Beyond product/market fit: the product/pricing/channel loop

Much of this post has been inspired by Bryan Balfour’s very excellent Four Fits Framework, a must read.

The concept of product/market is often used to describe when a startup finds its core customer group (market) with a product its developed. Finding product/market fit is a critical path item for any new & small business to become a big business.

It’s often assumed following product/market fit, there’s a mostly linear progression to distribution: we have a great product, we know our market, time to go sell it. Product development capabilities are redeployed to features & requests.

However, to become a really big business, this linear process from product -> channel often fails to properly consider the nuances around really scaling.

Fragmented distribution channels

Sometimes everything checks out on paper - addressable market is large and well-understood, early customer feedback is great, product works - but there’s just no scalable source of demand. As such, acquisition ends up begin a grab-bag of tricks - some SEM here, a little social there. The logic follows that organizations just need to get really good at all of these various increasingly technical activities, & growth will follow.

The problem is that channel fragmentation is really high overhead and unlikely to deliver outsized performance. It requires an army of technical specialists, or expensive agency support. It’s easy to fool yourself as well, as the hidden cost of these channels is often not the media spend but the expensive people required to be good at these activities - the fully-loaded rather than marginal cost of acquisition. Worst of all, the little of this, little of that approach is by definition a portfolio approach, and will deliver a well-diversified growth rate similar to buying an index fund. Portfolio of channels delivers a portfolio rate of return. It’s really hard to build a $100 million business this way.

Keeping prices too high

Sometimes the real volume unlock in a specific channel is the same product, just priced 30% cheaper. Marc Andreessen famously advises entrepreneurs to raise prices. This might be the exact wrong thing to do depending on channels. Premium travel products sold through mass market OTA channels is a good example of this.

It’s incumbent on the company to understand where pricing meets volume in any of its distribution channels. Many product driven organizations never develop a comprehensive understanding of this & fall into a trap of protecting unit economics at the individual level at low volume - e.g. high gross margins - instead of sacrificing margin for high volumes, which then lead to scale economies and greater contribution overall.

Growth through the product/pricing/channel loop

In most startups today, fixed costs are relatively low. Airbnb & onefinestay can create hotel equivalent inventory for a fraction of the cost and time of a traditional hotel group. D2C brands rely on contract manufacturing (Harry’s a notable exception). Context Travel can launch new tours in new cities in a matter of days. This is where a lot of the market disruption comes from.

However, the trade-off with this low cost of product development vs traditional industry is that often for a company to really scale, the product development is an ongoing art. It’s not a case of the ‘doors open to the hotel, & now let’s sell the rooms’. The hotel needs to be constantly reconfigured.

It’s almost certainly easier to reverse engineer a product for a channel at a certain price than it is to find a distribution channel at a specific price for a product that has been developed. This is what the product/pricing/channel loop is all about. The scale organizations over the next decade will need to have a deep understanding and organizational process to figure out how all of these elements interact with one another to unlock growth.