How to Screw up Everything but Still Succeed. Guide to Product-Market Fit
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Product-market fit (PMF) sounds like a very basic concept, the one you can understand just by the name. However simple it is in theory, in practice it is one of the hardest things to get as an emerging company. And just as crucial.
As a design agency, we help create MVPs (minimum viable product) for different SaaS businesses. Quality MVP is indeed important, but the product-market fit is the one thing that really makes or breaks the success of an MVP and the whole startup.
So let’s uncover what exactly it is and what it takes to achieve it.
What is product-market fit and why should you care?
The first one to define the product-market fit was Marc Andreessen. Here’s how it sounds like:
Product-market fit means being in a good market with a product that can satisfy that market.
Fair question here would be, what is a “good market”? It means having lots of potential customers who have some underserved needs and therefore are likely to use your product.
But what this definition doesn’t tell is that if you are a startup owner, you’re in the middle of a race to achieve product-market fit. Furthermore, this race doesn’t have an end date — it is an ongoing process of continuous monitoring and adaptation. Why so? Because the needs and preferences of the market never remain the same. They are evolving, and so does the fit between a product and the market.
Still, the process of achieving product-market fit doesn’t change that much. Let’s discover the essential steps required to achieve it.
6 steps to product-market fit and one pyramid
Eric Ries described one of the easiest ways of achieving product-market fit in his book The Lean Startup. It is also known as The Lean Product Process and includes just six steps:
1. Find target customer
2. Define what are their needs
3. Develop a value proposition
4. Figure out the main MVP
5. Build an MVP
6. Test and collect feedback
Product-market fit is one of the key elements of Lean Startup theory, as well as the product-market fit pyramid. It is a great visualization of how product-market fit connects different components of the product design process.
Product-market fit pyramid
6 steps may turn into 12 or 18 or more if the initial hypothesis doesn’t prove true. After each iteration, you have to check the metrics to realize how close you are to product-market fit.
Measuring product-market fit. Key metrics
So what are the metrics that you should look at when striving to reach product-market fit? There will be lots of formulas and details on each of them, but we’ll try to keep things as brief as possible.
1. PMFSurvey. How disappointed the users would be without your product?
Sean Ellis promotes this metric to be the main indicator of product-market fit. Product market fit survey is also known as the Sean Ellis test. The survey consists of asking one simple question to your customers, that is “How would you feel if you could no longer use X!?”. You can use this survey tool made specifically for this metric.
Image credit: pmfsurvey.com
If at least 40% of users would be very disappointed if they could no longer use your product, you got the “must-have” product and can start thinking about scaling it.
2. Churn rate. Do people want to stay with you or not?
The annual churn rate is the most common metric, and the standard benchmark is set at 5%. The number is not universal, though: each type of business has its own specifics, and new companies will typically have a higher churn rate than the established ones.
Note that the annual churn rate is very different from the monthly! Calculating monthly rates and comparing the dynamics is important, too, but make sure you don’t mix annual with monthly rates.
3. Net Promoter Score (NPS). How much do people like you?
This one is easier. NPS is calculated based on answers to the classic “On a scale of 0 to 10, how likely are you to recommend this company’s product or service to a friend or a colleague?”
Net promoter score formula
Companies with good product-market fit get at least 50 NPS. 50 is a great result for a SaaS product. This metric is basically a quantitative method of measuring word of mouth, which is so important for emerging products.
4. Growth rate. How many customers do you attract?
Growth rate can be calculated in revenue or number of users (for SaaS), and the time period can be different for each product.
Many people believe that if the business is growing, it goes in the right direction. However, things are not that simple. Having a high growth rate is good, but you have to be conscious of what makes it so high. If that is just the result of marketing investment, then it has little to do with product-market fit.
How to analyze metrics?
Don’t worry if one of the product-market fit metrics is far from the benchmark. There are plenty of product-market fit examples that work despite the metrics. Here is just one of many cases: at the top growth rates of Facebook, their NPS was -14.
Metrics is the tool, not the goal. What really matters are the underlying causes that influence the overall situation and, consequently, the numbers.
There are so-called vanity PMF metrics, which means the numbers that look impressive but don’t truly influence the overall sustainability of the business. For example, having 10 million users is great, but what if no one pays for the premium? Doesn’t look that great anymore.
It happens when we look at separate metrics independently. For example, you have a really high growth rate. Awesome. The next thing you have to check is whether the churn rate is not higher than the growth, and then – whether the customer acquisition cost is balanced with customer lifetime value. You can be sure you’re doing great only when the metrics are balanced.
That’s why metrics should be plural. It may be tiring sometimes, but there is no single magical formula that shows your success (though just in case you found it, please drop us a line). And when all those metrics leave you confused, take a look at our list of best books on SaaS metrics with main take-outs from each of them.
Testing product-market fit
OK, so how do you do product-market fit testing? First of all, get your product ready. MVP is nice-to-have, but a prototype can work, too. Make sure you know what buyer personas you target.
If you want to test more than one hypothesis at once, you can set campaigns with different positioning points. But be careful with that option, as it requires additional experience.
So what do you need from the customers?
First of all, provide answers to the main questions of the product-market fit survey (see metrics #1 and #3 above).
Second, conduct in-person interviews. Many people find it intimidating and end up talking to the users they already know, leading to biased results. Survey participants need to be chosen randomly. You’d be surprised how many people are ready to dedicate some of their time to help you improve the product.
