Case Study: Segment CEO Peter Reinhardt On How His Startup Achieved Product-Market Fit

Learn from Segment's CEO how to smartly achieve PMF in your startup.

Jul 11, 2020

Apply for the Segment Startup Program, which gives startups free access to tools and unique training to help master data analytics from the earliest stages of their business.

Executive Summary:

The Problem - Knowing When To Kill An Idea

Peter and his team at Segment struggled to know when to pull the plug on an idea that wasn’t working. Their decision to drop ClassMetric to pivot to analytics.js made all the difference in making Segment into what it is today.
Action Item: Don’t mislead yourself into thinking “one small tweak or product update from finding product-market fit (PMF).”
The Solution - Focus On Problems The World Needs Solving

Peter describes what PMF looks like once you’ve solved an actual important problem: “In just a couple of days, we got hundreds of responses. It quickly became apparent that, in the digital age, businesses were struggling with the effects of having customer data siloed in many disparate systems. “
Action Item: You won’t know what product-market fit looks like at any given instant; you have to stay focused on customer feedback regardless.
The Takeaway - Be Bold With Pricing And Vision

It’s simple - don’t be afraid to start with a high price for your product or service. You’re more likely to get more than what you’ve originally hoped for anyway; Peter secured 150x on their previous pricing by just asking for more.
Action Item: Ask for more. The worst your customer can say is no.

Founder File: Segment Company Values

At Segment, our mission is to make using customer data easy. Our customer data infrastructure makes it easy for companies to collect all their customer data and send it wherever they need at the flick of a switch.

It gives companies flexibility in the tools they use, and saves them an enormous amount of engineering time, and eliminates time vetting, evaluating and implementing new vendors. We work with companies like 21st Century Fox, IBM, Intuit, TIME, Atlassian, HotelTonight, and 15,000+ others to make data collection easy and painless. We're The Last Integration You'll Ever Do.

In the past, I studied math and aerospace engineering. I would love to go to space someday, and I love cheese.

Peter Reinhardt, cofounder and CEO of Segment.

The Problem: Knowing When To Kill An Idea

What was the core challenge of achieving product-market fit in Segment's journey?

Knowing when to kill an idea was a significant challenge for us when starting. We went through two big pivots before landing on the idea for what Segment is today.

Our first idea was a classroom lecture tool, ClassMetric, which we developed as students at MIT. It gave students a button they could press in class to let professors know that they were confused. The idea generated some buzz on campus, and we were excited about where it could go. However, after we invested months of work into launching it, we realized it wasn't working. Professors would ask students to open up their laptops, and they'd just head straight to Facebook.

Eventually, we tried something else. We'd been unhappy with the quality of the analytics tools available to us when building the classroom lecture tool, so we decided to develop our own. We pivoted the business entirely and spent a year trying to create an analytics tool to solve our problem. But it was a crowded marketplace, and we weren't listening to what customers wanted. It never took off.

By this stage, we ran out of capital, so the pressure was on to find something new. My co-founder Ian eventually suggested that we pivot again to a tiny open-source library called analytics.js that we'd built for ourselves. We'd been using it to funnel data from our website to different analytics tools like Google Analytics and Kissmetrics. I thought the idea was laughable, and I did all I could to persuade my co-founders to drop it. Eventually, we decided to post it to Hacker News to test it out. We built a beautiful landing page for the library, and it took off!

What was your initial thought process in resolving the issue of product-market fit?

We always convinced ourselves that we were one small tweak or product update from finding product-market fit (PMF) - but that thinking was illusory. I had never seen what good PMF looked like before, so I didn't know if we'd found it, or if it was time to throw out an idea. We were misleading ourselves, mistaking any small positive interaction for proof of PMF. And this meant we were wasting a lot of time, with no clear focus. While we were writing a lot of code and kept feeling like we were on the cusp, we ultimately had no customers, and very few people were interested in learning more.

But the one advantage we had was that we were committed to stretching our startup's runway as long as we possibly could so we could test more than one idea and get more shots on goal. And I can't stress that enough to other founders. The building, launching and testing several product ideas was the only way we could find PMF. So at each stage, we went back to the drawing board and tried something new.

When you've finally found product-market fit, you'll know. Everything in your business goes crazy simultaneously. You'll feel a loss of control coupled with a proud rush of adrenaline that people care about what you've built.

But the one advantage we had was that we were committed to stretching our startup's runway as long as we possibly could so we could test more than one idea and get more shots on goal.

The Solution: Focus On Problems The World Needs Solving

How did you evaluate your initial solution before trying to implement them?

