Mastering Product-Market Fit and Growth with Sean Ellis

Sean Ellis, one of the most influential thinkers in the world of growth, joins the podcast to discuss two key topics: how to know if you've got product-market fit and what to do if you don't, and how to figure out how to grow once you've found product-market fit.

The Sean Ellis Test

Sean explains the origins and purpose of the Sean Ellis test, also known as the product-market fit test:

"It's a simple question that helps you figure out if anyone considers your product a must-have. The question is: How would you feel if you could no longer use this product? I give them the choice of very disappointed, somewhat disappointed, or not disappointed."

The key metric is the percentage of users who say they would be "very disappointed" if they could no longer use the product. Sean found that once you get 40% or more saying they'd be very disappointed, those products tended to do well. Below that threshold, products often struggled.

Some key points about the test:

• It's a leading indicator of product-market fit. Actual retention is the lagging indicator.
• It allows you to get signal very early, even before you have good analytics in place.
• The 40% threshold emerged from looking at patterns across many startups.
• It's not a hard rule - the real power is having a target for the team to align on.
• B2B companies may need a higher threshold (e.g. 50%) as users tend to be "nicer" in their responses.

Using the Test Results

Sean emphasizes that the most valuable part of running the test is not just hitting a certain percentage, but digging into the responses of those who say they'd be very disappointed:

"Until you deeply understand that product-market fit, you kind of don't have the tools to be able to grow the business. That's really the next step - to dig in and figure out who considers it a must-have, how are they using the product, what did they use before, what problem are they solving."

He recommends follow-up questions like:

• What is the primary benefit you get from the product? (Open-ended initially, then multiple choice in a follow-up survey)
• Why is that benefit important to you?

This helps uncover the context of why the product is valuable, which provides insights for messaging, positioning, and product development.

Improving Product-Market Fit

For companies struggling to reach 40%, Sean advises:

1. Focus on the users who say they'd be very disappointed and understand what they value.
2. Ignore those who say "somewhat disappointed" - they see it as a nice-to-have, not a must-have.
3. Look at the benefit your must-have users are focused on. For somewhat disappointed users focused on that same benefit, what do they need for it to become a must-have?
4. Streamline onboarding to get users to the core value faster.
5. Adjust positioning and messaging to set the right expectations upfront.

He shares an example of how Lookout Mobile Security went from 7% to 40% very disappointed users in just two weeks by focusing on antivirus functionality in their messaging and onboarding.

Growth Strategy After Product-Market Fit

Once a company achieves product-market fit, Sean recommends this sequence for growth:

1. Activation/Onboarding: "The hardest part sits inside the product team. How do you shape that first user experience so they actually use it in the right way?"
2. Engagement & Referral: Build loops to reinforce the core value.
3. Revenue Model: Optimize monetization.
4. Acquisition: Only focus heavily on this once the other pieces are working well.

He explains: "Customer acquisition is so hard that if you're not really efficient at converting and retaining and monetizing people, you're gonna really struggle on the customer acquisition side."

Activation and Onboarding

Sean emphasizes the importance of deeply understanding what's preventing users from getting value:

"A problem well-stated is a problem half-solved. I think a lot of it comes down to not the things you try, but how you deeply understand the problem that's preventing someone from getting using your product effectively."

He recommends:

1. Look at where you're losing the most people in your funnel.
2. Ask users directly why they didn't complete key actions.
3. Study how other successful products in your space handle onboarding.
4. Test different messaging and expectations-setting.

He shares an example from LogMeIn where they increased their signup-to-usage rate from 5% to 50% in three months by focusing entirely on activation. This allowed them to scale their marketing spend from $10k/month to $1M/month profitably.

Choosing a North Star Metric

Sean advises starting with the core value uncovered through the Sean Ellis test:

"We want to think about a metric that reflects us delivering that value."

He recommends having a time-boxed group discussion (e.g. 30 minutes) to decide on a North Star metric. Key criteria:

• Should be able to go "up and to the right" over time
• Should correlate to revenue growth, but not be revenue itself
• Ideally captures frequency of engagement (e.g. weekly active users vs monthly)
• Reflects value from the customer's perspective

Examples:

• Amazon: Monthly purchases (not GMV)
• Airbnb: Nights booked
• Uber: Weekly rides

Changes in Growth Strategy

Sean reflects on how growth has evolved:

"When I first started, just being data-driven on customer acquisition was enough to win. Now I would say most online marketers are very data and test-driven."

The key difference now is the need for cross-functional collaboration:

"To be competitive today, you actually have to be able to be super efficient at all parts of the business. Once you start getting into activation and referral and engagement and retention, now you're talking about the overlap between marketing, product, and in B2B bringing sales in there, customer success. Those teams are not used to working together."

Using AI for Growth

Sean sees several promising applications for AI in growth:

1. Answering questions: He uses ChatGPT to draft responses to advice-seekers, asking "How would Sean Ellis answer this?"

2. Experiment ideation: AI can help generate and evaluate potential experiments.

3. Analysis: As experiment velocity increases, AI can help with the bottleneck of analyzing results.

4. Cross-functional collaboration: AI recommendations may face less resistance than suggestions from other teams.

Key Takeaways

1. The Sean Ellis test is a powerful tool for measuring product-market fit, but it's most valuable when used to deeply understand your must-have users.

2. Focus on activation and onboarding before scaling acquisition. Getting users to experience core value quickly is critical.

3. Choose a North Star metric that reflects value delivery from the customer's perspective.

4. Cross-functional collaboration is key for modern growth strategies. Look for ways to align teams around shared goals.

5. AI tools can augment growth efforts in areas like ideation, analysis, and even cross-team communication.

6. Always prioritize reputation and learning over short-term gains. This mindset leads to better long-term outcomes.

By following these principles and continuously iterating based on user feedback, companies can build sustainable growth engines that deliver real value to customers.

Article created from: https://www.youtube.com/watch?v=VjJ6xcv7e8s