For a startup to thrive and grow, you have to figure out product/market fit — this has become increasingly clear over the last five years in San Francisco. You can raise millions, get a huge amount of exposure, and possibly even see a bit of initial traction . . . but if you can’t get to product/market fit, you’re just not going to make it.
“Put simply, product/market fit is when you stop wondering if your product actually solves a problem and you start wondering how you're going to deal with all the people trying to buy your product.” –Tristan Kromer, trikro.com
More specifically, business viability hinges on finding profitable product/market fit.
So as a business owner or operator, the question you have to ask yourself is: “How do we get there quickly?”
What’s the sales hack to find profitable product/market fit? How do you systematically hone in on a profitable, scalable business model without wasting 12 months selling to the wrong people?
Here’s a technique I use to address this challenge:
The 3-step process for finding profitable product/market fit
Step 1 - Find profitable customers
“Getting a grip on who or what is a profitable customer for your business as early as possible is key to smooth growth. It directs all your sales and marketing processes.” – Sujan Patel, Co-founder of ContentMarketer.io
To find profitable customers, you have to set the right price early on. It’s all about zeroing in on your sales cycles to get a feel for sales complexity and your customer acquisition cost (CAC).
Think of it this way: If you’re sending out multiple salespeople to close an enterprise deal and help onboard the customer, your cost of sale is very high. It’s crucial that you charge enough to make the deal profitable for your business.
Figuring out your CAC doesn’t have to be complicated. Just work through a handful of sales cycles, get a good idea of sales complexity, then establish ballpark CAC using the numbers presented in this blog post by David Skok, and below:
Sales Complexity: CAC
- Freemium: $10
- Self-Service: $50-$200
- Light Touch Inside Sales: $1,000-$2,000
- High Touch Inside Sales: $3,000-$8,000
- Field Sales: $25,000-$75,000
When you have a better idea of your CAC, the next thing you need to do is establish your v1.0 pricing guidelines in such a way that the minimum value of a paying customer is at roughly three to five times your CAC. You can base this on a 12-month contract as a starting point, and adjust when you figure out how long customers stick around.
For example, if you have a ‘Light Touch Inside Sales’ model and CAC of $2,000, then your LTV, at three times CAC, should be:
$2,000 x 3 = $6,000 or $6000/year assuming your customers stick around for 1 year.
If you want a more conservative estimate, in the form of a higher target:
$2,000 x 5 = $10,000 or $10,000/year assuming your customers stick around for 1 year.
As soon as you’re confident that you have a pricing model that’s profitable for your business, take it to market. Don’t be afraid to be firm when negotiating price. Doing so will help you get a better understanding what the market can bear in terms of costs. You might lose one or two deals, but the lessons you’ll learn are worth the risk.
At this point, you might be thinking to yourself, “That all sounds great. But what if I do everything you’re saying and I’m not able to make even one sale?”
If you can’t close deals at the pricing level you established, it’s probably a good idea to re-evaluate your sales process and reduce sales complexity. If you can’t reduce sales complexity and you’re struggling to close deals at a profitable price point, you might need to reconsider your business — after all, there’s no use trying to grow an unprofitable business.
Holding strong on a profitable price point will force you to find the right customers to make your business profitable and sustainable in the long run.
Step 2 - Sell what you can deliver
The whole concept of only selling what you can build might seem obvious, but it’s often overlooked by eager salespeople.
The worst mistake you can make early on is to sell what you can’t deliver. This is where the dynamic and relationship between your product and sales teams can become strained at times.
As a salesperson, it’s easy at times to get ahead of yourself and make inflated promises to get a prospect excited about the product — but it’s crucial that you avoid doing this. You have to respect your product team — it’s the only way you have any chance of building a scalable, profitable, sustainable business.
Again, the key here is to avoid becoming a buffet — don’t focus on trying to offer and build every single feature every person you interact with asks about. Instead, focus on finding the right customer who will buy what you can deliver.