With ClassMetric, it was immediately apparent that the idea wasn't working once we started beta testing. We would sit at the back of the classroom, and we could see that by the time the classes ended, 80% of students were surfing Facebook.

However, there was an inherent problem with the way we were coming up with ideas at all. We would start with a big-bang vision for how we thought the world should work. The world doesn't care about your image. At all. The world just has problems it needs to solve.

Analytics.js didn't seem like something exciting that would change the world (at first), but we put it out there, and it quickly became clear it was solving a real problem for many developers and companies.

Finding a solution to a real-world problem is not easy, so I urge early-stage founders to stay agile and keep experimenting: once you find product-market fit, you'll know it.

When you were working to implement them, what else did you discover that either confirmed you were on the right track or opened your eyes to a new facet of the problem?

The analytics.js library was open source before we even decided to post it to Hacker News, meaning it had already been available to developers at no cost. As a result, I just couldn't see the upside to making this into a product. Why would developers pay for it?

However, the feedback we got after posting on Hacker News made it clear right away that we had found something that was helping people. In just a couple of days, we got hundreds of responses. It quickly became apparent that, in the digital age, businesses were struggling with the effects of having customer data siloed in many disparate systems.

The positive reception validated the idea right away. We received thousands of email sign-ups and stars on GitHub. Less than a month after we launched the first iteration of the product, 70 companies used it.

The world doesn't care about your image. At all. The world just has problems it needs to solve.

The Takeaway: Be Bold With Pricing And Vision

Segment went from being free to charging $120/year to then charging $120K/year. What advice do you have for founders who are trying to close enterprise deals in the early days? What are some underrated tools or resources that founders can use to win enterprise contracts?

I learned a valuable lesson from experience with an early sales advisor. Ahead of our first meeting, he told me that, rather than ask for $120 per year, I should ask for $120,000. I looked at him like he was crazy. How could I possibly ask for a thousand times what we were charging at the time?

He told me he'd quit if I didn't at least try. I wasn't left with much choice! In the sales meeting, sure enough, the prospect asked me how much we'd charge, and I replied $120,000. I turned beet red.

To my total surprise, the prospect came back with a counter-offer of $12,000, and after some back-and-forth, we eventually agreed on $18,000 a year. They got 85% off the list price, but we'd secured 150x our previous pricing just by asking for more.

The key takeaway from this experience for founders is that don't be afraid to be bold with pricing. If your solution solves a real problem for the prospect, they'll negotiate. Naming a high price in person (as opposed to via email, for example) is especially awkward, but I think it also gives you the best chance to recover. If they react negatively, just ask why. You'll learn far more about the true value of your product.

How can founders sell future product development and roadmap?

There are two key considerations here. The first is something I've already mentioned: your product needs to solve a real pain point, and your roadmap should reflect that. It can't just be based on your big grand vision of how you think the world should work and will work in the future. If it doesn't solve a market challenge, no one will want to buy it.

The second is product velocity; you need to balance technical debt with pushing ahead on the product. Only by showing real momentum will your roadmap be sellable. At various stages in Segment's lifetime, we've done everything from only investing in infrastructure to stalling on the product to feeling like we are overextended in terms of 'big bets,' and not focusing enough on the fundamentals. This should inform how you plan roadmaps, get the right inputs, and ultimately dedicate engineering resources to a new product.

What did you learn about running product demos to enterprise prospects in the early days?

One thing that did become clear was the importance of personalization. Doing a generic product demo will get you so far, but going that one step further will help you win more deals. It also allows you to strike up a strong rapport during the demo.

This goes for how you deal with leads on your website too. We found a hack to open up a "fast lane" on your website for those who have requested a demo. When someone enters their email and company name, we now pass them onto our predictive analytics tool, MadKudu, which predicts whether this person is a low fit, a medium fit, a good fit, or a very good fit for our product.

This means we can roll out the red carpet for leads who have a high likelihood of becoming one of our customers. These leads skip all the usual steps and are fast-tracked to book a demo with one of our team members.

This type of personalization works well because it goes much deeper than identity attributes and into sales readiness, significantly increasing your conversion chances.

Is there a role for professional services for B2B startups?

Absolutely. My advice is to start building a professional services team as early as it makes sense to do so. In B2B software, bottoms-up buyers like developers don't want anything to do with expert services. That's fine. They don't need it. When you start selling to executive buyers, it's a different situation. Executive buyers want to buy a business outcome, not a technical solution. A business outcome requires more than a product. It involves process changes, implementation of a technical solution, training of their teams, etc. That's what professional services add, and it's critical when selling to an executive buyer.

Apply for the Segment Startup Program, which gives startups free access to tools and unique training to help master data analytics from the earliest stages of their business.

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