Product-Market SALES Fit (What Comes First?) – a16z Podcast

Check out the a16z Podcast Episode Page & Show Notes

Key Takeaways

  • 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? “
  • 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?
  • 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
  • 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

  • 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

  • When building a business, the first problem you face is finding product-market fit
    • After that, focus on scaling
  • 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?
  • 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? “
  • 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

  • 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
  • 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
  • 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

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
  • 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

  • When you release a new product, create a new sales team
    • Different products have different markets and require different sales strategies
  • 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
  • Salespeople love getting recognition for doing great work – Especially if it comes from upper management or even the CEO

Additional Notes

  • 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
  • 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
  • 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?”
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