7 min read

How to Validate if Your SaaS has a Product/Market Fit

2020 September 18 16:00 GMT-06:00

“Startups occasionally ask me to help them evaluate whether they have achieved product/market fit. It’s easy to answer: if you are asking, you’re not there yet."

-Eric Ries, The Lean Startup

Many SaaS startups struggle to make tough decisions in the beginning stages of finding a good product/market fit. Leadership teams must choose the best strategy that can lead their product to drive sustainable and scalable customer growth for their company.

The SaaS industry is a gold mine for companies looking to make a positive impact on their target audience, but the competition is intense. Not only do you need top-notch marketing and sales strategies to create interest in your product and increase your sales, but you also require a high amount of product/market to direct it toward the right people.

Once you have assembled your team, gotten your product idea down, created a minimum viable product (MVP), and started testing it, your startup is tasked with determining if the product can fill a void in your chosen market.

To get this part down, your team must look for the right “signals” that indicate a potential product/market match. Keep in mind that finding a product/market fit is not a one-time “magical” moment is a continual process with data that will fluctuate with time.

With a sound understanding of product/market fit and the metrics to use for measuring it, validating product/market fit can become more accessible.

In this article, we examine some of the telltale signs to look out for when validating the claim of achieving a product/market fit for your SaaS company.

Validating Product/Market Fit for SaaS

The most successful SaaS companies offer products that satisfy the needs of their target audience.

Sometimes, SaaS founders firmly believe their tool offers groundbreaking features that cater to a specific market and wonder why they do not see the success they expected. Unfortunately, when the choice of market, the company’s buyer persona profile(s), hypothesis, or value proposition is incomplete and fails to wonder an audience.

When the value of a product fails to show, it is crucial to keep an open mind and see things for what they are. As your company gets closer to a product/market fit, your team may start to see a combination of two or more to the following signals.

An increase in revenue performance

Your product’s revenue performance is one of the best signals of reaching product/market fit.

If a SaaS company launches a beta version of its product and people are still willing to buy it, it is an early indicator that its reported features, functionality, and corresponding marketing campaign(s) have helped generate interest.

High sales margins and an increase in overall MRR (monthly recurring revenue) cannot be disputed and are the ideal signal of finding product/market fit.

>Every SaaS company is different and may target distinct consumer bases. The starting price of a product being tested for product/market fit will differ for every business.

Therefore, the revenue performance for a $10/month software targeting small business owners will significantly vary from software that caters to enterprises and is priced at $50/user/month.

Despite these differences in price points, the greater the revenue a company perceives for a specific product, the greater the likelihood of product/market fit.

Product Market Fit upward graph(Source: Notion)

What to consider good revenue

While every company aims for an increase in their revenue performance, it is a good idea to have a standard with which to measure your numbers.

Opinions vary on the golden standard of monthly recurring revenue (MRR) that a SaaS company should perceive to indicate a product/market fit.

US VC Brad Feld of Feld Thoughts argues that product/market fit reflects incrementally and can be traced based on an increasing MRR.

  • From $1 to $10 K MRR, your company has the illusion of a product/market fit.
  • From $10 K to $100 K MRR, your company has a semblance of product/market fit.
  • From $100 K to $500 K MRR, your company has found a good product/market fit.

This is a good starting point for most SaaS companies.

Remember that it may not strictly apply to all SaaS companies because each will offer their product with a different starting price that inevitably affects its MRR.

Evidence of Demand

The primary indicator of a possible product/market fit is substantial evidence of demand for your product.

Demand can take a variety of forms, including:

  • An increase in visits to your company website,
  • Word-of-mouth leads to more referrals,
  • More leads,
  • More inquiries from interested parties, and
  • Your business’s ability to sell more of your product.

As the usage of your product increases and your business acquires recurring clients, client churn should decrease.

Returning Customers graph(Source: Segment)

Consistent positive feedback

Humans learn by testing different models and variations of outcomes; therefore, building a reliable product that will bring in substantial revenue for your startup continues beyond your first MVP.

Your product team should be listening to the diversity of feedback it receives from your beta product’s tester. Taking a chance on the input you receive and making the designated changes to your product can differentiate between 100 and 1,000 new customers in a few months.

If the feedback your team is receiving is predominately positive and there are not any significant requests for changes in features or functionality, this likely means you are on the right track to achieving a product/market fit.

Having real customers

Any sale your SaaS company makes is welcome.

However, when you want to validate your claim to product/market fit, your product and sales teams should be certain that those who are making a purchase are a full range of real customers. In other words, your clients fall within one of your buyer personas, your business does not have a personal connection to them, and they are likely to use your product regularly.

How many people are there that have signed up, paid for, and continued to use the product?

When you have factual data that customers keep coming back for your product, your team can confidently claim there is a market need for it and that the product and its features are solving a real problem for a specific audience.

Positive survey results

Collecting feedback from your first product users and first customers is not only about asking which changes they would like you to make to your software product.

It also includes asking upfront what they would feel if they would no longer use your product. Explicit questions like these serve as good baselines to validate whether your offer fills a void in your chosen market or is only one of many options available to users.

Surveys like the Sean Ellis Test are a relatively simple assessment your team can perform to gather insight into how current users feel about your product.

Segment your customers

Once your survey results are in, your product team will need to segment your respondents to pinpoint the commonalities between your supporting users and your detractors.

This ensures you can pay more attention to those clients who are not convinced that your software is the right fit for them or does not add much value to the current market ecosystem. Require them to give specifics of what they do not like about your product and how you can improve it to fit their standards.

To validate the claim you have achieved product/market fit, make sure more than 40% of all respondents feel your product is indispensable, and they would be “very disappointed” if they could no longer use your product.

Your Net Promoter Score is an average high score of 8-10

A net promote score (NPS) determines overall customer loyalty and satisfaction. It gives the company’s insight into consumers’ general perception of their brand after the client has bought and tested the product.

NPS is used to measure a product’s viability within a chosen market.

Respondents are categorized into three groups based on their answers, and each group is assigned a score range. If the average score for all participants is between 8-10, then this is a sign you have likely acquired a product/market fit for now.

What to do when you see the signs

If the product your team is testing shows one or more of the signals discussed above, congratulations!

The role of your marketing and sales

Achieving a product/market fit and finding who to sell the right product is half the battle – having it will not single-handedly scale your business and lead to greater sales and revenue.

Once you reach this point, look to invest even more in your marketing and sales approach.

Pre-product/market fit, your marketing team and your company founder should increase product and brand awareness. You will want to explore the limits of your sales potential.

Post-product/market fit, your marketing, and sales efforts should extend to paid advertising for greater customer reach and customer acquisition, conversion, and retention.

Post Product Market Fit graph(Source: Notion)

Other issues will require your attention, too:

  • How can you scale your SaaS company?
  • How can you grow your customer base?
  • Can you reduce the cost per acquisition of each customer (CAC)?
  • How can you consistently outperform your competitors?

Creating solutions to these and similar questions will demand your team to pick its priorities and be resourceful.

Navigating to a Product/Market Fit

Every SaaS company experiences a “before” and an “after” when validating their product/market fit. It is not enough to claim to have achieved it without looking for sufficient evidence that it is true.

Understanding the concept of product/market fit and recognizing when you have it is crucial to the future sustainability and growth of your company and the product itself.

 

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Karen Lopez

Written by Karen Lopez

Karen Lopez is Theia Marketing's Marketing Assistant.

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