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Decoding Product Market Fit - Ft. Zomato

(Glossary- PMF- Product Market Fit, CSAT Score- Customer satisfaction score, NPS- Net Promoter Score, EBITDA- earnings before interest, taxes, depreciation, and amortization, USP- Unique selling proposition, MAU- monthly active users)

This made me wonder how often we come across this buzzword. Almost all the founders and VCs repeatedly refer to this term.

So how does this PMF play a pivotal role in startups? And why is it considered a validation metric? Let’s dive in!

What Is Product-Market Fit?

According to Andy Rachleff, Sequoia Capital founder Don Valentine first coined the term product-market fit.

  • PMF is achieved when the market wants a product and is willing to pay for it.
  • It is irrespective of the number of orders placed or items sold. One could have sold as low as 100 items and they might have been able to hit the PMF!

Stages of Product-Market Fit:

Avnish Bajaj of Matrix Partners India has perfectly defined below three stages of PMF:

  1. Early PMF: This is at the early stage of the startup, where organic user growth is kicking in! E.g., OLA was able to get their initial 1000 customers in Mumbai with just word of mouth.
  2. Scalable PMF: This stage is generally during the hyper-growth of the startup. E.g., Due to great success in Mumbai, OLA launched its operations across all cities in India.
  3. Scalable & Profitable PMF: This is the golden point, every founder and VC work hard for! Hitting profitable PMF would help recover all the VC investments in the startup and start profitable growth after breaking even. E.g., Let us say if after scaling up OLA operations across India, OLA is able to earn a profit margin per order.

Below are the litmus questions asked to check if one has found the PMF:

  1. Who is your target customer? (demographics and geography wise)
  2. Why would the customer buy your product? Is it solving their pain point or getting a job done?
  3. What is the customer satisfaction score? (CSAT)
  4. What is your product’s USP that will make the customer come to you again and again and love your product?
  5. Is your customer willingly referring your product to his/her friends, family, colleagues? (Net Promoter Score)

Target Group For This Survey: 60 people from the age group of 20 years to 40 years, working in the private sector, living in Tier-1 or Tier-2 cities in India.

Below is the summary of the survey:

  1. More than 90% of the people from this target group use Zomato.

2. CSAT Score: 80% of the people are satisfied with their Zomato experience. This indicates that Zomato has a good Customer Satisfaction score (60%-80%=Good Range). 10X experience is actually more than just a satisfaction. It’s customer delight!

3. Customer Retention: More than 78% of the people are reordering from Zomato. This shows a USP (could be faster delivery, exciting discount offers, etc.) in Zomato’s service, which is responsible for this amount of customer retention.

4. USP: 77% of the people feel discount offers make Zomato more preferable than other food delivery apps. Only 22% of people prefer Zomato for fast delivery. This clearly shows that discount offers are Zomato’s unique selling proposition.

5. Net Promoter Score: More than 90% of the people are willing to refer/promote Zomato to their friends and family. It shows how amazing the virality of the product has gone! Such virality directly cuts down the marketing and advertising budget of the company.

6. Pricing: Below data shows that half of the people are not happy with the Zomato’s pricing.

Although the above data set is small, these results indicate that Zomato can penetrate the market well, provide a great customer experience, retain most of the customers, and has a great virality. So we can say that, Zomato has found its Product-Market Fit.

Which Stage of PMF Is Zomato At?

  • Over the last 13 years, Zomato has raised a total of $2.1Billion in 20 rounds from various VC firms, and it is currently valued at $5.4 Billion. These numbers are mind-boggling.
  • But the interesting fact is, it took Zomato 12 years to become profitable. In 2020, the company declared that it had reached EBITDA level profitability of $3Million-$4Million.
  • The company report also says that 15 months before reaching profitability, it burned $40Million per month.

References:

https://www.businessinsider.in/business/startups/news/zomato-and-swiggy-have-never-been-this-close-to-making-profit-say-goldman-sachs-analysts/articleshow/79163334.cms#:~:text=%E2%80%9CZomato%20mentioned%20it%20is%20now,pro%EF%AC%81ts%2C%E2%80%9D%20said%20the%20report.

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