The Email Inflection Point in the Product/Market Fit Journey

When we launched the initial marketing automation product for Pardot, the feature set was quite simple. We had a minimal analytics that would track the individual lead’s movement around the site, a basic form capture to collect contact information, rudimentary CRM integration to sync data, and that was about it. Over time we added core modules like landing pages, automation rules, complex CRM integrations, and dynamic customer journeys. Only, the initial plans didn’t call for email marketing.

In fact, we actively didn’t want to do email marketing. Who wants to be an email service provider (tools like Sendgrid didn’t exist then)? Who wants to deal with deliverability? Who wants to fight spammers? The initial strategy was to have integrations to Mailchimp and Constant Contact such that modules like the forms manager could trigger an autoresponder and an automation rule could trigger a 1-to-1 email.

Quickly, we realized something was wrong.

Our approach delivered a poor, incomplete experience to our customers. Email was too important to be siloed from the marketing automation system. Email was too powerful as a marketing channel to not be a first-class module.

After endless internal debates about email, we finally decided to become an email service provider. Now, we enabled email to be a core feature throughout the platform. Now, marketers didn’t have to switch between as many different systems to run their marketing programs.

Email was a major inflection point in our product/market fit journey. Prior, customers liked the software but our product/market fit was modest. After adding email marketing, and a few rounds of refinement, our product/market fit was excellent and customers raved about the solution.

Major strategy changes often seem daunting. By focusing on the customer, and going down a much more difficult path technically, we delivered a superior experience. And, in the end, that was one of the most important product decisions we ever made.

Time and Effort are the Greatest Barriers to Entry for New Markets

Back when we were pitching Pardot to VCs in an unsuccessful attempt to raise money, one of the more common questions was, “What are the barriers to entry?” Then, a more specific variation of this question would arise, “What’s stopping Google from assigning 100 engineers to this market and crushing you?” Both are legitimate questions and we’d counter with things like having a mini-brand, 100+ paying customers, strong product/market fit, and so on. One famous investor, who writes the excellent Above the Crowd blog, told us he wasn’t interested because there weren’t enough defensible network effects or marketplace elements to be interesting. Fair enough.

In hindsight, the answer to the barriers-to-entry-question is much simpler: until there’s a meaningful market, no big company is going to care. By the time the market is large enough to matter, the winners will have been established, and the massive tech companies will merely acquire one of the leaders. When a major tech company does enter a large existing market as a laggard, most often they abandon it a few years later (see Google Hire’s recent shut down notice). Why? The market it already saturated with viable solutions and competitive dynamics are too strong. For major tech companies it’s always better to buy than build for a new product offering.

So, with small-but-fast-growing markets as the ideal target for most startups, barriers to entry are almost non-existent. After talking to thousands of people about entrepreneurship, and seeing so few people start companies, I take a different view.

Time and effort are the greatest barriers to entry for new markets.

Creating a new company is hard. Expect 5 – 10 years of difficult work to build something viable.

Most entrepreneurs don’t have the time.

Most entrepreneurs aren’t willing to put in the effort.

With new markets, there’s no guarantee it will grow into a large, meaningful market. Some do, most don’t. Quite often, people think a market will catch on and grow fast, only to have it fizzle out. That’s a big risk, and people are generally averse to risk.

The next time someone asks about barriers to entry for a new market, remember that it’s rarely an issue. It’s not that an entrepreneur couldn’t enter the market, it’s that there are so few entrepreneurs out there, and even fewer are going to commit the time and effort.

Why the Lack of a Strategic Plan?

When meeting with entrepreneurs I like to ask to see their strategic plan. Many times, I require seeing a simple strategic plan as a prerequisite before meeting so as to have a more informed conversation. Only, the vast majority of the time, no strategic plan exists, simple or otherwise. Then, when a strategic plan is present, and we go through several of the items, it becomes clear that it’s out of date and/or not remotely achievable. What gives?

I hearken back to the early days of my first startups and realize I never had a strategic plan. My strategic plan was Herb Kelleher’s famous quote:

We have a strategic plan. It’s called doing things.

While that worked well for me with a tiny team and few moving parts, as team and complexity grew, I needed a way to align everyone around a common, high-level focus. Enter the strategic plan.

Now, I believe, even with limited people and resources, a strategic plan is worthwhile. As a tool to communicate with employees, advisors, mentors, and investors, it’s invaluable.

One of the reasons so few entrepreneurs spend time on a strategic plan is the belief that it’s time consuming and difficult. From my experience, the simpler, more concise, the better. Here’s a simple guide for a basic strategic plan:

  • What do you do? Why?
  • Who do you serve? Why?
  • What are the measurable goals? Current values? Target values?
  • What are the priorities? Who owns them?

https://twitter.com/davidcummings/status/1134546561730584576

More complicated strategic plans are less likely to be updated and maintained, rendering them nearly useless. Finding a balance that has enough value but isn’t cumbersome is key.

Entrepreneurs should build, regularly update, and share their strategic plans. Keep it simple. Keep it accurate. Keep it worthwhile. Strategic plans are a valuable tool every entrepreneur should employ.

When the Opportunity is Bigger Than Expected

Three years into Pardot we were humming along and had just cracked the $1M annual recurring revenue milestone. Customers were loving the product and saying things like, “I don’t how I did my job before using Pardot” — a great sign we had a must-have product, not a nice-to-have. After listening to customers talk about the value they received, internally we started debating raising the price to match the value.

