How to Find Product Market Fit — Road to the Holy Startup Grail
By Danny Holtschke from StartupGeist
Markets that don’t exist don’t care how smart you are.
— Marc Andreessen
If there is no market for your product, even a great product and a great team will not make your startup grow big. If there’s a market but your product is bad, you won’t make it either.
Marc Andreessen even believes that many of the most successful startups just got so much traction because they had a good product market fit — even though they messed up most other things.
In contrast, he sees many well-managed companies go straight off the cliff because their product, or the market for their product, isn’t great.
Better focus on finding product market fit. Find out here how to measure and reach it.
80/20 Summary
How to measure product market fit
Alright, before we dive into the question how to find product market fit, let’s briefly summarize startup experts on how to measure product market fit.
Measuring it qualitatively
The inventor of the concept, Marc Andreessen notes that:
You can always feel when product market fit isn’t happening. The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of “blah”, the sales cycle takes too long, and lots of deals never close.
Whereas startup life within a company with a proper product/market fit looks like this:
The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can. Reporters are calling because they’ve heard about your hot new thing and they want to talk to you about it. You start getting entrepreneur of the year awards from Harvard Business School. Investment bankers are staking out your house. You could eat free for a year at Buck’s.
Groovy, baby! According to Steve Blank, you exit “search phase” when your business has reached the following milestones:
You’ve found a sales channel that matches how the customer wants to buy, and the costs of using that channel are understood.
Sales (and/or customer acquisition in a multi-sided market) becomes achievable with a sales force (or network effect or virality) without heroic efforts from the founders.
Customer acquisition and activation are understood and Customer Acquisition Cost (CAC) and Lifetime Value (LTV) can be estimated for the next 18 months.
William Mougayar asked the VC Albert Wenger about his indicators of product market fit and cites as his answer:
Product market fit is best measured by observing how customers react to your product, better yet, observe them interact with your product. You know you’ve achieved product market fit when the customers intuitively understand what need the product fills for them, and they have no trouble using it, in fact they enjoy using it…in fact they start telling their friends about it, maybe even telling the world about it on Twitter. That’s how you know if you’ve got product market fit.
— To sum all these different ideas up: You’ll know that you have product market fit when your customers are excited by your product and gladly recommend it to others, when you have a basic idea of how to sell your product and selling it doesn’t require you to move mountains.
Do you want some more precise info? Let’s look at the quantitative indicators that have been defined by different entrepreneurs and startup experts.
Measuring it quantitatively
Firstly, probably the most famous one is the ‘Ellis Test’ — invented by Sean Ellis, godfather of growth hacking.
Ask your users how disappointed they would be if they could no longer use your product (on a scale from “I no longer use it” to “Very disappointed”).
If 40% of your users tell you that they would be “very disappointed”, you have found product market fit! BAM! This test is a great test because it is as simple as it can be, and it can be applied by all sorts of startups.
Secondly, David Cummings offers five ways to identify product market fit.
- 10+ customers have signed on in a modest period of time (e.g. 3–9 months) and they haven’t been friendlies (people you already knew, favors you called in, etc.).
- At least five customers actively using the product with little / no product customization (e.g. the product is valuable and mature enough that heavy development work isn’t required for each new customer).
- At least five customers have actively used the product for over a month without finding a bug (no matter how great the product is people always find issues with it, which is natural for this beginning stage).
- At least five customers use the product in a similar way and achieve similar results (early on you find that customers use the product in ways you didn’t imagine, which is great, but the goal is to find consistent, repeatable patterns).
- At least five customers exhibited a similar customer acquisition and onboarding process whereby they bought and went live with the product in a timeframe that was consistent with each other (e.g. had a two month sales cycle and took a week to get the product running).
Be careful however here, because David’s perspective is B2B SaaS based. The range of 5–10 startups is only significant in that context.
But what about a B2C context?
Thirdly, you might want to go with Ash Maurya that suggests to take a multiplier of at least 10x — meaning that you must find at least 50 to 100 paying B2C customers compared to 5 to 10 in a B2B context.
How to find product market fit
You’re probably asking yourself how you can find this magic point of product market fit. What levers must be pulled or what things must be done right?
