What does Product Market Fit mean?
Business, at its core, is simple: Find a problem to solve for someone. Price the solution at (or lower than) its perceived value, and you have a deal. It's an exchange of value. If you can't find someone who needs your solution, or if the price is too high, then you have no business. You must first solve for a problem and fill a need before you can sell it to anyone.
As a startup (or any company) your goal is to find a market and identify the problems, desires, or needs of the market participants that are not being served. It's called a gap in the market. This gap in the market is an opportunity to fill that gap with a solution that solves those problems, fulfils desires, or serves the needs of the target customer.
Finding a great market matters more than anything else. You can have a weak solution for a desperate market, and you will win. You can have an amazing product for a crappy market and you will lose.
If you do have a great solution for a great market, you are pretty much on a rocket ship bound for success (Even if you mess up other factors within your company). For this to happen, it's almost a given that the founders solve a problem they know and encounter themselves.
The team working on the product has to use that product themselves, every day. Why is this important? So-called "dogfooding" (eating your own dog food/product) eliminates the need for lengthy and costly research and focus groups.
Instead, the team can iterate on their own experiences and problems. It doesn't mean that they should never talk to external users, quite the opposite. But they are so close to the product, that they are able to find really great solutions and a unique product experience that is hard to match if you build a solution for a problem you don't have yourself.
Why your market is the most important thing
Companies that serve a great market (again, a market with unserved desires or needs and lots of people willing to pay for a solution) will be able to focus on the product as their main marketing instrument. In other words: The market will pull the product towards them, without the need for marketing from the startup. It's almost like a magnetic force working for you.
But how do you assess a great market?
- A small and rare problem = loser idea
- A small but common problem = possible winner
- A large but rare problem = possible winner
- A large and common problem = jackpot
A different rule along the same lines is: Make sure that the gap in the market has enough market in the gap.
Before and after product market fit
According to Andreessen, the life of every startup is divided into two main stages: Before having reached product market fit (BPMF) and after having reached product market fit (APMF).
Before having reached PMF with your minimum viable product you can't afford to focus on anything else. Any strategic partnerships or growth initiatives like marketing campaigns are a consequence of having reached product market fit. These kinds of activities could even harm your company if done prematurely.
Who in your team is responsible for product market fit?
Finding product market fit is a team effort. Every department and role has to work towards it. Sales, customer support, finance, business development, and everyone else will only have a reason for existence if real problems and needs of the target customer get solved. So everyone should be working to reach this milestone, and do whatever it takes.
How to unlock product market fit with the right process
There is a big chunk of unpredictability when it comes to achieving product market fit. However, there definitely is a rigorous process to follow that will increase your chances. A lot.
First, think about your business like a science lab experiment:
- You form a hypothesis (value assumption)
- You test your solution in the market
- You see how the market reacts by analyzing customer feedback
- You iterate the hypothesis and the solution until getting positive feedback from the market
Probably the most well-known startup approach is the lean startup methodology by Eric Ries which has this process built right in. The lean startup methodology is a bit controversial, but it's still one of the most researched and well-known approaches to product development.
If you have not seen this video yet, do so right now. This is a very powerful explanation of the lean startup approach by Eric Ries which has an impact on how your company develops its products. The Lean Startup method outlines three core principles:
Build something that works (the minimum viable product) Get feedback from customers using real data Build based on what customers tell you (customer validation) Repeat cycle until getting positive feedback from the market.
This approach requires some discipline as failure will cost you money and time (for example if you build a product that no one wants). But don't be scared by this! You are building something for people who want it and will pay for it. So if you fail at your first attempt, just keep trying until discovering the right solution for them.
As mentioned above, PMF is your number one goal. Everything else can almost be ignored until you get there. You do whatever it takes. Let's break it down into even more specific steps.
- Validate that there is even a problem, need, or desire in the market that is worth solving
- Form your hypothesis
- Create a minimum viable product (MVP) or solution
- Test your MVP with real customers and get feedback with the help of tests and surveys
- Analyze the customer feedback and the most important metrics to assess if you're moving in the right direction
- You iterate and repeat until you get there
How you can measure product market fit
Product market fit isn't black or white (binary). Instead, it is gradual and can be stronger or weaker, depending on how good your solution is overall, relative to the market and the problem you're addressing. Usually, the best point to start is on a qualitative scale because it's easy to do and works with very few customers. The preferred way for most would measure the Net Promoter Score.
Net Promoter Score (NPS)
A net promoter score is a number based on a customer survey that will tell you, how many users will promote your product by word of mouth. The higher the score, the more likely it is that customers will talk about your brand and recommend it to their friends. This is helpful to figure out if users find your product so good they would recommend it to others.
The 40% Rule aka Sean Ellis Test
Another helpful metric to determine product market fit is to ask users how disappointed they would be if they couldn't use your product anymore. You would give them three options:
- Very disappointed
- Somewhat disappointed
- Not that disappointed (it's not very useful to me)
If at least 40% of the survey participants say that they would be "Very disappointed" if they couldn't use your solution anymore, it is considered a good indicator that you've reached product market fit.
Sean Ellis is a startup consultant who came up with this metric and, just like all other notable figures in the startup world, considers product market fit the fundamental component of a successful business as shown in the Sean Ellis Startup Pyramid below.
Are people coming back to use your product or service regularly? If so, they are probably finding value in it.
If your revenue is increasing and lower than your customer acquisition cost, this is a good indicator that the market wants what you have and is willing to pay the price for it. This means your product's perceived value is higher than its price tag for the target customers.