What is product-market fit?

Sergio Paluch
Apr 17 · 8 min read

If you are new to startups, you will surely come across the term “product-market fit” at some point. It’s a very useful concept for describing a key phase of a startup’s journey, but it can often be difficult for entrepreneurs to understand this state and to recognize when their startup has entered it. In the following article, I will attempt to define and describe what is product-market fit in the simplest terms I can and help the reader identify what factors drive it.

Efficiently bringing an exceptional product to your ideal customers

When you are launching a high-growth company -a.k.a a startup- your goals are to:

  • Build a product that solves a need much more effectively than other available solutions,
  • Market that product to a group of potential customers that most acutely need to solve that need, and
  • Find an efficient way to commercialize your product to those ideal customers.

Product-market fit is when you are able to accomplish and align all three of the above objectives.

Unlike some other types of fit that are binary, product-market fit runs on a continuum making it difficult to tell whether your startup has found it fit or how strong it is. A common mistake that I see founders make (and that I have made myself) is believing that you have found strong product-market fit when, in fact, you are still on the weak side of the spectrum.

When do you have product-market fit?

It’s a bit clearer when your company has found product-market fit rather than the converse, which can be a lot more obscure. Some people describe entering the phase of strong product-market fit as holding onto a rocket ship as it shoots into orbit. Customers are pouring in, your company can’t hire people quickly enough, and investors are knocking on your door. It feels as though the wheels are going to come off and your company is barely able to keep it together.

I personally think this kind of description is not very applicable or helpful since even companies with strong product market fit rarely enjoy that kind of astronomical growth. Instead, what I have observed at companies with strong product-market fit is a bit less dramatic. There are more subtle signs of product-market fit such as:

  • Customers writing rave reviews about your product, thank you notes, and love letters;
  • Strong organic growth such that if you turned off all of your marketing efforts, you’d still be gaining substantial amounts of customers or users;
  • Low customer churn or high customer retention;
  • High Net Promoter Scores (NPS).

I should note that all product categories are not created equal. For example, the average Net Promoter Score for internet service providers is -1 while for online entertainment products it’s 47. Therefore, if your startup delivers internet services to customers and has a Net Promoter Score of 10, that’s pretty awesome. On the other hand, if your startup streams videos to users and has a score of 35, that’s pretty miserable. Due to this variation, surveys that measure consumer sentiment need to take into account your vertical or product category.

Figure via Retently.com

Another way to tell that your startup is reaching product-market fit is to look at how key metrics such as conversion rates and sales cycle times are changing. Key metrics will reflect when your company is tending toward stronger product-market fit:

  • Conversion rates are increasing
  • Sales value and revenue per customer are increasing
  • Churn is decreasing
  • Sales cycle times are decreasing
  • Customer acquisition costs (CAC) decreasing
Figure via Beta Boom

In the beginning, it will be easier to get the above metrics to move in the right direction as you hone in on your product and ideal market. However, as your startup gets closer to optimal product-market fit, which is ever-elusive, the rate of change will decrease as it becomes harder to make advances on any of the three fronts: product, market, messaging. The objective is to keep improving product-market fit until your efforts stagnate.

As you tend to optimal product-market fit, it might feel as though all of the friction in your startup has disappeared. It becomes much easier to acquire new customers and keep existing ones. Support volume slows down or even drops. You get relatively fewer angry emails or complaints about missing features or broken user experiences, and your customers become more vocal as they rave about your product or company on social media and elsewhere.

Conversely, when your company has poor product-market fit, it feels as though you are wading through molasses or pushing a cart uphill. The sense of friction is palpable. More concretely, all of the indicators that we described above are either trending the wrong way or are outside your industry benchmarks. For example, your churn rate might be significantly higher than other similar startups or you keep getting a flood of emails from customers complaining about your product’s poor user experience or missing features.

What is killing your product-market fit

In math nerd terms, finding the optimal product-market fit is essentially finding the global maximum for a three-variable function. In normal person terms, you have to improve the product, the targeting of your ideal customer, and your messaging such that you make the best product for your ideal customers and efficiently get it in their hands. The problem is that you are essentially flying blind most of the time while trying to optimize your product-market fit.

