Why your product isn't ready for growth?
Product market fit isn't a insurance policy.
Welcome to the 200th edition of the GrowthX Newsletter. Yes, 200th edition, that’s a huge number for me personally. Writing is something I have enjoyed for a really long time, but I never imagined we would grow into this massive community.
I want to thank you from the bottom of my heart for being an avid reader. I hope this has transformed the way you now look at internet businesses and are able to action stuff at your workspaces. Do write to me if this newsletter has added value to your daily work life.
I often ask this question to founders/ founding teams who have a product with some traction - “Is your product ready for growth?” and 9/10 times the answer is “Absolutely yes”.
A lot of their answers are based on the assumption that if they have achieved product market fit, the product must be ready for growth. This is an assumption that maybe untrue.
If your product is in 0 → $1 million revenue journey, you need to read this article & really absorb it. Plus, share with other people in your team.
Confused on that last bit? Let me explain.
When a product achieves product market fit, a couple of indicators go green. First, you will see consistent organic adoption (pull for the product). Second, users keep coming back to the product to solve their use cases. Third, users brag about your products to others & are even willing to pay $$ for it.
But this does not mean you pour energy into growth.
Think of the Uber example. The cab app launched as a luxury car service for a select few set of users in San Francisco. It did have all the signals to point to a strong product market fit in that market. Does this mean it should now spend all its marketing dollars expanding what it has? - that would have been a disaster.
Uber had a product market fit.
This does not mean it had a business model. Product market fit does not mean you have a business model that returns more cash than you invested in the first place. Now this cash that returns could be in a very short term (vertical e-commerce) or a really long-term (social media platform business).
PMF ≠ Business model
But, am I asking you to figure out the business model before you invest in growth? Nope, that’s not my intent - all I want is for you to have a broad idea on how the business will return more cash than invested over a period of time. I get it - not every user will be profitable for your business from day 1 and that’s okay.
Read the above statement again. It’s important.
Now that the business model is out of the way, we will pick the next few signals to understand if your product is ready for growth. Before we begin, I want to re-iterate; growth does not mean just acquiring new customers. It also means —
→ New customers placing their first order
→ Existing customers transacting more
→ Churned users returning back
Let’s understand this deeply.
Imagine if you are acquiring new customers from a limited total addressable market, and let’s say your onboarding rate (#user signups to #users taking first action) is abysmally poor — you will exhaust your target audience even before you gain any momentum on your acquisition strategy.
Plus, a poor onboarding rate means you will spend way more on customer acquisition cost (CAC) as most user signups that you will earn by spending marketing $$$ will not take any action on your product. This is extremely harmful for the business if you grow before fixing this.
To understand this better, let’s take an example of CRED vs Dream11.
The target audience for CRED is extremely limited (70 million credit card holders in the country last I checked) vs audience size for Dream11 is potentially 700 million Indians who watch cricket and are over 18-year-olds (hence permitted to “bet/play” on the app).
Dream11 has the luxury of a large audience and thus has a higher margin for error. But, CRED would struggle to grow new user acquisition if it does not solve smooth onboarding from day 1. Plus, the cost to acquire a credit card user is going to be much higher than a cricket “betting/playing” user on Dream 11.
Second, is meaningful repeat usage.
And this is exactly where you need to pay attention as a growth operator/founder. Once you acquire a customer, their subsequent usage with your website/ app or even physical product need to add up.
What does “add up” mean?
Every time a new user does a repeat transaction/usage with your product - that action need to help the user experience the core value proposition of your product every single time.
Let’s take an example of Airbnb. Person A used the airbnb website and booked a stay in Istanbul for 2 nights. He/she had an amazing stay and hence kept visiting the airbnb website even when the person had no immediate plans of booking another stay.
Things get interesting here, though - this Person A is creating multiple airbnb travel lists on the website & saving them for future use. Here’s an example of how the “wishlists” look like.
The wishlist is a meaningful usage as a direct co-relation between saving “wishlist” and a probability of using airbnb for future travel. Now, you can only connect these dots for your product once you have some level of repeat usage data, but if meaningful repeat usage isn’t happening for most new customers, your product may be too early for hyper-growth.
The last signal in the 3-step framework is the existing power user behavior. Not every customer is going to be a power user of your product, I agree. But, there will be a set of few users who will pour in extreme love for your product. There are a couple of ways to understand this -
First, is classic, speaking to high usage/transacting users. Second, see if some of your users are fighting for your brand online (let’s say when someone comments mean things on Twitter/X). And third - your product has an extremely strong word of mouth in specific social circles.
What’s even more important than just a few power users bragging about your product is the user retention of the majority of users.
It’s very unlikely that the next scale of new users will behave like your current power users - let me break it to you - they won’t. We call it the end of golden cohorts. Your early users, most of the times will be the power adopters of your product
Quick example - the first set of Amex users in India were extreme financial elites. And, if you compare that data set to avg Amex users today, they do not behave like the first 1000 amex users.
This means if a majority of your users (>50%) are retaining and transacting/using your product on a frequent basis (daily/weekly/monthly), probably the product is ready for growth. But most founders wouldn’t want to wait for this in the name of chasing sexy hyper-growth. So what do you do?
Ask a simple question - If 100 users today signup on the product and only 35 (with 35 being a minority percentage of the whole base) keep transacting every few days/weeks/months, will this be large business?
Assume two things - first, the maximum number of users we can acquire at a CAC that would support the business model and second, we will be able to build a really large average revenue per retained user product/features?
If the answer is a firm YES, you may go ahead & push the growth levers.
I spend a considerable portion of my life writing these articles, and I absolutely enjoy this. All I want is to spread the right structure to “building a large business” for Indian builders. I would appreciate if you could share this article with founders & operators who are in the 0 → $1 million journey. Takes 5 seconds to share. Plus, if you want to dive into some past articles, go to archives.
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