The way you phrase questions is also important. You won’t get any valuable information if you ask what people love about your product. Instead, focus on what is wrong, what could be improved.
The process of achieving product-market fit is basically testing the value hypothesis. If the hypothesis proved to be right, the metrics are fine, you have the PMF. If that is not the case, you have to iterate, change the product or change the focus market.
Changing the market might look like an easier option, but you should also be prepared to change both market and product, only if just slightly.
Finding or creating? Reaching the right audience
There are two approaches in finding the right market:
1. Focus on a particular niche/improving existing solution (example: Telegram as a better social media app)
2. Find an innovative solution (example: Netflix, as a new approach to video rental)
Many startup founders think that creating a new market is the best option. The most famous startups are the disruptive ones, giving solutions that the customers couldn’t have thought of. Airbnb, Apple, Uber, Netflix and similar companies were offering products to people unaware of such things, simply because it was nonexistent.
Whatever you choose, you have to find an existing problem and the solution to it. In one case, the solution is a completely new product, in the other, it is a more robust alternative.
So, is the whole process of finding product-market fit and working hard to achieve it worth the time and effort invested? Definitely yes! Let’s take a look at cases when product-market fit helped SaaS startups achieve business success.
Success stories: SaaS startups who achieved product-market fit
Adjusting or completely changing your product to meet market needs can sound intimidating.But once it’s done, it could lead to impressive results, as seen in examples below.
Superhuman is an email client solution. In 2017, they have been working on their MVP for two years already. The issue was that they never actually validated the problem and there was no clear product-market fit. And so when the product was almost ready to see the market, they tested it among the pre-launch audience and were quite upset with the result. Only 22% of users stated that they would be “very disappointed” if Superhuman was to shut down.
What did the Superhuman team do? They focused on the feedback provided by those 22% to improve the product. The first round of improvements turned out to be positive, increasing to 32% of users who would be disappointed if they couldn’t use Superhuman anymore.
The team then asked follow-up questions to determine how the email client should be improved. After they added new features and ran another survey, the results were amazing: now an impressive 58% of users wouldn’t want to see Superhuman go. Only after that the product was ready to launch and scale up.
Segment is a B2B customer data platform. In 2011 they raised $600.000 from Y Combinator for their initial project called ClassMetric. This was an app that was supposed to collect students’ feedback. Each time students felt confused during a lecture, they pressed a button and the professors were able to see how many people got their material and how many needed additional explanation.
However, testing this idea showed that students don’t actually need an app for that. Users were fine with using Gmail or Facebook instead. The company didn’t validate the problem before developing an MVP and now had to quickly look for a new idea before they ran out of money.
Then the company tried to build Segment.io — their own version of Google Analytics, but with the focus on segmentation. Still, a year later they didn’t have any customers.
Segment made a bold decision to ditch the existing project once again and instead focus on the open-source data library they built in the development process. But this time they didn’t go big. Instead, they created a landing page for the database with an email signup form and posted it to Hacker News to see if someone was interested.
First positive responses came very quickly, validating the idea. Segment continued developing its database tool and succeeded, gaining a $3.2 billion exit.
Gamaya is an agricultural data processing company that was initially focused on farmers. They turned to Eleken to help them update their MVP, making its interface less clunky and confusing. We’ve managed to do that, creating a simple-looking yet informative platform.
But the story of our collaboration (and Gamaya achieving product-market fit) didn’t end with that. At some point, they realized that their product could also serve golf clubs that need to monitor the conditions of the fields.
This encouraged them to create a small product for golf clubs. Golf club owners could use Gamaya’s data platform to view their entire golf course and study its health.
As amazing as this idea looked, its realization could have exceeded Gamaya’s budget. Luckily, Eleken designed their platform so it would be possible to expand it, using it as a basis for two different solutions. This, in turn, allowed Gamaya to target two different audiences at the cost of one product, making the most of their market research discovery.
The role of UI/UX design in achieving product-market fit
So what role does UI/UX design play in a product-market fit? Basically, it helps you visualize your idea for future validation and increases the chances of its approval by both users and investors.
Design largely contributes to that first impression people have when trying out your product. If a user experience is poor or an MVP looks outdated, chances are that both users and investors will decide that it’s not worthy of their time and attention. On the other hand, a modern look and great user experience will encourage them to look further into your product.
Let’s take Astraea’s case as an example. It is an AI platform that makes it really easy for anyone to acquire, discover, and analyze satellite data at scale. They understood the importance of product-market fit and wanted to achieve it. To do this, they had to improve the quality of the platform’s user interface, making it attractive, usable, and consistent. They also wanted to add tailored applications to the existing products to increase potential value and impact on the customers.
Being a small team with no UI/UX designer in-house, they turned to Eleken for professional help. We redesigned the initial platform, helping it fit to the best standards of modern UX.
We also added the features that the client was looking for, such as Monitoring and EarthAI Notebook. After working with Eleken for over a year, Astraea was ready for big changes. The UI/UX improvements helped them launch a new business and gain interest from the investors.
Product-market fit means that your product truly meets the needs of the target market. To achieve it, companies test their products among the target audience to validate their hypothesis and improve their product. Achieving product-market fit takes time and potentially significant adjustments, but it is worth it as it helps your product stay relevant and generate stable profit.
Are you ready to start your journey to the product-market fit assessment?Then it's time to set up a plan for your team and build a product roadmap. We have an article full of tips and tools for building a product roadmap.