The objective is to fiddle with and test the product, market, and messaging in order to find a way to optimal product-market fit or as close to it as reasonably possible. And the trick is to start with those factors that are easiest to change. Usually, that is messaging, market, and product in decreasing order of difficulty. Let’s look at an example to illustrate this point.

The wrong messaging

Imagine that you have created a project management software for engineering and product teams. Specifically, your product excels at helping teams track tasks and bugs to address. Let’s say that your product really is exceptional at tracking engineering tasks and that the customer that you are targeting is hungry for a better solution than those existing in the market.

Unfortunately, the messaging on your website and advertising focus not on your product’s ability to seamlessly track tasks but rather on its team communication features. You have a superior product and a huge market that is hungry for a better way to track engineering tasks, but your messaging is focusing on the wrong things. What happens?

Engineering and product teams sign up and pay for your software expecting it to solve their communication needs, but it turns out that it falls short in that category. Consequently, many of your customers write angry support emails and abandon your product. Had your messaging focused on your product’s elegant solution for tracking tasks instead of communication features, you would have attracted more suitable customers and set the right expectation. Instead, the ether that binds product to your ideal market is weak.

The wrong market

Going back to the above example of a project management software, let’s say that you are targeting dentistry offices in your marketing efforts. There is little chance that dentists and their staff are going to rave about your project management software even if you do a great job messaging the nature of your product and have a killer solution. Of course, this is an extreme and contrived example, and in reality, you are unlikely to miss the mark that badly. However, even subtle shifts to your targeting can have big changes in your product-market fit.

For example, if your project management software is really geared toward Scrum rather than waterfall methodology, those customers that are working in the latter will likely derive little value from your product and you will continue to have poor product-market fit even if you have a great product and are addressing the right general population of potential customers. Details matter. Of paramount importance is whether the customers that you are targeting have exactly the need that your product is addressing.

Luckily, optimizing the targeting of your marketing efforts is often a matter of changing the channel and perhaps messaging. It is usually a good idea to start experimenting via digital advertising since it’s easy to change and measure both messaging and channels. The more precise that you can define the audience and your product’s benefits, the quicker you’ll be able to hone in on the optimal market.

The wrong product

It goes without saying that product-market fit will elude your company if your product is not sufficiently better than existing solutions or is riddled with usability issues. Unfortunately, changes to the product itself require a greater time and material investment than adjustments to messaging or targeting making it more efficient to start with the latter and save changes to the product until your team feels confident in reaching the optimal market. There are times, however, when improvements should be made to the product in parallel to marketing optimizations.

Obvious usability issues and functional bugs should be addressed as quickly as possible since any user of your product will be able to spot them even if they aren’t the perfect target. It might make sense to pause and make sure that you are reaching the right customer before augmenting your product when customers are requesting features that don’t seem core to your product vision or when they are providing conflicting feedback.

Returning to the above example one more time, you’re core solution is making it easier for Scrum product and engineering teams to track tasks since that is where you see the greatest unmet need. If your current customers are loudly voicing the need for a more sophisticated chat feature, you should wonder if you are really reaching the right customers or even solving the right problem.

A long road to paradise

It’s exceedingly rare for startups to find product-market fit right away even though such tales are glorified in the media. More commonly, optimizing product-market fit is a long journey sometimes lasting years as it had for Twitch, which created a great video streaming product but didn’t find the right market with Justin.tv for four years until they hit the jackpot with video gamers. The trickiest part is figuring out how strong your product-market fit is and whether you should turn your attention from trying to make it better to scaling your business.


Originally published at https://betaboom.com on April 17, 2019.

BETA BOOM

Insights for first-time tech founders, entrepreneurs, and innovators.

Sergio Paluch

Written by

Founding partner at Beta Boom (betaboom.com) — a venture capital firm investing in the next wave of tech founders.

BETA BOOM

BETA BOOM

Insights for first-time tech founders, entrepreneurs, and innovators.

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