Seven Steps to Achieve Product Market Fit
There are many reasons why most startups don’t succeed, but the vast majority fail because they can’t reach product-market fit (PMF). But what is PMF that leads to the demise of so many companies? While many definitions exist for PMF, it simply means offering a solution to a real pain point that the potential customer is trying to solve and creating enough value to compel the prospect to become a customer. Since PMF is so crucial to a startup’s success, I decided to create a guide and checklist on how to achieve product-market fit, in seven steps:
1. Identify The Pain Point
At Think+ we screen about 1,300 companies annually and talk to a dozen per week. Too often we meet founders who are wasting their precious time building products with cool technology but unclear demand and without addressing any clear pain point. So, it is critical to start the process by asking: “Am I solving a real pain in a large addressable market?”
Entrepreneurs often get so excited about what they have built that they overlook the market demand/need and they build a “solution in search of a problem”. Most successful companies identify massive pain point and only then build a solution to address it with a sustainable and profitable business model. That’s why the ability to shift your focus from your technology/solution to the underlying problem is crucial in building a great company.
When you identify a paint point, make sure it passes the depth/breadth/frequency test (how big, how many people impacted, and how frequently). For example, finding a good restaurant or a good doctor is pain point that has all three factors, but getting your car washed by a mobile service in the parking lot of your office may not be a big pain point.
2. Unpack the Pain Point
Albert Einstein said, “If I were given one hour to save the planet, I would spend 59 minutes defining the problem and one minute resolving it.” Even if you are not Einstein, this approach is absolutely critical as understanding the problem and its causality is the first step to solving it.
Understanding the problem will require you to ask many questions. For example, Toyota adapted the famous “five why’s technique” to help them peel away the symptoms of its problems and find the root causes for failures/defects and achieve their Six Sigma process improvement program. This technique requires you to ask as many successive “whys” as needed to get to the root of the problem.
3. Analyze the Pain Point
We are all good at rationalizing ideas or solutions we discover and so it is imperative to talk to your target audience to better understand the depth, breath, and severity of a pain. One common approach to analyze the pain is interviewing potential customers. There are many resources that you can study to understand how to do customer interviews but the most comprehensive one is “The Mom Test”.
The key here is to formulate questions that help you understand what users think of the problem, whether they are aware of it and looking for alternative ways/solution to address it, and how annoyed they are by it.
Keep in mind that the purpose of this exercise is NOT to get validation for your solution, but rather it is about understanding customer’s pains and priorities.
You also have to realize that most people can’t imagine technologies that don’t exist yet and they think in incremental terms and not disruptive ones so don’t ask what your customers want, instead, figure out what they need. Like Henry Ford once said, “if I had asked people what they wanted, they would have said faster horses.” More details on how to understand customer’s pain points are here.
As you interview your target customers to analyze the pain point, it’s also important to map out everything you know/learn about your potential customer (their age, gender, needs, income level, occupation, discretionary budget, priorities, etc.) so you know how to design your product. This is often referred to as Customer Segmentation. For more information about this, I recommend following the guidelines proposed by Steve Blank here.
4. Check your Market Timing
If failing to get Product-Market fit is the biggest reason for failures, Bill Gross of IdeaLabs argues that ‘timing’ is the single biggest reason behind a startup’s success. But to gauge market timing, you must understand factors that impact your target customers’ willingness and ability to adopt your solution. Making this more complicated, the way customers interact with technologies and address problems changes over time, and not always in a predictable way. As these interactions and behaviors change, the viability of a market category can change as well. If timed well, a startup can succeed and even look like it is changing consumer behavior when in fact it may be benefiting from a confluence of events such as the heavy lifting of their predecessors (who failed), and an inflection point in the market. So ask yourself “Why is now a good time to launch your solution and is the market ready for disruption, NOW?”
5. Build your MVP
Your MVP (minimum viable product) should have just enough features to address a problem, with a very basic solution and minimal, even crude, design. MVP is meant to get the early adopters interested in a new solution to their problem. Core functionality is the main goal at this stage and advanced features will come later. But If a product has the potential to reach a large user base even with its core functionality, then it’s a good sign that product market fit already exists. For example Facebook reached 70,000 users within the first months of its basic product launch.
The MVP is the most effective tool in terms of time and resources to help determine the product’s potential. It allows you to measure the key metrics quickly and to iterate. When building MVP, don’t over-complicate the solution or the design and focus on capturing enough data to give you actionable insights. More details on how best to build an MVP are here and here.
6. Measure Results and Modify your Solution
As you are simulating your hypothesis, it is crucial to think of the right metrics that can help you evaluate the resonance of your proposed solution and quickly find out what works and discard the rest. Metrics such as Net Promoter Score, engagement, and churn rate are a few key items to consider. This step helps you not only measure the success and failures, but it also helps strategize your product roadmap and build features that help grow customers.
7. Finally, Check if LTV >> CAC
Product market fit doesn’t exist in a vacuum; it is highly dependent on the price of the solution and the possibility of selling it at a profit.
If your solution is addressing a pain point, can you make money with a sustainable unit economics? Although a pain might exist and customers might be willing to use your service, you have to be able to reach them cost-effectively and price your product so that the economics of adopting it works for the customer while making you a good profit. In the past decade, we have witnessed many on-demand companies that ultimately failed since their LTV of a customer, based on what they were willing to pay, would not support a positive unit economics. One such example was Washio, an on-demand laundry company that shut down earlier this year because it couldn’t scale its services profitably. Although Washio was addressing a need, it was focused on penetrating a market segment where CAC was higher than the LTV.
Creating PMF is not an event or a magical incident. Rather, it is the result of a diligent and methodical process that can be developed as a capability by most companies regardless of their strategic orientation. Many successful companies don’t start with a perfect product but they can ultimately modify their solution to meet the need of the market before they run out of resources.
Founders are often emboldened by initial traction and may conclude, prematurely, that they have reached PMF. As a result, they shift capital away from product development into growth, only to find out that the famous chasm cannot be crossed with the existing product. So it’s critical to know when you’ve reached PMF.
As a rule of thumb, when users start growing organically and traction becomes automatic because your customers are referring their peers, it’s a good sign that you may have reached PMF. Other key indicators are increasing engagement, increasing dependency, and shorting sales cycle.
Once PMF is achieved, your focus should shift from nailing a product that customers want, to distributing your product and scaling it to serve your growing customer base.
I think there are three phases to every successful startup: 1 - search for product market fit, 2 - scaling/executing, and 3 - leadership. This post is the result of my observation witnessing many startups fail/succeed in the first phase. If you have questions, comments, suggestions, please email me (firstname.lastname@example.org) and I’m happy to discuss and update the article.