Guess what the answer is? Yeees, this is about startups so there is no easy answer.
There’s a great article by William Mougayar — venture advisor, entrepreneur and investor — that digs deeper into the question how product market fit can be found. According to him, there is no simple way to create it because it is a multidimensional concept.
As Morgan Brown, who has done intense research on hyper-growth startups notes:
There is no silver bullet for hypergrowth.
Finding product market fit means getting all dimensions of your business model right: product, customer acquisition channel, value proposition, pricing/revenue, cost etc.
That’s why product market fit is not even a ‘point’ you reach — it is a continuum you will move forward on with small steps.
You’ll have to work on a lot of different dimensions of your business to find out what really works… That’s why it’s really hard and most startups die here.
According to Ben Horowitz, the search for product market fit is quite a messy and murky process for most startups. In most cases, you will not know for certain, if you are moving towards it, or away from it.
Markets are constantly shifting, your competitors are bringing up new innovations, and what seems to be a total blockbuster today might be an outdated slow seller tomorrow.
Yes, it’s messy.
Still, I would like to summarize some guidance by pointing out the core dimensions of product market fit that startup experts have identified.
Product
Do they intuitively understand the value of your product and manage to use it in a meaningful way?
Did you create a ‘must-have’ product experience — which all hyper growth startups have in common?
Have you built something that people want?
Market
If you have the perfect solution to a problem that 10 people have worldwide , you have a problem.
Still, if you have a market of 1.5 billion people and no one’s really amazed by your product, you won’t reach rocket acceleration either. It’s generally most promising to start focussing on a niche market, serving it really well and then move onto a bigger market.
Just remember how Facebook started as a platform for students, Snapchat started with a focus high-school kids etc.
Have you validated your niche market and whether people/customers who really love what you’re doing?
Customer Acquisition
Maybe you have a decent product for a great market and still struggle to acquire customers?
Is your communication of your value proposition shitty? Or are you trying to reach people via the wrong channels?
The point here is: products don’t ‘sell themselves’.
Even companies that went viral — think Facebook, AirBNB, Dropbox … — did so because they worked hard on finding cheap and effective customer acquisition strategies and then kick started their growth.
David Cummings outlines how to reach initial product market fit:
- 10 friendly customers likes the product and give friendly-focused feedback, helping move a bit closer to product market fit.
- 10 paying non-friendly customers sorta-like the product and give tons of feedback, significantly moving towards product market fit.
- 10 more paying non-friendly customers really-liked the product and gave great feedback, inching the product closer to product market fit.
- Finally, 10 more paying non-friendly customers rave about the product and have ideas for improvement , but ones that are approaching the nice-to-have category, helping assert the arrival of initial product market fit.
Get Potential Customers to “No” as Quickly as Possible. A few labor-intensive ideas to get in front of a number of people to determine viability for an idea:
- Make a methodical plan to reach a certain type of person (e.g. take the last 100 people featured in the local business journal and contact them via phone).
- Find a list of award winners (e.g. the Inc. 5000) and contact at least 500 companies on the list.
- Reach out to 100+ people that you know and ask for a referral to someone that could be a potential customer, or could point you in the right direction.
Business Model Experiments and Pivot
You might ask yourself now what you can do if you know you’re lacking in customer acquisition.
The general answer is: experiment and pivot.
By “pivoting”, startup people generally mean adapting aspects of your business that don’t work until they do. Many of the most successful startups don’t follow a straight path to success, but change their business radically once or even several times.
Let’s check out an example by David Cummings, bold serial entrepreneur and keen blogger. His company “Pardot” started with selling leads for B2b tech companies, which didn’t work very well. While exploring the reasons, they saw that they had chosen a great market, but did not really satisfy it with their product. That’s why they decided to create a software for generating, tracking and disseminating leads instead. It turned out to be one of the biggest exits of a bootstrapped SaaS-business ever ($95m)!
That’s a classical example of a product pivot. But maybe your product is cool and you were just targeting the wrong audience? Or you didn’t find out how to reach them properly yet?
I suggest you check out Dropbox’s amazing presentation on how they struggled with getting that right.
