Product-market fit 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 work a lot on developing MVP (minimum viable product) for all sorts of businesses. Quality MVP is important, but there is one thing that really defines the success of an MVP and the whole startup.
What is product-market fit and why should you care?
The product-market fit was invented by Don Valentine from Sequoia Capital. He used it to describe a startup that can succeed despite being a total wreck just because there are people who need the product so much.
This definition may be a bit misleading. That’s why we would rather go with the one by Marc Andreessen, who was the first one to write it down:
Product-market fit means being in a good market with a product that can satisfy that market.
Fair question is, 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.
There is a common belief that when you have product-market fit, you feel it. I bet if you read this article, you are still not sure whether you have the product-market fit or not. Doubt everything, as Buddha said. Also, intuition might not be enough for the investors.
Let’s take a look at some ways of proving product-market fit (or finding one).
The startup pyramid
This pyramid is a great visualization of the importance of the product-market fit. The author of this concept is Sean Ellis, the CEO of GrowthHackers.
From everything he learned (and taught) about growth, Sean Ellis got the conclusion that there is no scaling before achieving product-market fit. In this case, scaling can be dangerous and ruin the startup faster.
The startups that are yet to reach product-market fit, are called BPMF (before product-market fit), and the rest are called APMF (after product-market fit). No need to remember these abbreviations. The only thing to remember is that achieving product-market fit is essential.
6 Steps to product-market fit and one more 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 there are just six steps:
1. Find target customer
2. Define what are their needs
3. Develop a value proposition
4. Figure out the main features of the Minimum Viable Product (MVP)
5. Build an MVP (read how to build an MVP here)
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.
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 here we’ll just look at the basics of each.
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. You can use this survey tool made specifically for this metric.
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: 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 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?”
Companies with good product-market fit get at least 50 NPS. 50 is a great result for a SaaS. 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, it is 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 metrics is far from the benchmark. There are plenty of examples of product-market fit 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 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).
If all those metrics leave you confused, take a look at this list of best books on SaaS metrics. If you are not committed enough to read a whole book, we have main take-outs from each of them.
Testing product-market fit
Ok, so how do you test product-market fit? First of all, get your product ready. MVP is good, but you can go with what you have, a prototype can work. 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. Be careful with that option, as it requires more experience.
So what do you need from the customers?
First of all, answers to the main questions of the product-market fit survey (see metrics #1 and #3 above).
Second, you need in-person interviews. Many people find it intimidating and end up talking to the users they already know, ending up with biased results. The customers for the survey 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 of phrasing questions is important. You won’t get very valuable information if you ask what they love about the product. Instead focus on what is wrong, what could be improved. Ask them why you should not use the product.
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.
Looking for a product-market fit made many people change their product completely. Did you know that Slack founders initially were developing a video game? The working chat was just a tool to simplify their internal communication when at some point they realized that a business communication platform would have a better market than a video game.
Here is another example from one of our clients for whom we did UI/UX design. Gamaya, an agricultural data processing company was initially focused on farmers. At some point, they realized that their product could also serve golf clubs that need to monitor the conditions of the fields. Read more in the case study.
Changing the market might look like an easier option, but really you should 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)
The first option is less risky, the second one is disruptive and may require more iterations. Success is not guaranteed.
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 — they were selling products to people who didn’t know they would use such a service before, simply because it was not existent.
Whatever you choose, you have to know that the root is the same: 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 just cheaper or faster than the existing solutions. In both cases, there has to be a problem to get a market.
· Product-market fit means that your product has apool of people who need it and are willing to pay for it. It is one of the mostimportant things for a startup. Only the products with good PMF can have stablehealthy growth and scale successfully.
· Some of the metrics that help measure PMF are:churn rate, organic growth rate, Net Promoter Score (how many people arewilling to recommend the product), PMFS (how many people would be verydisappointed if they could no longer use the product).
· Product-market fit should be tested and lead toiterations if the value hypothesis is not proved. Once reached, it has to betested regularly, as both product, market, and competition tend to change.
· Whether you aim to develop a better solutionthan your competitors or build something completely new and disrupting, thefirst thing you need to do is to find the problem that you are trying to solve.
Are you ready to start your journey to the product-market fit? Great, 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.