How Do You Know If You Have Product-Market Fit?
“The only thing that matters is getting to product-market fit… Product-market fit means being in a good market with a product that can satisfy that market.”
Marc Andreessen wrote these words back in 2007, coining the term product-market fit. While the concept has gained widespread adoption there remains a lack of consensus on what it means at a more precise level. For an early stage company, it is still really hard to both recognize the signs of product-market fit, as well as to optimally execute towards amplifying these early signals. This quantitative approach to Product-market fit where I’ve found it on Tribe Capital essays, is useful to think of Product-market fit as being the alignment of all three pieces.
Why Product-Market Fit (PMF) is Important?
Product-market fit is the number one reason why startups succeed. Product-market fit is the moment when a startup finds that their marketing message, sales process, and product are all aligned perfectly against an unmet market need and customers run to their door, money in hand. But “how do you know if you have Product-market fit?”
One of the most beautifully striking diagrams I’ve seen is the Product Market-Fit Pyramid by Dan Olsen:
Achieving Product-market fit means we have built a product that creates significant customer value / customer success. This means that our product meets real customer needs and does so in a way that is better than the alternatives. We can be excellent executers, but that has no value if we don’t match the market needs.
For example, Slack’s story is one of winning the ‘market needs’ part of the equation. By tightening the feedback loop as much as possible, they were able to accomplish a few things: boost user satisfaction, iterate on the product faster, get buy-in sooner. Bringing product and customer close together was also helpful for distribution: sell the innovation, not the product! Sell to teams and then have those satisfied users sing your praises to the company at large. That’s the catch with Product-market fit; you won’t know when it will happen, but when it does, it will drive exponential demand and force your hand. :)
How to Measure Product-Market Fit?
There are many indicators identified to measure the PMF, but no single agreed upon definition.
You know you have “Product-Buyer Fit” when; your sales demo builds your sales pipeline / buyers rate the pain you are addressing and your solution as 8 or 9+ on a scale of 1–10 / buyers become more engaged and more excited as you step into your demo during a sales meeting.
You know you have “Product-User Fit” when; your users are using your product as often as you intend, getting the value from it you like, having the experience you expected, and having the impact they want / your users tell their friends and colleagues about it and offer to help get others on board.
And you can track several metrics to identify the one that best suits your context to scale your growth.
Value Proposition: Just ask your users “how would you feel if you could no longer use the product?” and measure the percent who answer “very disappointed.” If that percentage is over 40%, you have PMF.
Referral: Ask your users “How likely is it that you would recommend our product to a friend or colleague?” (on a 0 to 10 scale) and measure your NPS (Net Promoter Score). If that number is around 40–50, you have PMF
Acquisition: Compare your customer acquisition cost (CAC) to your customer lifetime value (LTV). If your CAC is much lower than your LTV, you have PMF
Retention: Plot the % active users over time to create a retention curve. If it flattens off at some point, you have PMF
By analyzing the responses you could find key differences between the traction phase and the growth phase of your company. Understanding what stage you are at, helps you focus on the right goals, metrics, channels and team structure. But how do you know when you are ready to transition from one phase to the other?
When you develop a new product , you can then create an MVP (Minimum Viable Product) prototype and test your solutions with customers. Once your value proposition has been validated by tests, you can include the features identified in your product roadmap. But striving to perfect your product doesn’t necessarily help you to reach Product-market fit. Rather, think in the context of the problem to be solved for the market.
Scaling is the result of a startup’s growth. Too often, however, scaling is intended to drive a startup’s growth. That’s where we have a problem. — Neil Patel
A market with lots of real potential customers pulls product out of your startup. The product doesn’t need to be great; it just has to basically work. And scaling your product before Product-market fit isn’t a good idea. You should be focused on improving your Product-market fit metric.
Product-market fit isn’t a definitive point on your product roadmap, but an endless process to implement. Growing the team before you get Product-market fit slows you down and growing after you get Product-market fit speeds you up. Finding it, can take time, so be patient and persistent!
Don’t stop measuring and optimizing your Product-market fit!
For this article, I’ve consolidated a bunch of the best advice I’ve found for measuring and reaching Product-market fit. Hope it was useful. If you found another resource or tactic, I would be happy to have it in the comments. :)
