Why product/market fit could be crucial to scaling up success

27 February 2020

The business development landscape has never looked more varied. While some businesses – both new and established – take the traditional, more measured approach to growth, others appear to move from start-up to scale-up with incredible speed, and in some cases with seemingly little proven revenue or returns.

Not all growing businesses are guaranteed to succeed; sometimes the pace of growth – whether too quick or too slow – can leave the business model vulnerable, open to market changes and fast-acting competitors, and ultimately falling by the wayside. But for those scale-up businesses that do succeed, the returns for owners, management teams and investors can be quick and substantial.

So as managers, what should we be looking for (both in our own companies and our competitors) that can identify a scale-up business with the potential to take a sector by storm? 

One of the critical concepts among entrepreneurs and investors concerning a high-potential, fast-growing business is ‘product/market fit’. This concept is the relationship between a product or service developed by a business and the response from customers. A product which the market ‘gets’, and which it wants straight away – with no need for fine-tuning or altering of either the item or the market – is an excellent example of product/market fit.

That’s not to say the team behind the product isn’t still a crucial part of the business success, but it does mean that there is an added edge – the ‘sizzle factor’ – for a particular product in a specific market.

Product/market fit is often an essential component of a scale-up business – one that, regardless of size, is both ambitious and enthusiastic for fast growth. That’s because many companies looking to scale up will be looking to investors to fund their growth, and product/market fit can be a hallmark of the ability of a business to achieve growth successfully, and determine the profile of investor it can approach.

While healthy revenue in itself may be a compelling investment argument, many businesses will be looking to source funding on the back of either a very persuasive product idea or having an exceptional team in place (or both). 

In order to prove either of these, businesses need three things – credible data, assumptions (based on the evidence of testing out what you think you know), and hope. For a pre-revenue business to try and prove product/market fit, it will need much more than just hope – the good idea on its own; it will require evidence and assumptions. Data and insight to demonstrate that any revenue assumptions are going to materialise will give you an added advantage.

So how can you demonstrate product/market fit?

Below are five key points:

  • Use in-depth data and research to show there’s a big market – not only of potential customers but of accessible customers who need your product.
  • Prove to stakeholders that your business model is the right one. It’s not just about how strong your idea is; it’s also about the strength of all those things that are needed to make the idea work – the execution plan, logistics, pricing, distribution channels etc.
  • Understand the difference between data, assumptions and hope; turning hope and intuition into research-based assumptions can make a huge difference.
  • Match the product/market fit with the investment thesis – understand the returns your target investor expects, and identifying what they will get out of their investment.
  • Recognise those KPIs around unit economics that really matter. If you’ve done the previous four things well, you should know – and be able to show – the cycle of how money spent in the business turns into revenue and then profit.

These were some of the issue discussed by two corporate finance experts in a recent podcast on product/market fit, which you can listen to here.

Measuring product/market fit, and demonstrating it through research data and evidence, gives management teams in companies looking to scale up the tools and the clarity to make strategic decisions that will achieve growth and attract investment. But as always, people are still vital; they have to buy into the data and the evidence behind a strategy and will make the investment decisions.

Mel Root