Then, of course, worries emerged:

  • Would prospects pay the higher price?
  • Would sales cycles lengthen?
  • Would sales velocity slow down?

And, naturally, the sales reps didn’t like the idea because they feared they’d make less money.

After getting internal feedback and input we made the call and doubled prices. What happened next was unexpected: sales and revenue grew even faster than planned.

At that point, it dawned on me the opportunity was bigger than expected.

Marketing automation was a billion dollar market in the making.

We were at the right place, at the right time, with the right team.

But, honestly, at the start of Pardot we thought it was a decent idea but didn’t know if it was good or great.

We didn’t know if the timing was right.

We didn’t know if the Great Recession would slow us down.

Three years into the business we knew we were on to something big — even bigger than expected.

Competing Definitions of Product/Market Fit

One of my favorite questions to ask seed/early stage entrepreneurs is “do you have product/market fit?” Then, naturally, it’s followed up by “how do you know and what are the metrics?” Of course, the answers, and rationale, are all over the place. While there are a variety of ways to define product/market fit, here are the three most common:

  1. By Unaffiliated Customers
    A simple, easily quantifiable definition is product/market fit is achieved when you have 10 unaffiliated customers that are passionate about the product. Unaffiliated, in this definition, is key in that the customers need to have bought the product based on its merit, not based on being a friend of the founder or an old colleague. Passionate customers are another important component in that there has to be a positive indicator beyond just paying money that there is a real need, one with authentic demand, being solved.
  2. By Positive Momentum
    A looser definition of product/market fit is when instead of feeling like everything is an up hill slog in the startup, things get easier and there’s palpable momentum. Examples include customers signing with significantly shorter sales cycles, PR opportunities popping up, and potential employees actively reaching out to join.
  3. By Distribution Scalability
    A later stage definition of product/market fit is when the cost of customer acquisition is favorable relative to the lifetime value of the customer. Here, the idea is that the solution is valuable and customers are being acquired in way that makes the startup indefinitely scalable.

While there are a number of competing definitions, it’s clear that product/market fit represents good things happening in the startup and the foundation for a successful company.

When the Startup Stalls

Last week I was talking to an entrepreneur with a stalled startup. After being in business for several years, getting to millions in recurring revenue, and having a great run, the business plateaued. What to do next? Of course, there are a number of areas that can be improved in the business, as is always the case regardless of growth, so I asked the bigger question: What do you want to do with the company?

After much back and forth, it became clear that the desire was to keep running the business and to get it back on a high growth trajectory. We talked about a number of different strategies and decided to focus on three areas: retention, customer acquisition, and the rule of 40.

Retention

Retention represents the core health of the business. Customers that are happy, successful, and finding value renew their contracts. The old adage that it’s more cost-effective to keep an existing customer than to find a new one still rings true. With a mature, no-growth business there’s even more time to focus on the existing customers and ensure they have a great experience and renew (see SaaS Enemy #1).

Customer Acquisition

Customer acquisition represents all aspects of acquiring new customers. Often, when a business slows, the customer acquisition channels haven’t scaled with the company and the law of large numbers kick in such that growth on an overall percentage goes down as the number of churned customers goes up (see Leaky Bucket). Now’s the time to analyze the customer acquisition channels deeper and look for opportunities to make improvements.

Rule of 40

The Rule of 40 states that the profitability, as a percentage, and the overall growth, as a percentage, when combined, should be 40 or higher. A business with 10% margins growing 30% annually meets the Rule of 40 while a business that’s breakeven and growing 10% annually is significantly below. Put another way: grow fast without making money or generate healthy cash flow with little-to-no growth. For a plateaued business, if it’s clear it can’t grow more, it’s time to meet the Rule of 40 by making it more profitable and focusing on operational efficiency.

Stalling startups is all too common and part of the normal course of business. By its very definition, a startup is a growth focused business, so if growth isn’t currently possible, it’s likely time to sell, look for new product ideas, or no longer be a startup.

Markets or Ideas for Startup Success

As I look for patterns in successful startups, the more I believe the market, inclusive of timing, is more important than the initial startup idea. People get so enamored with the idea — even putting it up on a pedestal as the be-all-end-all — that they don’t step back and spend enough time assessing the market.

An entrepreneur will research an idea for a few weeks before jumping into a journey that might take 10 years. Instead, spend several months in the market. Learn it. Study it. Look for trends and gaps. Really experience the market, however possible.

Take Pardot as an example. The initial Pardot idea was lead generation as a service, not marketing automation. We picked a great market — online lead generation — and had great timing — the shift of offline marketing dollars to online — making the pivot into marketing automation successful.

Take SalesLoft as another example. The initial SalesLoft idea was alerts and news about your contacts, not sales engagement. We picked a great market — productivity software for sales people — and had great timing — the shift of offline selling to online — making the eventual pivot into sales engagement successful.

Take any famous entrepreneur. I bet they picked a great market (and timing!), found an opening in the market (an initial idea), and then built a suite of offerings to service that market over many years.

Archimedes, the Greek inventor, has a famous quote:

Give me a place to stand and with a lever I will move the whole world.

Entrepreneurs with a tiny wedge into a large market can build a great business.

Pick a market, not an idea.