What is GTM Fit?
Less discussed than PMF but if you aren't able to find GTM Fit, you won't be able to scale quickly, efficiently, and effectively.
This isn’t a post about Product Market Fit (PMF). It has been discussed by many people who know much more about the concept than I do. I think a good description of PMF is when a company’s product satisfies a strong market demand, evidenced by consistent and growing sales, enthusiastic customer feedback, and low churn rates. It indicates that the product effectively solves a significant problem for a well-defined target audience, making it a must-have solution.
There are a lot of different opinions on what PMF is but the best I’ve seen is from First Round Capital - the 4 Levels of PMF. I like that it’s more of a continuum than a binary.
Less talked about is GTM fit. Companies who are seeing PMF can fail to take their companies to the next level because they haven’t figured out GTF fit.
GTM Fit is Related to PMF
GTM Fit is part of and related to PMF. You can’t ultimately have PMF if you don’t figure out GTM fit. However, it has less to do with the product than how you’ve gone to market. Do you have a team in place to effectively, efficiently, and consistently acquire new customers?
This is a breakdown of First Round’s 4 Stages of PMF and you can see (highlighted in green) that some of the metrics are focused on GTM.
So, what is GTM Fit?
Another great article is Stage 2 Capital, The Science of Scaling. A lot of great actionable advice and metrics that all early stage companies should use in growing their business. They describe GTM Fit as:
Go-to-market-fit is acquiring and retaining customers consistently and scalably
You might have a great product that the market would love if they were aware of it or if it was distributed in the way that they buy. Building up that distribution network, whether it’s a PLG or SLG motion is part of what GTM Fit entails.
Can you have PMF Fit without GTM Fit?
If you use the strict criteria in the tables above, the answer is no. However, I think you can have PMF without GTM Fit. The spirt of PMF is that you have a product that the market wants and is willing to pay for. However, you might not be efficiently and effectively delivering it to them because you haven’t figured out GTM Fit.
Let’s say I created a DevOps tool that makes the lives of DevOps folks much easier and they are willing to pay for it - I have established some sort of PMF. However, I’m generating most of my opportunities and customers through SDR outbound. I have SDRs generate new opportunities (though not as much as I want) through prospecting and when they get those opportunities, I have very expensive AEs who are responsible for closing those opportunities and are doing that but not at a great rate. This might be a very expensive approach to generate and close new opportunities and it’s not a high enough volume.
That might be because that’s now how the DevOps folks I am trying to reach typically solve this pain point. Maybe they search for solutions and test it out using an open source or free version first. The ones who get the most value eventually convert to the more valuable paying customers. In that case, I might want to work on generating more inbound through a content marketing strategy. The primary sales motion might be having more AEs converting some of these users on free or lower tier plans to higher tier. This could require less experience and probably less expensive Sales teams.
So in this case, I have some sort of PMF but I haven’t established GTM Fit yet because I’m not efficiently or effectively acquiring new customers.
Finding GTM Fit
The first step to finding GTM fit is measuring the right things. These measurements won’t give you the solution but they can tell you if you’re on the right path and they will help you in your decision making.
Some of the GTM financial metrics like LTV:CAC, Payback Period, and Magic Number show you whether you are efficiently acquiring new customers. However, these numbers are a bit like looking in the rear-view mirror. But you can break them down into components that you can track more operationally like “First Meetings per Salesperson per Month” and “Meeting to Customer %”
LTV/CAC
The Lifetime Value of a customer should be more than the cost to acquire that customer.
LTV = ACV * % Gross Margin % / Churn Rate
CAC = Demand Gen CAC + Sales CAC
Demand Gen CAC = [Cost Per Meeting] / [Meeting to Customer %]
Sales CAC = [Salesperson Monthly Cost] / [Customers Acquired per Month per Salesperson]
Customers Acquired per Month per Salesperson = [First Meetings per Salesperson per Month] * [Meeting to Customer %]
Payback Period
The cost of acquiring a customers divided by the monthly recurring revenue of those customers.
Monthly ARR = ACV / 12
CAC = Demand Gen CAC + Sales CAC
Demand Gen CAC = [Cost Per Meeting] / [Meeting to Customer %]
Sales CAC = [Salesperson Monthly Cost] / [Customers Acquired per Month per Salesperson]
Customers Acquired per Month per Salesperson = [First Meetings per Salesperson per Month] * [Meeting to Customer %]
Magic Number
The increase in recurring revenue over a quarter by the sales and marketing expenses of the previous quarter.
ARR Increase = New Customer ARR + Expansion ARR - Churn ARR
Sales & Marketing Costs (Previous Quarter) = Sales Costs + Marketing Costs
New Customers ARR = New Customer ACV * Customers Acquired per Month
Expansion ARR = Expansion ACV * Expanding Customers per Month
Need Help Finding out to how to get GTM Fit?
If you’d like help figuring out where you are on the path to finding GTM fit and what you need to do to get there take this GTM assessment.