Mastering Product-Market Fit for Web3 Products: A Growth Accounting Approach

Is your Web3 product valuable?

This is such a simple 5-word question that carries a much heavier weight.

With all the new products constantly being launched into the Web3 space, product builders and developers face a common issue. If their idea is worth working on. And if the problem they are trying to solve actually exists in the market.

To put it simply, the product builders need to ensure that their product has a place in the market i.e. it is Product-Market Fit. Now what exactly does being Product-Market Fit mean?

What is Product-Market Fit?

This term came initially by Marc Andreessen, the founder of Andreessen Horowitz, back in 2007, where he explained Product-Market Fit as:

“The only thing that matters is getting to product-market fit… Product-market fit means being in a good market with a product that can satisfy that market.”

Extending on Marc’s words, Product-Market Fit refers to the alignment between a product and its target market. When a product fits the market perfectly, it generates high demand, strong adoption, and rapid growth. All of the things that product owners want for their products (think of it as a chocolate factory for product owners).

Now talking about Product-Market Fit is easy. But achieving it is a whole different story. Especially considering the evolving landscape of Web3, and the technological advancements constantly happening around the world, it becomes extremely difficult to keep up with the changing market trends and keep your product worthy and relevant to your target market. Even more so, it is important for product owners to have a quantitative (measurable) approach to finding the Product-Market Fit for their products.

Why is Achieving Product-Market Fit Important?

We talked about how achieving the Product-Market Fit can generate high demand, strong adoption, and rapid growth so let’s extend a little more on that perspective. Product-Market Fit stands as a starting point to understand and evaluating your “product health”. By product health, here we mean the overall performance and well-being of a product. It is a measure of how well a product is performing against its goals, objectives, and benchmarks. We can measure product health using a variety of metrics. Some of these common metrics include:

Attracting Users: A product that has achieved product-market fit can attract a significant number of users. When a product fits the market perfectly, it becomes easy for users to understand its value proposition and see how it solves their problems. This leads to increased adoption and user growth.

Retaining Users: A product that has achieved product-market fit can retain existing users. Users are more likely to continue using a product that provides a perfect fit for their needs. This leads to increased retention and loyalty.

Increasing Revenue: A product that has achieved product-market fit can increase revenue. A product that is well-aligned with its target market is more likely to prompt users to pay for it. This leads to increased revenue and profitability.

Differentiating from Competitors: A product that has achieved product-market fit can differentiate itself from competitors. When a product is well-aligned with its target market, it stands out from similar products that may not meet users' needs. This leads to increased brand recognition and competitive advantage.

Scaling the Product: A product that has achieved product-market fit can scale rapidly. When a product is well-aligned with its target market, it generates demand and adoption, making it easier to grow the user base and expand into new markets.

How Can We Achieve Prduct-Market-Fit?

While there are several ways of achieving Product-Market Fit, in this article, we will be focusing on one of the proven ways of achieving PMF i.e. Growth Accounting.

What is Growth Accounting?

Growth accounting is a quantitative approach to product development and growth. It involves measuring and analyzing the key drivers of growth, such as user acquisition, retention, and revenue. Growth accounting helps product owners identify the sources of growth, measure their impact, and optimize their strategies accordingly.

Most importantly, Growth Accounting provides a framework for data-driven decision-making and helps product owners prioritize efforts based on the most significant growth opportunities.

The Growth Accounting Framework

The Growth Accounting Framework divides the growth stream into components. These components are based on some kind of activity across their customer segments.

Product owners and builders can easily understand the growth of their Monthly Active Users (MAUs) by tracking these components, which ultimately leads to revenue, one of the most important metrics to track in any Web3 product.

Based on the revenue, we can divide the customer segments into the following six categories:

New Users: This category refers to revenue generated from users who are new to the Web3 product in the current time period. It includes revenue from new subscriptions, sign-up fees, and one-time purchases.

Churned Users: This category refers to revenue lost when a user who was active in the previous time period has no revenue in the present one. In the context of Web3 products, this could refer to users who have stopped using the product or canceled their subscriptions.

