What is product-market fit?
Product-market fit (PMF) occurs when you are in a good market with demand for your product. Most importantly your product creates enough value to meet the needs of the market.
Marc Andreessen of Andreessen-Horowitz is credited with coining the term in a 2007 blog post. He argues that the only thing that matters to a startup is achieving product-market fit.
Andreesen splits the life of a startup into two stage
- BPMF: Before product-market fit
- APMF: After product-market fit
Before achieving PMF, it is the only thing a startup should focus on. Forget fancy offices, catered lunches and structured hiring processes. If you don’t have product-market fit you eventually run out of headroom and go bankrupt.
The Product-Market Fit Pyramid
Dan Olsen describes product-market fit as a pyramid that starts with your customer base and their underserved needs. At the top are items related to your product value proposition, features and user experience (UX).
PMF occurs when the decisions you make relating to the top three layers resonate with the market.
Olsen recommends spending time on truly understanding the needs of your prospects before you start building. He highlights the difference between a ‘problem space’ vs a ‘solutions space’.
Spend more time on understanding the problem before jumping to conclusions on your proposed solution.
Why is product-market fit important?
Product-market fit is essential to sustained, scalable growth. If there isn’t a demand for your product you will spend heavily to try and create demand.
This could be increased marketing or PR spend to generate a buzz. Or investment in research and development to come up with a product customers love. If these methods fail, and demand is lacklustre, you will run out of funding.
How can you tell whether you do (or don't) have product-market fit?
How to know when you have product-market fit
- It feels like you wont be able to keep up with demand from customers.
- You are hiring sales and customer service teams like crazy. Great talent wants to work with you.
- Customers love your product and advocate for you via word of mouth.
- Your churn (or customer attrition) metrics are reducing and net promoter score is increasing.
- Your customer acquisition cost (CAC) is reducing and you are less reliant on paid advertising.
- Press and investors are desperate to talk to you.
- Customers defend you when you are criticised on social media.
- You have a unique product that is difficult to replicate.
Conversely, when you don’t have PMF
- Your sales teams are spending more time on prospecting and data entry than selling.
- Customers are cancelling faster than new ones are added.
- Sale cycles are getting longer.
- Press coverage is mediocre or non-existent.
- It becomes harder to persuade candidates to work for you.
You can measure product-market fit through quantitative methods like NPS surveys, churn rate or market share. Or qualitative measures like word of mouth and media enquiries.
Testing Product-Market Fit
Identify your target customer
It is important to understand who you are trying to target. If you haven’t done so already, consider developing a buyer persona.
This could be done via demographic data like age, income, interests if you are targeting consumers. Firmographic data like turnover, number of employees and industry is better when targeting businesses.
That said, not everyone is the same so don’t try to pigeonhole people based on broad terms. It is better to think in psychological terms of what they are trying to achieve with your product strategy.
Understand the needs of your target customer
Identify underserved customer needs that your product can resolve. The ‘jobs to be done’ methodology can be helpful here.
- Is your product solving a specific problem for your target customer?
- What is the next best alternative to your offering?
- Is there an alternative solution?
The product could resolve a range of pain points from customers. Does it:
- Make it easier to make money?
- Protect them from legal risk?
- Enhance their reputation?
- Make them more attractive?
Understand what they are trying to achieve and focus on making that easier.
There is often an opportunity to disrupt a market where incumbents are ignoring a subset of buyers. If your product can target the needs of this subset, you can gain a foothold to scale into the wider market later.
Define your unique value proposition
Now it's time to focus on what differentiates you from the competition. Are you able to address a segment of the market that the big players can’t?
Consider narrowing in on a specific problem for a limited target market. Focus on resolving this problem before moving onto more advanced features. This is the method recommended by Eric Ries in The Lean Startup.
By focusing your product and marketing, it will be easier to position your brand and attract customers.
Validate product-market fit with a Minimum Viable Product (MVP)
What is a minimum viable product?
Ries recommends adopting a Build-Measure-Learn principle. Here you introduce a Minimum-Viable-Product (MVP) with limited features. The MVP can be incrementally improved through testing, evaluation and user feedback.
This may be a smartphone app only available for android originally. Or an ecommerce store that only sells a single t-shirt in one colour. It could even be a service like a recruitment agency that only finds project managers for fintech companies in North London.
The important element is that you are deliberating restricting the product with a minimum possible feature set in order to test the market. This reduces time to market and management indecision on strategy. You can focus on a single metric to measure product-market fit.
Begin with simple innovations and iterate. This encourages a low-cost, data driven approach to evaluation and ensures it solves a relevant need before you attempt to scale.
Test your MVP Prototype with potential customers
There are a few ways to test the market. You could go out to potential customers and survey their likelihood to buy.
Or you could go straight to the heart of the matter and sell. Even before your product is ready. Set up a simple landing page with Carrd, run Google or paid social ads to it and measure demand.
Gather and analyse feedback from customers
One way to measure product-market fit is to use the Sean Ellis test. Ask users how they would feel if they could no longer use your product via a multiple choice question.
“How would you feel if you could no longer use [ProductName]?”
- Very disappointed
- Somewhat disappointed
- Not disappointed
- N/A I no longer use [ProductName]
You want to survey a relatively large sample of customers (at least 30). If you can limit it to recent users/buyers you can filter out those that may answer D.
You are looking for customer validation that your product offering is needed. If more than 40% say they would be ‘extremely disappointed’ it will be easier for you to scale growth.
To really understand your position, add an open-ended question to follow up.
“Why did you select that response?”
This will give you qualitative data on the features customers love (and hate).
It’s important to note that gathering feedback is not about collecting a laundry list of features your product should have. Steve Blank argues that customer development is about testing whether your minimum feature set can address the needs of the market.
Unless you are receiving repeated requests for added features, you should stick to a minimalist product and iterate.
Improve and iterate on your MVP
Central to the lean startup is the concept of validated learning. Once you have feedback, use this to continuously improve your product and your operations. Double down on the areas users love. Identify the areas they hate and remove or improve them.
If you have a low amount of passionate ‘fans’ you might consider pivoting to a new market and target customers.
Ries describes failure as a prerequisite to learning and essential for business sustainability. In some cases, firms have learnt from the MVP that they are better making a pivot to a new focus.
- Shopify was built out of an online storefront for snowboards.
- YouTube began as a video dating service.
- The giant advertising agency began by selling wire shopping baskets.
Based on your feedback, you will understand if you are on the right track to product-market fit.
Don’t overcomplicate what you do. Gradually iterate on your product to continuously improve it.
What to do once you have achieved product-market fit
Once you feel enough of a pull from potential customers, you should focus on growth.
Now you know there is demand for your product, it’s time to go to market and sell!