Summary of A16z Podcast Episode: Prioritizing Product-Market Fit: Insights from a16z Podcast
Podcast: A16z
5 min. read
— Description —
Learn how to achieve product-market-sales fit and build a successful company with these 4 steps Discover the importance of understanding your customers needs, pricing strategies, and product expansion Dont miss out on maximizing your business potential.
Prioritizing Product-Market Fit: Insights from a16z Podcast
Table of contents
Key Takeaways
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In addition to product-market, a business also needs product-market-sales fit
- This involves answering the question – “Do we have the right sales strategy (subscription, freemium, one-time purchase, etc) for our product? “
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Engineers should be visiting the front lines of the sales team to understand:
- Who exactly is buying the product?
- How much are they willing to pay?
- What features do they most need?
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The 4 steps to building a successful company:
- 1) Create a product that solves a pain point
- 2) Listen to both customer complaints and customer successes to figure out what’s working with your product and what isn’t – update your product accordingly
- 3) Focus on getting more customers
- 4) Work on expanding your product and building other features your customers may need
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Always price higher than you think customers will pay – you can always give customers discounts!
- As long as there’s value, customers will be happy to spend money
- Just think – “If our product is really superior, why would we not charge a higher price?”
Intro
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This conversation includes:
- Jyoti Bansal (@jyotibansalsf): founding CEO of AppDynamics (which was acquired by Cisco for $3.7B the night before it was to IPO)
- Peter Levine: General partner at Andreessen Horowitz
- Satish Talluri (@satishtalluri): Investment Partner at Andreessen Horowitz
- Sonal Chokshi (@smc90): Host of the a16z Podcast
Product-Market and Product-Market-Sales Fit
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When building a business, the first problem you face is finding product-market fit
- After that, focus on scaling
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Phase 1 of product-market fit is figuring out where your target market is located
- Tip: Start broad then segment the market
- Interview different businesses (of all sizes) to get feedback and discover potential customers
- A good question to ask: Which company has the most pain?
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Phase 2 is figuring out the correct sales strategy
- It’s not just product-market fit that you need, it’s product-market-sales fit!
- This involves answering the question – “Do we have the right sales strategy (subscription, freemium, one-time purchase, etc) for our product? “
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An important point:
- If you have less than $1 million in ARR (annual recurring revenue) focus on product-market fit
- If you’re in the $1-10 million range, focus on finding the optimal sales strategy
- For $10-75 million in APR, focus on scaling your sales organization
- For $75+ million, focus on releasing product numbers 2, 3, and so on AND developing a sales team for each
- And remember – You have to be 10x better if you’re developing a product for a market that already exists
Sales Advice
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Engineers should be visiting the front lines of the sales team to understand:
- Who exactly is buying the product?
- How much are they willing to pay?
- What features do they most need?
- Engineers should also be helping sales teams understand the product
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There are two main ways to sell software: Top-down & Bottom-up
- Top-down: Selling a big license to higher-ups in the company so that several teams can use your software
- Bottom-up: Selling your software to the end-users (single employees) and then selling licenses once more teams need your product
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When selling software, expect to use 10-15% of the purchase price towards services aimed to help the client with adoption and education of the product
- Although this cuts into your margins, what good is your software if it’s just sitting on the shelf and the client isn’t using it?
- Also, the more you help your client use your software and provide them with value, the more likely they are to renew their subscription
- Although this cuts into your margins, what good is your software if it’s just sitting on the shelf and the client isn’t using it?
How to Build a Successful Company
- First, build a product that solves a pain point
- Then, listen to both customer complaints and customer successes to figure out what’s working with your product and what isn’t – update your product accordingly
- Once that’s solved, sales should focus on getting you more customers
- Next, work on expanding your product and building other features your customers may need
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Three questions to ask yourself:
- 1) What do you need to win more revenue today?
- 2) What do you need to do to keep customers happy?
- 3) What do you need to win more revenue 2+ years from now?
- Two-thirds of the engineering team should focus on your core product while the remaining third should focus on building new features
Sales Team Advice
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When you release a new product, create a new sales team
- Different products have different markets and require different sales strategies
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There are 3 Phases in the sales learning curve:
- Phase 1 is understanding the first 25 customers
- In this phase, the product managers sell the product much like the founders sold their very first product
- Phase 2 is selling to 25-100 customers
- For phases 2/3, you can start using your existing salesforce
- Phase 3 is selling to 100+ customers
- Phase 1 is understanding the first 25 customers
- Salespeople love getting recognition for doing great work – Especially if it comes from upper management or even the CEO
Additional Notes
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There are two ways to grow your company: Building or Buying
- Both have their challenges
- Building a new product may be cheaper but takes more time
- Buying a smaller company is more expensive but moves the timeline much faster
- Large companies usually use a combination of these two growth methods
- Both have their challenges
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When trying to determine a price for a product, ask yourself: how much value does it provide?
- You should be able to describe your pricing in half a sentence – don’t make it super complicated
- The sales team should be able to easily memorize the pricing tiers
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Always price higher than you think customers will pay – you can always give customers discounts!
- As long as there’s value, customers will be happy to spend money
- Just think – “If our product is really superior, why would we not charge a higher price?”