Up and to the Right: How Breakout Companies Grow Fast

Product-market fit has a good rap for good reason. Marc Andreessen says, “it’s the only thing that matters for new start-ups.” It’s the foundation for success. Without it, a company fails. But with it, you might not win. Product market-fit is the foundation; Product-Channel fit is the house. They work together but are different. Breakout companies must master both.

Product-Market Fit — starts with the market, finds a problem and creates a solution. For example, Twitch looks like this:

• Market>“Gamers”
• Problem>“I feel isolated”
• Solution>“Twitch — a platform to watch other Gamers”

Twitch, now ~40 Million Monthly Active Users has 44% DAU/MAU. Once gamers find Twitch they stick. But, gamers need to know Twitch exists.

Product-Channel Fit — Product-channel fit, coined by Brian Balfour here, is the inverse of product-market fit. It starts with the solution, finds a channel and shows the market how to get the solution.

• Solution>“Twitch”
• Channel>“YouTube Influencers — play with me and other gamers”
• Market>“Gamers”

The connection between solution (product) and customer (market) happens through the channel. When this connection happens, you get growth.

Here’s the super cool part about product-channel fit. Forecasting is hard and missing forecasts feels crappy. Product-channel fit analysis makes forecasts more accurate. Win. I’m obsessed with improving my ability to better predict early stage businesses. Building them is hard enough!

Okay, let’s do this …

Breakout companies master product-market fit and product-channel fit.

There would be no Etsy without search; no Zynga without Facebook; no Dropbox without viral; no Peloton without paid.

After finding product-market fit, a company must connect target customers to its solution. This happens in various ways; however, go-to-market strategy impacts how quickly a company learns, how fast it grows and how much cash it burns.

• Option 1: wait for customers to discover product (high profitability — slow growth)
• Option 2: portfolio theory in which the company attacks multiple marketing channels (low profitability — moderate growth)
• Option 3: focused approach on one channel to find and optimize product-channel fit (high profitability — high growth)

Breakout internet and software companies choose 3. These companies have significant marketing channel concentration, sometimes up to 70%+ for new customers/users. It’s this correlation, between breakout companies and product-channel fit, that is most interesting to me. Why does it exist?

Breakout companies succeed because they recognize that channels don’t adjust for products; products must fit channels. This has three implications:

1. The product’s characteristics imply the channel

2. Each channel is unique and the likelihood multiple channels work for an early company is low

3. If you don’t find channel fit, growth flattens

What does all this mean?

We can create a framework to predict marketing success and improve forecasts. Here’s how:

There are four scalable marketing channels:

• SEO
• Paid
• Viral
• Influencers (some people don’t include this, I do)

Each channel has unique requirements (outlined in the framework below) and early companies naturally fit one channel over others. If a company’s product meets the requirements below, it can find product-channel fit and forecast growth based on the channel. If it doens’t, growth will be bumpy, costly and ultimately stall.

Think of a company (your own or one you’re advising/investing in) and apply this framework. Which channel is viable?

Pinterest Case Study — Pivoting to Find Product-Channel Fit

It’s 2012 and Pinterest Pinterest hit 11.7 million monthly uniques in the U.S making it the fastest site ever to break the 10 million mark. Pinterest was acquiring new users through Facebook but Facebook changed its algorithm. Growth stalled.

Pinterest needed new product-channel fit. The growth team, led by Casey Winters, analyzed their product. Based on the framework, what channel was Pinterest best positioned for?Pinterest was pre-revenue (Paid and Influencer channels were out); organized by interest (Viral is out because network density was low .. eg how many friends are re-modeling bathrooms right now). BUT it had millions of UGC pages.

The team latched onto this. To win as an advertising business, Pinterest needed hundreds of millions of visitors monthly. The team indexed Pinterest’s UGC against keyword volumes to estminate traffic. The potential was there but to succeed more work was needed.

Pinterest optimized it’s product for SEO by aggregating independent content pieces into topic pages with high keyword volumes. It served these pages to Google. Today, at 1 billion monthly visitors, SEO drives most new traffic and 41% of all traffic.

Citizen Case Study — Going Viral Through Calculated Network Density

In 2017, Citizen launched its app that taps into police scanners to give people local crime news. They addressed a human need (safety) and human behavior (to talk about the news). They launched in New York, one of the world’s densest cities, and went viral.

Today, Citizen is in 22 U.S. markets and has surged past Next Door and towards Twitter to rank #7 in the App Store News Category. Its growing virally with 90% of all installs coming from word of mouth.

Citizen cracked viral because it’s product met the channel’s requirements and it focused on amplifying the potential. By finding very dense cities with high crime rates (all public data!), Citizen seeded itself in markets with max potential.

Scan the chart below .. it shows the 15 largest U.S. cities vs cities Citizen launched in.

The average population density for the U.S. is 93 people square mile. New York City is 28K people per square mile. My home town, San Francisco, the 14th largest city (by population size) is the 2nd most dense! In thinking through companies with strong word of mouth (from Citizen to Lyft to Facebook), they focused on dense markets.

Now What?

If valuing a company (yours or an investment), the product-channel fit framework helps you assess growth potential before marketing even starts. I would love to hear from you!

*Source: Governing.com