Resurrected Users: This category refers to revenue gained from users who had churned in the past but have returned to use the Web3 product in the current time period. For example, a user who had canceled their subscription but has now resubscribed to the product.

Expansion: This category refers to revenue gained from users who have increased their revenue relative to the previous time period. In Web3 products, this could refer to users who have upgraded to a higher subscription tier, purchased additional tokens or NFTs, or increased their usage of the product.

Contraction: This category refers to revenue lost from users who have decreased their revenue relative to the previous time period but have not yet churned. In Web3 products, this could refer to users who have downgraded their subscription tier or sold their tokens or NFTs.

Retained Users: This category refers to revenue carried over by users from the previous time period to the present one. In Web3 products, this could refer to users who have continued to use the product and renew their subscription or hold onto their tokens or NFTs.

It is important to note that these metrics are not set in stone. Depending on the product that you are building, it can be a plus point to add other important metrics that are ultimately contributing to the growth of your product. For example, in the case of DeFi applications, product builders can track some additional common metrics such as Total Value Locked (TVL), Impermanent Loss (IL), etc. This would give the product owners a broader perspective of their current product standing in the market and help them make better data-driven decisions in the future.

Identities Associated with Growth Accounting

There are three important identities that express the definitions of the six revenue categories in growth accounting:

The first identity states that all revenue in the present time period is equal to the sum of the gains in revenue (new, resurrected, and expansion)

Revenue(t) = retained(t) + new(t) + resurrected(t) + expansion(t)

The second identity states that customers who generated revenue in the previous time period can either continue to generate revenue in the current time period (retained), stop generating revenue altogether (churned) or decrease their spending (contraction).

Revenue(t-1) = retained(t) + churned(t) + contraction(t)

The third identity states that the change in revenue from one time period to the next is a result of the gains and losses in revenue categories.

Revenue(t) – Revenue(t-1) = new(t) + expansion(t) + resurrected (t) – churned(t) – contraction(t)

By understanding and applying these identities, Web3 product builders, marketers, growth executives, and analysts can gain insights into how to achieve product-market fit and optimize revenue growth for their products.

Important Stats to Measure While Using Growth Accounting

Here are three statistics to measure through Growth Accounting:

Gross Retention

The first statistic, gross retention, measures the percentage of revenue retained from the previous time period out of the total revenue from the previous time period. This helps measure how well a company is able to retain its existing customers over time.

Gross retention = retained(t) / revenue(t-1)

Quick Ratio

The second statistic, quick ratio, measures how efficiently a company is growing in terms of revenue gained per every unit of revenue lost. It is calculated by dividing the sum of gains in revenue (new, resurrected, and expansion) by the losses in revenue (churned and contraction). If the quick ratio is below 1.0x, it means that total revenue is shrinking.

Quick ratio = [new(t) + resurrected(t) + expansion(t)] / [churned(t) + contraction(t)]

Net Churn

The third statistic, net churn, measures the sum of losses minus gains in revenue from existing customers only (excluding new customers) divided by total revenue from the previous time period. Measuring how many customers a company loses over time and how much revenue it loses, as a result, can help determine the level of customer churn.

Net_Churn = [churned(t) + contraction(t) – resurrected(t) – expansion(t)] / revenue(t-1)

It's worth noting that these statistics are interconnected with the growth rate of a company. Specifically, the growth rate is approximately equal to the new rate minus the net churn rate. This means that if a company can increase its new rate and decrease its net churn rate, it will see an increase in its overall growth rate.

Conclusion

In conclusion, achieving product-market fit is crucial for the success of any web3 product. It requires a deep understanding of the target audience, their needs, and how the product can address those needs effectively. Growth accounting offers a quantitative approach to comprehending how a product is performing and how to improve it to attain product-market fit. The six revenue categories and three statistics outlined in this article can help web3 product builders, marketers, growth executives, and analysts gain insights into their product's performance and make data-driven decisions. By regularly tracking and analyzing these metrics, product owners can identify areas for improvement, optimize their product strategy, and ultimately increase revenue growth.

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Also, read 4 Proven Web3 Traction Channels to Boost Your DApp User Acquisition

May 6, 2023