convert free users to premium users under its “freemium” model. To assuage the labels concerns, the company tweaked its business model for the US, introducing a mid-tier premium customer category and several new features based on US listener preferences.
Where – The local context
• Regional opportunities: Which regional markets in the US best optimize ease of access, speed of product adoption, profitability, and sustainability?
• Local restrictions: What US restrictions (legal and regulatory) exist for producing, marketing, distributing, and selling my product? How can I surmount them?
• Distribution outlets: Through what media could I develop customer interest in my product? Where could I best sell my product to my target customer?
Acquiring licensing rights in the US did not require regional relationships, but Spotify did need to map out alliances with regional advertisers—yet another subset of customers. In so doing, the company developed new revenue streams by delivering ads filled with local content to “free users” based on their locations. Thus, Spotify’s regional strategy helped it retain its crucial freemium model and justify its expansion plan.
When – Market timing
• Developing demand: How long does my target US customer need to be educated about my product?
• Adoption time: How long do customers take to adopt novel offerings in the target market?
• Necessary partnerships: How long would it take to build essential partnerships? When do these relationships need to be developed relative to my market entry?
Perhaps because Spotify took two and a half years to prepare and launch in the US, demand for its product was at fever-pitch when it launched. Notably, the company entered at a time of uncertainty in the US industry: physical album sales numbers had been falling dramatically, and streaming competitors like Rdio had failed to capture popular demand. The industry climate, hype around Spotify’s product, and the minimal effort needed for customers to test the free product accelerated the time between market entry and mass adoption in the US.
The Missing “Magic Metric” for Customer Success