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How to Establish Product-Market Fit: SaaS Growth Metrics to Focus On

product market fit

Customers and Product-Market Fit First, Raising Money Second

Whether your business is just starting to focus more heavily on product-market fit, or if the goal is to raise money so you can continue to grow, today’s market is proof that customer focus will remain a critical element in success. Whatever stage in the game you’re at, here’s some wisdom you can take to the bank: don’t get tunnel vision when raising money.

Speaking to Business News Daily, Lighter Capital CEO BJ Lackland summarized a common mistake startup entrepreneurs should avoid when hitting the fundraising trail. He advised:

It’s a mistake focusing on raising money instead of customers and product-market fit. Once companies have a product, many focus on raising money. But they should focus on customers and product-market fit, making sure their value proposition and offering resonates with a market and will get traction.

Key SaaS Metrics Help Validate Product-Market Fit

Truth be told, if you’re gearing up to fundraise, investors and lenders will not only want to review your financial reporting, they will want to see how your company is performing based on key SaaS metrics; for instance, monthly recurring revenue (MRR), customer churn, and MRR churn. These metrics are important because they validate your company’s revenue stream, product-market fit, and most importantly, the ability to achieve profitability. Investors and lenders use this data to see if your company is a sound investment.

So before you go on a quest to fundraise, focus on your customers and product-market fit.

In the guide below, you’ll learn how to establish product-market fit and why it matters. We’ll show you how to calculate and track two key SaaS metrics that validate product-market fit, which investors use to determine whether your business is a good investment.

Why Product-Market Fit Matters for Startups

Tap into any startup community discussion and you’ll quickly discover that product-market fit is one of the hottest topics. The buzz around this concept can be distilled into a simple phrase: make things that people want. While it seems obvious that you need to find a market for your product, the number one reason why startups fail is lack of product-market fit, according to CBInsights. From the report:

“Tackling problems that are interesting to solve rather than those that serve a market need was cited at the No. 1 reason for failure, noted in 42% of cases.”

Creating a product that has a strong market demand is especially important when raising investor money. Venture capitalists and debt lenders are willing to take a chance on your company only if they think they can get a return on the investment. If your product is not in high demand, the chance of getting good returns on their investment is slim.

Product-market fit is the only thing that matters and companies should strive obsessively to achieve it until they do. 

RELATED: 3 Steps to Nail Your Product-Market Fit

So how do you ensure that you’re building the right product for the right market? And how do you convince potential investors you have nailed it? There are many different models for measuring product-market fit, yet in our experience the process can be more qualitative than quantitative. Many startups never achieve product-market fit, while others have to do multiple pivots to get there.

What SaaS Metrics Help Establish Product-Market Fit?

SaaS businesses rely heavily on gaining and retaining customers to grow their recurring revenue stream. There are two commonly-used SaaS metrics that indicate how well you’re doing in this respect: customer churn and MRR churn.

These metrics can help you and your potential investors determine if your offering is well-received by your customer base and may help highlight some masked performance indicators. Having a well-received product is the first step to a strong and profitable company.

Beginning with customer churn, and then moving to MRR churn, read on to gain a better understanding about these SaaS metrics and why they matter to investors and lenders.

What is Customer Churn?

Customer Churn is the percentage of customers that cancel their subscriptions in a given time period.

Why Customer Churn Matters

Customer churn offers important insights into how well you’re meeting your customers’ needs. In the early stages, when you’re first reaching out to your potential customer base, your revenues and total number of customers can be growing while you are still hemorrhaging a large percent of existing customers every month.

To find out if there’s an underlying problem with customer satisfaction, you need to step away from overall revenue and total number of customers and look at the customer churn.

Why Customer Churn matters to investors

If founders are only focused on overall growth and not on customer churn, they might believe everything is moving in the right direction when in reality there is a severe underlying problem that’s causing a large portion of their customers to quit using their service or product. If new customer sign-ups were to drop off, the company’s revenue stream would rapidly decline.