4 steps to achieve Product/Market Fit
The foundation of a growth framework for startups
The number one priority for any startup founder — even before looking for investors — should be achieving product/market fit. No other criterion has a greater influence on the success and evaluation of a startup. Unfortunately, many myths surround this topic and there is hardly any tangible advice.
Many founders have the infamous hockey stick in mind when they dream of scaling their product, but it is probably much more likely that success will only come after many tests and setbacks:
What I will cover in this article:
1. Is there even a market?
Many VCs often demand to target a potentially huge market. The classic distinction is made as follows:
- TAM: Total Addressable Market — the total market for a vertical or industry
- SAM: Served Available Market — subsegment of the TAM (often geographically limited)
- SOM: Share Of Market
The problem is that something such as “the market” does not exist or rather there are potentially many different humans with different needs and problems to address within a market. If you develop a product that should work for everyone, the probability is high that the value proposition, as well as the product communication, is massively diluted.
Marketing guru Seth Godin introduced the concept of the Smallest Viable Market in his work “This is Marketing”: Rather than targeting an entire market, founders should first find a consistent niche. The advantages are obvious:
- It is relatively easy to create distinct persona.
- The feature backlog can be prioritized based on the added value for the persona.
- The product has the potential to spread virally within a homogeneous target group using the same platforms and social networks.
2. Which problem is my product trying to solve?
Studies show that the intrinsic motivation of the founder is essential to survive the many ups and downs in a startups life. Therefore, problems that the founder has experienced first-hand are predestined. They must be significant and offer a high potential added value to potential customers.
Therefore it is essential to be clear about the:
- Vision — Why do I want to solve the problem? — and
- Mission — What do I want to achieve? — to before the
- Product — How will the problem be solved? — is tackled.
If it is a long-standing problem and a market already exists, a rule of thumb says that the new solution should be 10 times better. Only then will users accept the financial, psychological, and opportunistic switching costs and give your product a chance.
3. How do I build a product that the market actually needs?
In essence, it’s not about working on a product in isolation for several months and then throwing it on the market. Instead, potential users should be involved from the beginning and a core product (aka Minimal Viable Product — MVP) should be honed in an iterative process.
The following methods are best practice frameworks for founders:
- Lean start-up
- Business Model Canvas
- Growth Design Thinking
Growth Design Thinking: iterate, test, accelerate
Design Thinking is a technique that you can use to place the user, or more precisely the person with his or her needs and motivations for action, at the center of all trade. This can make the decisive difference whether a product is perceived as interchangeable and useless or whether it offers a concrete added value so that it finds a permanent place in the user’s everyday life.
EMPATHIZE
It can be very complex, requires a good methodology and an understanding of human factors of action and motivation. In the end, it is all about getting to know the potential customer and his problem in-depth in a 1:1 conversation:
- Why does she spend 5,000 euros on a watch when there are also copies for 100 euros?
- Does she post pictures on Instagram to keep in touch with friends or for social recognition?
- Does she donate 100 Euros to Greenpeace to do good or to feel better about himself afterward?
DEFINE
While in the first phase the background, beliefs, and attitudes could be evaluated, it is now necessary to group them systematically and assign them to different personas.
The aim is to select a highly selective persona that is promising in terms of market potential, willingness to pay, and willingness to change to a new product.
Example: Peter, is in his early 60s, his children are already out of the house and he wants to travel with his wife while they are still physically able to do so. He knows the Internet well but has a friend who works in a travel agency and books flights and hotels for him from time to time.
Peter would like to book hotels on the internet himself because his friend always suggests the same hotels and has a different taste than him. But on hotel price comparison sites he feels overwhelmed: Too many offers, too much information, annoying hints that the room is booked up immediately and no direct contact. He feels overwhelmed and is disappointed that he now has to make himself dependent on others.
IDEATE
With such a precise description of the problem, creative teams can now brainstorm exciting solutions; various techniques have now become established. In the end, however, all that is needed is a value-free, goal-oriented approach.
Example: The team focused on a website solution for large screens, as Peter does not research his travels on his mobile phone but on a desktop computer. In the process, they created wireframe sketches to show how Peter should find his way around:
- The entrance takes place over large pictures of the target destination for basic orientation.
- Instead of all hotels of the destination, hotels that match his interests are pre-filtered.
- Only five hotels per page are displayed. The font is larger; information that is not relevant is first hidden; the white space is increased).
- Trust symbols and ratings are moved to the foreground.
- There is an option for direct, personal contact via telephone.
