Choosing the Right Customer Acquisition Channel and Measuring Product Market Fit

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Sep 30, 2023
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Choosing the Right Customer Acquisition Channel and Measuring Product Market Fit
Introduction:
When it comes to startups and businesses, two crucial aspects are customer acquisition and product market fit. In order to effectively grow and succeed, it is essential to choose the right customer acquisition channel and measure product market fit accurately. In this article, we will explore the steps to select the best acquisition channel and discuss the importance of cohort retention rates in determining product market fit.
Step 1: Prioritize Learning and Volume
In the early stages of a startup or when expanding to a new target audience, learning becomes a priority. This involves understanding customer behavior, preferences, and market demands. However, as the business progresses, it becomes necessary to prove that you can move the needle in a meaningful way. This is where volume comes into play. By optimizing your cost per acquisition (CPA), you can aim for higher volumes of customers. It is crucial to determine how much volume is needed to gather sufficient data and decide how much you are willing to spend to obtain those answers.
Step 2: Identify Your Constraints
Every business has its own set of constraints, which can include time, resources, and targeting capabilities. It is important to identify and acknowledge these constraints before choosing an acquisition channel. By understanding your limitations, you can narrow down your options and focus on channels that align with your capabilities.
Step 3: Setup Your Channel Matrix
To make an informed decision, create a channel matrix that lists out various potential channels and their defining attributes. In the header row, list the channel defining attributes such as upfront costs, minimum spends, pay-as-you-go options, and incremental costs. In the header column, list out all the potential channels you are considering. This matrix will help you compare and evaluate each channel based on its scalability, volume, and resource requirements.
Step 4: Evaluate Channel Matrix
In this step, fill in the values of the channel matrix based on low, medium, or high ratings. Consider factors such as the overall volume of the channel, scalability in terms of time and resources, and expected costs per click (CPC) or cost per thousand impressions (CPM). By assessing these aspects, you can determine which channels are most suitable for your business goals and constraints.
Step 5: Choose 1-2 Channels as Hypotheses
Based on the data obtained from the channel matrix, select one or two channels that align with your constraints and optimize for learning. For example, if your constraints are time and targeting, focus on channels that offer high targeting capabilities, require minimal input/output time, and provide sufficient scale to gather the necessary data.
Measuring Product Market Fit with Cohort Retention Rates:
Once you have chosen your acquisition channels, it is essential to measure product market fit accurately. While Net Promoter Score (NPS) is sometimes used as a metric, it may not be the most reliable indicator. Instead, cohort retention rate emerges as the most important metric for determining product market fit. A product with a great cohort retention rate can be successfully distributed with a solid growth strategy and execution.
A cohort retention "triangle" chart is a valuable tool for tracking progress. As you improve your product, newer cohorts should exhibit higher retention rates. The goal is to have cohorts that level off at a specific retention rate, indicating that you have achieved product market fit. It is also important to analyze the retention rates of comparable products that have successfully grown to find the right benchmark for your business.
Good retention amplifies acquisition efforts since the users you acquire are more likely to stay. It is usually correlated with users' love for your product, which in turn boosts word-of-mouth marketing. Actively measuring cohort retention rate using the "triangle" chart allows you to track and improve product market fit over time.
Conclusion:
Choosing the right customer acquisition channel and accurately measuring product market fit are crucial steps for any startup or business. By prioritizing learning, understanding constraints, and evaluating potential channels, you can make informed decisions that align with your goals. Additionally, by focusing on cohort retention rates, you can gauge product market fit and optimize your acquisition efforts. Remember to continuously measure and improve these metrics to ensure long-term success.
Actionable Advice:
- 1. Prioritize learning in the early stages of your startup and aim to gather sufficient data to make informed decisions.
- 2. Identify your constraints, such as time, resources, and targeting capabilities, to narrow down your acquisition channel options.
- 3. Actively measure and track cohort retention rates using a "triangle" chart to determine product market fit and improve your acquisition efforts.
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