"Typically there's a lot of nice-to-have features that your product offers, but there are one to two features that solve a huge pain for your customer. Find out what your customer's pains are early on in the sales process, and you won't need to sell ahead of your product roadmap." – Benji Hyam, Co-Founder of Grow and Convert
Step 3 - Develop a pricing plan that is easy to understand
Pricing is the key to the profitability question mentioned above, but it’s also a key component to the product-buying experience. In the early stage of growing your business, you have to ask yourself questions like:
- How simple is it for the buyer to understand our pricing?
- How easy is it for the sales team to explain and prepare a quote?
- Will your current pricing plan significantly impact the velocity of your deals?
The method I outlined in Step 1 will give you a sense of how much you should be charging, but the shape and packaging of your pricing is what I want to focus on here.
When you are going through the price discovery process, you need to custom quote to get a feel for the market (especially if it’s green-field), but it’s really important to always be moving toward a simple, transparent pricing structure.
“Simple pricing has been critical to reducing buying complexity for our new Zapier customers.” – Wade Foster, Co-Founder/CEO of Zapier
Here’s a good post on SaaS pricing by KissMetrics, which is always good to look at for inspiration. SaaS is the epitome of simple product and pricing, and your offering might be more complicated (I totally get it). But the point here is to be moving toward a simple pricing plan that your sales team can easily communicate to prospects.
Using Pipedrive to zero in on your ideal customer profile
“Your Ideal Customer Profile is the foundation of your sales process. If you don't know who your low-hanging fruit customer is then you're wasting time, money, and resources turning over the wrong stones.” – Max Altschuler, Author of Hackingsales.com
So, now I’ve taken you through the three essential steps to a scalable, profitable business model.
Focusing on these steps will help you get closer to building a profitable business, but if you really want to make waves, there’s one final and incredibly simple bonus step you can take to optimize the entire process and fuel business growth.
Pro-tip: Use a CRM like Pipedrive to collect, organize and learn from data to find your ideal customer faster.
We all know Pipedrive is great for keeping deals moving through the pipeline quickly, but when it comes to refining your Ideal Customer Profile (ICP), the most valuable use of Pipedrive is tracking WON/LOST deals. By capturing and reporting on the reason why a deal was WON/LOST and who the prospect is, you can become incredibly effective at building that ICP you need in order to scale a profitable business.
Here’s how you do it in Pipedrive:
- Define “Lost Reasons”
The first thing you’ll want to do is define “Lost Reasons.” It’s important that you include information that can be acted on when you pull a “Lost Deals” report in three months’ time.
Some examples that you might include:
- No technical fit
- No budget
- No Response
To learn how to define “Lost Reasons” in Pipedrive, read this post. The goal is to encourage sales reps to use predefined reasons, rather than trying to come up with their own reasons every time . . . if all the “Lost Reasons” are different, it will be difficult to prepare a summary report in three months.
If your salespeople express a desire to leave their own comments anyway, let them know that Pipedrive provides a text box that can be used to provide deal-specific commentary.
- Enrich your contact data
If you’re capturing your reasons for winning and losing deals, you have half of the puzzle. The other half you need is to determine who these people are that you’re interacting with.
Here’s how you to do it:
- Create a report of all won and lost deals using List View, with the following headers:
- First Name
- Last Name
- Company Name
- Next, export to excel and enrich the contacts by adding additional information using one or all of these methods:
- Clearbit Sheets
- A virtual assistant in the Philippines using Rapportive
- A full-service solution like SimpleData or InspireBeats
Here’s a great post on building a team of virtual assistants in the Philippines by Matt Ellsworth from 500Startups.
All of these methods will enable you to gather this profile information from an email address:
- LinkedIn URL
- Company size (number of employees)
- Job title
Enriching contacts with more information can be valuable. For example, you can leverage LinkedIn profile attributes to increase the value of using LinkedIn as a lead source for your marketing and outbound lead generation initiatives.
So, now you’ve got it. You’ve found your profitable customer profile. Your marketing team can focus on finding more of the profitable customers.
I hope you can use the methodology outlined in this post on top of your existing sales process to hone in on your profitable customer profile and build a great business.