Tips from Ash Maurya
- Keep your day job
- Build an audience
- Build a Minimum Viable Product
- Conserve burn rate
- Charge from day one
- Sell other related stuff along the way
- Speed up learning
— Bottom line: Bootstrapping + Lean Startup = Low Burn Startup
Getting to product market fit, or out of the valley of death is the first thing that matters. Until then, bootstrap to buy yourself iterations, and apply lean startup techniques to maximize learning from those iterations.
Tips from Paul Graham
Do things that don’t scale
Paul Graham advises you not to think about stuff that helps you to scale on day one. It’s just fine “to do things that don’t scale”:
One of the most common types of advice we give at Y Combinator is to do things that don’t scale. A lot of would-be founders believe that startups either take off or don’t. You build something, make it available, and if you’ve made a better mousetrap, people beat a path to your door as promised. Or they don’t, in which case the market must not exist.
Actually startups take off because the founders make them take off. There may be a handful that just grew by themselves, but usually it takes some sort of push to get them going.”
Keep an extremely low burn rate
Again, Paul Graham advises to be relentlessly resourceful:
If I were running a startup, this would be the phrase I’d tape to the mirror. “Make something people want” is the destination, but “Be relentlessly resourceful” is how you get there.
When in ‘the fatal pinch — default dead + slow growth + not enough time to fix it’ — Paul outlines 3 options for startup founders: (1) shutting down, (2) increasing how much you make, and (3) decreasing how much you spend. In short, getting people to take less salary is a weak solution. Instead, he advises to focus on trying to make more money — by selling consultancy services. One person codes, one sells.
The good news is, plenty of successful startups have passed through near-death experiences and gone on to flourish. You just have to realize in time that you’re near death.
Use the startup growth calculator to identify if you are default alive or default dead.
Half the founders I talk to don’t know whether they’re default alive or default dead.
I propose the following solution: instead of starting to ask too late whether you’re default alive or default dead, start asking too early.
Paul thinks that one of the reasons founders don’t know if they are either default alive or default dead, is because they assume it’s easy to raise money.
But that assumption is often false, and worse still, the more you depend on it, the falser it becomes.
Keep your burn rate as low as possible while iterating towards achieving product market fit.
Some level of preliminary value proposition iteration and signup flow optimization is necessary to establish some early traffic, but then the focus should quickly shift towards measuring product market fit before anything else.
Quick summary: What you should have learned
- Product market fit is about finding a great market, building a product that this market really wants and figuring out how you can sell this product effectively.
- Product market fit matters because your startup won’t ever grow big until you found it — no matter how much effort you put in sales & customer acquisition!
- It’s multidimensional. There is no single thing you have to ‘get right’ in order to achieve product market fit.
- It’s not a clear border that you cross, but rather a continuum you move forward on. You can have more or less of it.
- Be aware that you can lose the fit you’ve already acquired! Markets are constantly changing and you might simply screw up your product with new versions.
- Remember and act out a few solutions on how to get to product market fit: product, market, customer acquisition, experiments and pivot, do things that don’t scale and keep an extremely low burn rate.
- You’ll know that you have product market fit when your customers are excited about your product and gladly refer it to others.
- You can measure product market fit by asking your users how disappointed they are when they could not longer use your product. If 40% tell you that they would be “very disappointed”, you’ve found it! (Ellis Test)
StartupGeist Knowledge Base
StartupGeist summarizes insights and experiences from digital entrepreneurs, startup experts and founders. This article is based on …
David Cummings:
- Think About The Market As Much As The Product
- Product/Market Fit Before Raising Venture Capital
- Initial Product/Market Fit
- 5 Ways to Identify Product/Market Fit
- 5 Quick Steps to Go from Product/Market Fit Focused to Customer Acquisition Focused
Fred Wilson: Revenue Traction Doesn’t Mean Product Market Fit
Tom Preston-Werner, CEO GitHub: Don’t give your customers what they ask for; give them what they want.
Paul Graham
William Mougayar: Product/Market Fit Is A Continuum
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I am Danny and started StartupGeist to help students and recent graduates build a business — and have a good life. Why? To be free, financially independent and healthy. How? Build a growth mindset and deliberately practice skills that turn your ideas into something bigger.
Originally published at startupgeist.com on January 29, 2016.
