Achieving and maintaining product-market fit through cost optimization

The importance of cost optimization in product-market fit

Every business owner, stakeholder, or decision-maker understands the influential role of budget in developing a digital product. However, it’s important to note that cost optimization is equally critical for achieving and maintaining product-market fit. Without effective management of development costs throughout the product’s life cycle, there is a risk of undermining its value proposition and long-term viability.

So how can cost optimization contribute to digital’s product’s success? Here are some of the most notable things to remember:

• Improved value proposition - Cost optimization allows you to allocate resources efficiently, resulting in better pricing models, higher-quality products, and/or additional features. All of this enhances the product’s overall value proposition, meaning it is more attractive to users.
• Competitive pricing - Managing costs enables you to offer the product at a price that is competitive on the market without sacrificing profitability. By streamlining operations and minimizing unnecessary expenses, you can price the products at a level that will compare well with higher-priced alternatives.
• Investment in innovation – Optimizing costs frees up capital that can be reinvested in research and development. This enables you to innovate, improve existing products, or introduce new products and features that better meet customer needs (or satisfy new ones). This innovation further strengthens the value proposition, ensuring your stand out in the market.
• Sustainable growth - Efficient cost management ensures long-term sustainability by optimizing resources and minimizing waste. In this way, you find it easier to navigate market fluctuations and invest in continuous improvement, ensuring you can deliver consistent value to users in the long term.

Given that cost optimization offers these multiple advantages – competitive pricing, better use of capital, sustainability, and an enhanced value proposition – it must be the number one priority for most businesses developing digital products, right? Not so. A recent survey by Expense Reduction Analysts showed the following results:

• 99% of respondents felt that the procurement function is under-resourced in their organisation (a big part of cost optimization is controlling external expenses, especially those associated with suppliers).
• 94% of respondents believed more investment in procurement skills would boost profits (making better deals means optimized cost management).
• 63% of respondents believed they would benefit from using external resources to help with building up procurement capabilities (buying in specialist skills and services is cost-effective).

While cost optimization can have a positive impact on product development and is a key factor for success, it is often overlooked or disregarded. To gain a better understanding of this issue, let’s revisit some basics.

Cost optimization anatomy

So, what cost optimization is? Simply put it relies on four (deceptively simple-sounding) key factors:

• Analysis – what is the current cost situation?
• Research - where can savings be made?
• Selection and implementation – take action to make the identified savings.
• Monitoring – what savings are you actually making (i.e. did it work?).

Cost optimization may seem simple on paper but can be challenging for startups and businesses involved in product development. This is because the focus is often on the product itself - the ideas, innovation, potential for disruption, development process, and user outreach. And these are undoubtedly crucial areas.

But let’s be blunt. Money management is not considered “sexy”; it’s not the reason why anyone becomes an entrepreneur or launches a product. However, it is absolutely essential because failing to achieve product-market fit can be costly. Let’s take a look at a few examples of costly failures.

Expensive examples of PMF failure

Here’s a list of ambitious products that were expected to “change the world” but ended up failing instead.

Segway’s two-wheeled, self-balancing personal transporter was highly-touted and as a result had very high marketing expenses. When the product itself failed to engage a wide enough audience the result was significant financial losses for the company.

Wink was a smart home platform, leveraging the Internet of Things to connect your smart products via a single app. However, poor expense management together with difficulties in generating sustainable revenue and managing expenses led to bankruptcy.

Juicero over-invested in developing a high-tech juicing machine complete with a proprietary supply chain for specialized juice packs. This led to inflated costs and when these were passed on to consumers the product failed.

Amazon’s Fire Phone had very high development expenses, marketing and launch costs, resulting in poor sales and significant financial losses for Amazon.

As we can see, overspending is all too easy. Achieving PMF and capturing a slice of the market can be a battle. Unfortunately, in the middle of a battle, you’re focused on winning and less likely to worry about the cost of winning.

Disclaimer: While these examples are glaring, the failures of these products were not caused by just one factor but rather a combination of many.

Avoiding PMF failure – factors influencing cost optimization

As survey after survey tells us, 95% of new products fail to achieve their objectives or meet sales targets (Source: study by Professor Clayton Christensen, Harvard Business School). This is especially so in technology-related industries where innovation and competition are intense and product success depends on more than just a well-designed product. Factors such as market timing, the competition, value proposition, the user experience, and overall execution are also critical.

To increase the likelihood of success, businesses developing digital products can employ various strategies, including thorough market research, user testing, iterative development, and agile methodologies. All of these tactics help to gain a deeper understanding of user needs and pain points to develop products that truly resonate with the target market.

Additionally, it is important to note that success should not be solely measured by the achievement of product-market fit. More important factors to consider include financial viability, user adoption, revenue generation, and long-term sustainability when evaluating the success of your product.

Product-market fit and cost optimization go hand in hand

By prioritizing cost optimization strategies, businesses can align their resources with user needs, enhance their value proposition, and create a strong foundation for achieving and sustaining product-market fit.

Product development can be exciting, and worrying about money is not.

But cost optimization is one of the fundamental factors determining your product’s market fit and long-term success. You might have a groundbreaking new digital product but without cost optimization it may not live long on the market. And cost optimization doesn’t just finance the development of the specific product, it’s part of funding your whole business, it funds your growth, and it funds your failures – ensuring your business survives them and lives to develop another day. Cost optimization is about maximum product development for minimum cost.

You can also access the complete presentation through our recorded sessions on YouTube.