Model-market fit

Model-market fit is the relationship between your business model and your market. It’s how who you’re selling to relates to how you’re making money.

Your business model needs to be designed for the market you’re reaching.

We discussed model-market fit earlier when we introduced the Five Fits Framework. There, we talked about the importance of determining:

• How much to charge
• How and when to charge
• Willingness to pay, including buying power
• Market size

We’ve already gone over the first three bullet points. In this section, we’ll focus on market size. Starting with an example.

Example: How to hire a marketing agency

Because you’re going through the Growth Program, you don’t need to hire a marketing agency. But say you did.

There are a few different paths you could take. On one end of the spectrum, you might look for a prestigious agency. You’re willing to invest in a strong, enduring relationship with reputable experts—who charge for their expertise. You could put out an RFP or reach out to a selection of agencies to begin the vetting process.

On the other end, you might need a marketer who’s fast and cheap. You’re willing to sacrifice quality of relationship and expertise for fast action. You decide to find a freelancer on Fiverr and hire them for a short-term arrangement on the spot.

It’s extremely unlikely that you would consider both options. Your willingness to pay will align with either the high-end agency or the Fiverr freelancer—not both.

If you have a lot of capital to spend, you have more buying power, and you’ll go higher-end. If your budget and time are tight, you’ll go cheaper.

That’s looking at it from the perspective of the buyer. Switching viewpoints, consider how those different needs, expectations, and budgets would affect the marketers themselves:

• The high-end agency is only accessible to teams with significant buying power, who are willing to overcome the initial friction of sales calls and a high-priced annual contract. Their market is extremely limited.
• Anyone can find and hire the Fiverr freelancer in minutes (low friction), without having to spend nearly as much. They have a much larger market.

But it’s not just market size that matters. It’s also the amount of potential revenue. The agency can charge more—and they need to, since their customer acquisition process is more arduous, and their CAC is therefore much higher.

The freelancer’s market probably has much less buying power, so the freelancer can charge only a fraction of what the agency charges. They won’t earn nearly as much revenue per user. As long as their ARPU is enough to cover their CAC and then some, that lower revenue is fine.

Customer personas also matter greatly here. The agency might be selling to CFOs at established brands, for whom sales calls and contract negotiations are part of their job. The freelancer’s customer might be a new local-business founder who’s still scrappy, and whose time and resources reflect that.

Takeaway: Factor your market size and personas—including quantitative elements like buying power and willingness to pay—into your business model.

We’ll show you how in the following project.

Project: Calculate your opportunity size

Your opportunity size is the size of the market you can reach. It’s a factor of how big the market is and how much of it you can capture.

Step 1: Revisit your customer personas

As you know very well by now, pricing is all about understanding your market. What they want to pay, what they want to pay for, what they’re able to pay, etc.

Reread your personas from the Market and Customer Research module. What do you already know about your customers and their psychology? How do they buy, and what do they want? What sort of buying power do they typically have—and is that buying power enough for what you’re selling? Do their hobbies align with your product’s value props?

Take a bit of time to think about how those persona characteristics might affect your business model. Low buying power, for instance, would mean that big upfront payments aren’t feasible for your startup. High willingness to pay could mean your ARPU might be on the conservative side.

Step 2: Determine opportunity size

How big is your audience? You can approach this in one of two ways:

• Calculate how big your market actually is.
• Calculate how big your market needs to be in order to reach your revenue goals.

Calculate how big your market actually is

When you started your business, you probably did some initial research to estimate the number of people (for B2C) or companies (for B2B) you could potentially sell to. If you haven’t done that yet, or if your market has changed, some ways to gather total market size data are by researching:

• Existing market figures, available through research and consulting firms, regulatory agencies, white papers, etc.
• Competitors—gather any info you can find about their market size
• Prospects/customers—your pricing survey/interviews can help with this by showing how desirable your product is, as can any other customer research you’ve done

Also consider how much of your market you can capture. That percentage is a function of:

• How competitive your market is, and how well-established your competitors are
• How differentiated your product and brand are (i.e., your unique positioning and value props)
• How much your market is growing

For example, if you’re starting a new social media app for short, shareable videos, you’ll probably only capture a small percentage of the market at first. If your product has some irresistible feature that TikTok doesn’t, you might end up with decent market share down the line, but initially, you’ll have a hard time converting deeply entrenched TikTok users. Your market percentage will be low.

Once you have those two numbers, multiply them to find your opportunity size:

Calculate how big your market needs to be to reach your revenue goals

Another way to go about it is to work backwards from your ARPU. How many customers do you need in order to reach your ARPU—or the ARPU (or total revenue) you want to have?

Use this formula:

If you want to make $10 million annually and your ARPU is $100, you’re going to need to line up 100,000 paying customers.

Or, if you have a clear sense of your market size, you can check whether your ARPU will support your revenue goal. If there are only 20 prospects you can sell to, and only 50% of them are likely to sign up, your ARPU would need to be $1 million to reach a revenue goal of $10 million.

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Add your market size, market capture percentage, and opportunity size to your project doc.

Step 3: Use your findings to reassess model-market fit

Now that you have an estimated opportunity size, here are some questions to ask or revisit:

• Does your model enable you to hit your growth goals?
• Do your price point and ARPU let you build the business you want to build?
• Should you add any additional questions to your survey/interview, to home in on customer persona buying habits and willingness to pay?
• Are there any model-market fit issues pertaining to your opportunity size, price point, ARPU, or market’s willingness to pay?
• If so, how can you address them?

Everything needs to fit together: goals, ARPU, price, market size, and that market’s willingness to pay.

To set the stage for sustainable growth, address any amiss “fits.” That might entail thinking through how to reach a wider market or capture a greater percentage of your existing market, or what would happen with a lower or higher price.

But don’t make any changes just yet. As you’ll see on the next two pages, there are additional fits to consider first: model-product fit and model-channel fit.