360 views on tech #49: What is product-market fit and how do you find it?
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What is product-market fit and how do you find it?
by Anisah Osman Britton — Sifted
Anyone building a startup needs to figure out if their idea has product-market fit (PMF), that is, you need to validate that there’s a market for it and that people will pay for your product. You need to know if you’re building the right product for the right customer in the right market.
What is product-market fit?
Product-market fit is achieved when a product and its value proposition solve the problem they’re trying to address, customers are willing to pay for it with their time or money and there is a big enough market to sell to. It’s a continuous process in a startup — not only does the initial product need to find product-market fit, but as new features and products are created, they also need PMF.
How do you find product-market fit?
There is no specific formula to find product-market fit, nor a timeframe within which to figure it out. However, to find PMF you need to have the right mindset and follow a well structured process:
Mindset
Don’t be tied to your idea — you may end up missing key indicators from the market that show that the idea isn’t working. You have to be open to change and ready to pivot. You need to listen to feedback and be resilient enough to keep trying when faced with a setback.
Process
There are three stages to finding product-market fit; the discovery phase, define and build, and test and iterate:
- DISCOVERY PHASE
This phase is extensive. Questions to ask yourself include:
- What problem are you looking to solve?
- Who is your customer and how widespread is the problem?
Calculate the size of 1) the population that has the problem you want to solve (TAM — Total Addressable Market); 2) the population within the geographical region that you are targeting that has the problem you want to solve (SAM-Service addressable market); 3) the market you can realistically acquire (SOM-Service obtainable market).
- How much pain is the problem causing? Are there any solutions or alternatives currently available?
- Validate any assumptions that you might have about the space: interview potential customers, experts in the industry, industry analysts and investors.
- Define your value proposition by answering “what product or service are you providing and how does that solve the problem you’re looking to address?”
2. DEFINE AND BUILD
Define your minimum viable product, or MVP — this is the most basic product offering you can start with. Write down how it will work, what features you need to build and what it will not do at this stage. Defining these parameters will keep the team focused on keeping it lean, so you can test out your assumptions in the market with the least amount of resources invested.
3. TEST AND ITERATE
Get your MVP into the hands of customers as quickly as possible. Watch how they use your product to find the pain points and the “wow” moments that you can leverage, and collect user feedback — what works, what doesn’t, what features would they love to have?
Use this feedback to drive your next round of product iterations. Repeat this cycle as needed until you’re satisfied that you’ve reached PMF.
To figure out if you have product market fit you have to engage with customers: are they returning to your product or do they stop using it after a certain point? If so, why? What are they saying about it? Are they telling their friends?
When have you hit PMF?
Customer retention
“Product-market fit is achieved when your customers love using and continue to use your product,” says Sokk. To measure this, you want to flatten the cohort retention curve — this is when the retained percentage of returning customers stays stable over a period of time. Obviously, you want the percentage level at which the curve flattens to be as high as possible. According to VC firm Sequoia Capital, “the higher the level at which the curve flattens, the higher the long-term retention and the healthier the product”.
Product-market fit is found when you can prove the defensibility and repeatability of selling to your target audience.
Referrals
Significant growth through word of mouth is also a strong indicator of PMF. Create referral links or codes to track where new customers are coming from. Also ask early customers, “How likely are you to recommend our product to a friend, family member or colleague?” and get them to score between 0 and 10 (with 10 being the highest). Use these results to work out your Net Promoter Score, or NPS — a popular measure of customer loyalty and satisfaction.
Feedback
Key information is in each and every conversation your team is having with potential customers. You want to understand what emotions are created by the problem you are trying to solve. It helps you to identify how useful feedback is. If there is too much emotion attached, it may not be an accurate reflection of the product’s usefulness.
Questions to ask users
When you’re gathering feedback from users you need a combination of quantitative and qualitative feedback:
Quantitative indicators
- How often do customers use or interact with the product? Does the customer journey make sense? Can a customer use the product as intended?
- How many people have the problem you’re solving? This could be the TAM or SAM.
- What do your early customer take up numbers look like? How much does it cost to drive this? This could be your customer acquisition cost, or CAC — the overall cost of acquiring a new customer. It’s calculated by adding all the costs from the beginning of a customer journey to a purchase, divided by the number of acquired customers.
- Would customers recommend your product? This could be your NPS score or direct questions to customers.
Qualitative indicators
- Customer interviews — spend time with your customer base, understand how they use your product and get feedback. This is essential for business growth.
- What are some of the key phrases customers use when talking about your product? Does this match your product’s value proposition and positioning?
- What works well? What could be improved?
- How does your product rank against others in the market?
Before you start conducting user research, it’s important to limit bias in the questions you ask and the answers you hear.
Taking feedback on board
You have few data points in the beginning of a company, so customer feedback becomes your most useful data set.
Listen to customers that love your product — they show that you’re solving a real problem and highlight what’s working well. Also, listen to customers who don’t love it — constructive feedback is your competitive advantage.
What happens if you don’t find product-market fit?
If it becomes apparent that your product does not have product-market fit — a common occurrence for new startups or products — you have three options:
- Persevere. Keep iterating on the solution. It commonly takes various iterations to achieve PMF.
- Pivot. Take the learnings and pivot towards a new solution.
- New venture. Drop the current problem, solution and market you’re working on and start something completely new. If you have raised venture funding, you want to manage your investors carefully — communicate that this isn’t a definitive failure rather a step in the journey. If you have the runway to do so, offer to return the money and part ways with an investor that is not onboard with the change.
Some products won’t reach PMF, however, because the sector isn’t ready yet — maybe there’s a barrier to entry that can’t be overcome due to cost, technology or access. Or maybe customers don’t find the problem pressing enough, as mentioned above.
The feedback you collect from your conversations will be crucial to understanding what is holding the product back, and whether it is insurmountable.
🧑💻 Top readings
- Milan’s new innovation era
- Investor’s advice during a downturn: Don’t panic
- 13 ways to ensure your board meetings aren’t a waste of everyone’s time
- Electric vehicle charging investment approaches the $100 Billion Mark
- Buildings as Power Plants
💸 Money matters
- Dataiku, the all-in-one data science and machine-learning platform for enterprises, raised $200M, the round was led by Wellington Management.
- Basecamp Research, which designs protein products based on those found in natural biodiversity, raised a $20M, from Systemiq Capital, Valo, Blue Horizon, True Ventures and Hummingbird Ventures.
- Api.video, api-first infrastructure to easily integrate videos in apps and websites, raised €11.2M, from MMC Ventures, Open Ocean, Blossom Capital, Financière Saint James.
- Fiscozen, a fintech startup on a mission to eliminate tax bureaucracy in Italy for SMEs, raised €8M, from Keen Venture Partners and existing investor United Ventures.
- Samara, a solar energy startup, raised €4.5M, the round was led by Seaya and included participation from Pelion Green Future.
😂 Meme of the week
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