PROTOTYPE
Based on the sketched solution, designers can now create low-fidelity design concepts, coordinate them with the team, and have rudimentary prototypes developed. These are used to demonstrate them to potential customers and to obtain feedback.
If there are problems of understanding and suggestions for improvement arise, the cycle of the first four steps can be repeated and the prototype refined.
Once the prototype has been improved to a point where it satisfactorily solves the defined problem, the product is fully developed and prepared for testing. Tracking aspects for data collection must already be taken into account, which is necessary for testing in a test.
TEST
Before a test is launched it is fundamental to define the success criteria (e.g. increase the check-out rate, i.e. how many users find the right hotel faster and click through to the check-out process) and to define the test period: How high must the uplift of the conversion be to achieve significant test results at estimated traffic.
For the launch of a classic A/B test, the new variant will run against a control. 50% of the users will see the one, the other 50% the second variant. I do not recommend too many parallel tests at the same time, because it will be even more difficult to get a significant test result.
Often, tests are ambiguous, i.e. the new variant is not statistically significantly better than the old one — an improvement is more likely to be due to chance. Then the design thinking cycle should be started anew to identify radically new ideas.
IMPLEMENT
If the test has proved successful and the test hypothesis is confirmed, the test version can be increased to 100%. A core feature of Growth Design Thinking is the data-driven approach. The qualitative information gained in the Empathy, Define and Ideate sections can be verified or falsified.
The goal is to accelerate the cycle of the Design Thinking process. Excellent and well-rehearsed growth marketing teams manage to launch one test per weekly sprint and generate corresponding learnings.
This requires certain operational excellence as well as various skills in a team, which I describe in more detail in upcoming articles.
4. How do I measure Product/Market Fit?
“The number one problem I’ve seen for startups, is they don’t actually have product/market fit, when they think they do.”
Alex Schultz via YouTube
I can only sign this statement. Identifying a product/market fit sounds trivial, but in reality, it is not at all — especially if you do not want to indulge in an illusion. The obvious feature is exponential user growth. However, this is only a lagging and not a leading indicator, a metric that you cannot consciously and purposefully control.
Recommendation — Net Promoter Score (NPS)
The NPS is a widely used tool for measuring customer satisfaction by measuring the probability of recommending the product. However, in my opinion, it is inappropriate to measure the Product/Market Fit (PMF):
- The system for measuring on a scale of 10 is not optimal, as the seven is given more often than average, thus reducing the significance.
- Qualitative feedback is difficult to evaluate and systematize.
(Zenloop has addressed this problem and developed a great product). - The NPS value says nothing about the PMF: different industries have different benchmarks; different products are not designed for recommendation and therefore receive low ratings.
Retention
The analytically measurable user retention is a much better criterion to recognize the product/market fit. Above all, it helps to work towards it in a targeted manner and to develop and test the right theses or features.
The basis of the retention curve is the product usage on a session basis of a unique identifiable user. The proportion of active users is deducted after the acquisition. Depending on the product and its usage patterns, you may want to focus on Monthly, Weekly, or Daily Active Users.
In the example, all users are active within the first month, since we measure MAU. After that, the product usage decreases more and more. However, there is a core group that continues to use the product throughout its lifetime.
If the curve converges against a straight line parallel to the x-axis, we speak of a product/market fit.
With most startups, however, the retention curve sooner or later intersects the X-axis, so that all acquired users leave the product.
“Kill the product” by Sean Ellis
“How would you feel if you could no longer use the product?”
The answer to this question determines how important the product is in the daily life of a user. According to a benchmark study conducted by Sean Ellis, founder of GrowthHackers.com, 40% is the threshold above which one can speak of Product/Market Fit.
The advantage of this approach is that you can qualitatively narrow down why certain user segments see your product as indispensable and others do not. It also helps to identify exactly the market for which the highest added value can be generated and the acquisition being scaled.
What are the next steps after achieving Product/Market Fit?
Start-ups that have achieved a Product/Market Fit often see a natural increase in organic traffic based on word-of-mouth referrals.
The next step is to use the entire range of growth marketing to scale the user base systematically and sustainably:
- performance marketing
- referral loops
- marketing automation
- product-led growth hacks
The goal is to minimize customer acquisition costs and increase customer lifetime value, so that Customer Lifetime Value (LTV) exceeds the Customer Acquisition Costs by a factor of at least three, based on a rule of thumb:
LTV > 3 CAC
I would love to hear your thoughts and experiences. I will continue writing articles related to growth and will add links to this article.
