35% of startups are failing due to missing the Product-Market fit. How to find one?
The most common reason startups fail is missing a Product-Market Fit, according to CBInsights:
Tackling problems that are interesting to solve rather than those that serve a market need was cited as the №2 reason for failure, noted in 35% of cases.
In short, biases and lack of research lead to missing Product-Market fit. Either an offer doesn’t solve a problem, or its pricing policy doesn’t fit demand, or… there are many reasons, and I’ll touch on them further.
The message is clear—validating whether your product or service will meet the demand and pricing expectations while delivering a healthy economy is crucial to securing your business from failure at its earliest stages.
Of course, it is a mixture of success and entrepreneurial flair along with practical experience, but also it involves significant effort and a conscious, open-minded approach to researching the market and testing your product offer.
What is a Product-Market fit, actually?
In short, it sounds deceptively simple (from Wikipedia):
Product-market fit, is the degree to which a product satisfies a strong market demand.
It could be this simple for an external observer or even an investor: the fit is there if customers are happily paying for it while the economy is positive.
But not for a product manager.
In fact, Product-Market fit is a complicated and multi-layered concept touching almost every aspect of a business. In this article, I deliberately overcomplicate things to show what stands behind the concept in my humble opinion.
How to find your Product-Market fit?
The devil is in the details, or components, that constitute the whole concept. Start with systemizing your hypotheses, gathering data, planning research, and validation.
Many founders fear these words as “Research” sounds like an enormous workload, expenses, and extended time to market. It could be true, but the chances of burning your precious funds are much higher if you rely solely on a gut feeling.
We use our Miro template that helps to visualize everything and works especially great for team workshops. Its public version is coming soon to get listed in our Product Management Playbook.
But now, let’s go over each component briefly.
Target Market
Everything starts from a well-defined, precisely identified target market. Who are your customers, and what do they need? This is the key.
Seemingly, the product goes first, but this is where the failure is hidden — you focus on what you’d like to develop or sell rather than what the market will pay for.
Understanding the demand and its aspects inform the business model and requirements for everything else, not vice versa. In an ideal case, the product or business idea comes from quantitative data or practical experience showing high demand for something.
Or it could be less straightforward: there’s no articulated demand, but a well-presented problem exists, and its volume is confirmed with data.
When discussing the target market and trying to define a portrait of our customers, we focus on Use Cases and Job Stories rather than socio-demographic parameters, regardless of whether it is a b2c or b2b business.
It is worth a separate article to elaborate on these two notions, but in short: Use Case and Job Story proper development help you to understand the motivation of your customer, its behavior, the reasons, and the context where everything happens. Such knowledge is extremely powerful in building product value propositions and marketing strategies.
Product or Service
What exactly do you sell, and how will it help your customer do their job? Be specific and describe your product or service's functional benefits.
Competition
How does your customer cover their needs right now? It makes a lot of sense to consider both direct and indirect competition. For example, your business is a delivery-focused restaurant with a menu of healthy lunches for small offices. You will compete with the nearest grocery store, Starbucks, with their salads and sandwiches and the idea of taking lunches from home, not only with other similar delivery services.
To define the weight of such competing ways of solving a problem, you will look at your target customer’s behavior and motivation behind it versus the pros and cons of each solution. Use Cases and Job Stories come into play again, and you must go for customer interviews to gain such qualitative data.
Here you can find three templates that will help you to shape the process of Customer Interviews (or so called Customer Development) program end-to-end:
— CustDev Program Pipeline
— CustDev Program Brief
— CustDev Program Report framework
Value Proposition
Articulated value the customer will get and how it sets the product apart from its competitors. It seems obvious, but there are risks to failing at marketing and sales when you can’t communicate the value clearly and concisely.
Customer Acquisition
Marketing & Sales are part of the business and besides looking at the volume of your market, you will need to figure out which part of it is addressable. If your market isn’t addressable (there are legal restrictions to promote your products or services), or the cost of acquiring a customer is too high, there’s no business.
Thus remember that the costs to acquire a customer (CAC) will directly influence your pricing strategy. If costs are too high, your prices go up… you get it.
You’re a growth hacker looking for Viral Loops or strategies when one customer brings you another. You can ignore it, but I would suggest focusing on this as early as possible. A high willingness to recommend your product is a great indicator of successful PMF. Strategies that push a customer to bring you other prospects — are the key to successful growth.
Customer Retention
Retention and repeat purchase rate summed up as a customer lifetime value are the basis for the healthy unit economy. Duh, everyone knows it. But many neglect to implement retention strategies within their business, revenue, marketing, and operations model overall.
Simply remember that customer retention has its costs in the same way as acquisition. For example, advanced customer support services, discounts, or additional features could increase operational costs and COGS, making the unit breakeven point unachievable within the customer’s lifetime.
That’s why ensure your retention strategies are in place to be tested from the beginning.
Revenue Model and Unit Economy
With all from above in place, you finalize the revenue model where costs and margins are clear and realistic. You also build Unit Economy and Cash flow predictive models to set KPIs and inform overall financial planning.
All these models will surely be changed and improved with real data in the future, but drafting is critical as it makes founders think about the real business rather than shiny dreams.
Things look overcomplicated, but only in case you do this for the first time and hesitate to use the experience of your peers. From the 2nd take and further, you will find such a pipeline as an organic one, a must-do routine thing, and you’ll cope with it.
Running a startup is an exciting thing to do, until it fails. So, just ensure you did the right things to keep it alive and growing.
However, it is unnecessary to follow our or any other frameworks strictly (we actually amend ours every time depending on inputs), but overall logic and the questions to answer will always stay more or less the same.
So, how to avoid finding yourself in these failing 35%?
Here’s a short receipt summarizing our experience with customers and our own products:
- Fight biases — do research on every aspect listed above.
- Don’t rely solely on performance data, as the numbers do not reveal the context or the circumstances in which they happen. Do qualitative research, customer interviews, and UX tests, and treat feedback as gold.
- Treat every aspect of your product and business as a part of a whole system. Great products won’t be sold without proper marketing, nor will you retain your user without good customer support.
- The economy will not converge by chance. Plan and validate it from the beginning. Validated PMF ignoring the economy is a nice way never to get profitable.
- Learn from mistakes and failures. Better if not yours :)
I hope you find these thoughts useful! Feel free to contact me with questions, and I wish you to find your PMF 🚀
In the next article, I’ll be talking about how to actually measure the Product Market Fit.
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