Is there a framework for making better business decisions? When it comes to SaaS, there is, and I didn't know about it until recently.
Conventional wisdom says you should create a pros and cons list.
Some say trust your gut. Fail fast, fail often. Don't overthink. Learn from your mistakes.
My business partner and I would play devil's advocate against each other's ideas to find flaws in our thinking.
For example, when deciding if we should switch to a freemium model, we would argue for and against the topic.
If we adopt freemium...
we should see an increase in leads (this hypothesis was true)
we may see a decrease in conversion (this hypothesis was also true)
we will be aligned with our industry (our competitors use a freemium model)
If we don't adopt freemium...
we will have to find another way to increase leads
we could lose market share to our competitors
we may miss a big opportunity to up-sell
This is a logical and practical way to make a decision.
This is, however, also a bad way to make a decision for a SaaS business.
Why? I'll explain with a few examples.
Have you heard of product-market fit? Eric Ries defines product-market fit as,
"...the moment when a startup finally finds a widespread set of customers that resonate with its product."
Product-market fit is the holy grail of SaaS companies. Andy Rachleff says,
"The only thing that matters is getting to product/market fit."
This leads founders to be hyper-focused on the product, often delaying marketing initiatives.
We experienced this firsthand. Our focus would teeter-totter between product and marketing. Since product development was our strength, we naturally spent more time on it.
Our thinking could easily be justified.
If we build a great product, we will solve our customers' problems. If we solve our customers' problems, we will increase conversion. If we increase conversion, all we have to do is find the right channels.
Another decision we struggled with was if we should niche down by targeting restaurants. Again, we came up with pros and cons. We played devil's advocate.
But nothing ever felt right. No matter how much analysis went into our decisions, we always felt we were missing something.
The four fits
I don't remember when I came across the four fits framework by Brian Balfour, but it has completely changed my thinking.
Brian's big idea is that decisions about the market, product, channel, and model work together.
No decisions are made in isolation.
"All of the fits influence each other. Your hypotheses for each work together to build an ecosystem. You need to have hypotheses for all components at once. Don't think about them in silos."
The four fits are:
Here's an image that shows how these fit together.
Notice, it's not product/market fit. Markets come first. Marc Andreessen says,
“You can obviously screw up a great market — and that has been done, and not infrequently — but assuming the team is baseline competent and the product is fundamentally acceptable, a great market will tend to equal success and a poor market will tend to equal failure.”
"Products are built to fit with channels. Channels do not mold to products."
You cannot grow when your channel does not fit your model. Balfour says,
"Your channels are determined by your model and vice versa."
For example, if your average revenue per user is $49 (like ours was), you cannot afford to use outbound sales as a channel.
If we would had niched down to target restaurants, we would have significantly decreased the market size.
For this to work, we would need to increase our average revenue per customer to offset a smaller market.
"Your market (and # of customers within your market) influence your model."
Here's how I could have used the four-fits in the examples from before.
Instead of thinking about niching (a market decision) alone, we should have included changes to the product and the model (adjacent fits) in our hypothesis. See image below.
While the four-fits is positioned as a growth framework, I see it as a decision and strategy framework.
Every aspect of SaaS, including idea validation, should use four fits framework to make better decisions.
Keep this framework in mind as you make decisions. Ignore it at your own risk.