All that you need to know about Product Market Fit

Product-Market Fit

Did you know that 9/10 startups fail and 40% of the reason behind this is not finding the Product-market fit? It’s common to conceive a great idea, build it by investing a lot of time, money and resources and then realize the market never really needed your product in the first place. At worst, it can lead to your startup failing before it ever gets off the ground.

Successful companies always operate by first finding the niche in the market and customer feedbacks before they launch fully functional products. Entrepreneurs who understand this, build a product that their customers love and would be ready to pay. For this process to be effective, it’s crucial for startups to consistently evolve and learn from their customers.

Since the product-market fit is extremely significant to startup success, we wanted to dig deeper to unfold the ultimate truth of achieving and most importantly measuring it.

Let’s get decoding.

What is Product-Market Fit?

Since this concept took form, there have been repetitious and overlapping representations of Product-Market Fit. Let’s look into each of these perspectives for a holistic understanding of the term. 

According to Marc Andreesen’s, an American entrepreneur, investor, and software engineer (Along with the other feathers in his hat of course) “The only thing that matters“, the product-market definition is:

“Product/market fit means being in a good market with a product that can satisfy that market”.

According to Marc, you can feel what Product-market fit is like:

  1. When PMF 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.
  2. When Product-Market fit is happening: 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.

Tren Griffin, in his blog post for ANDREESEN HOROWITZ, sets an interesting perspective.

He says “You know you have achieved PMF if your product grows exponentially with NO Marketing cost and only by Word of mouth”.

Tren also believes that achieving PMF is an iterative and continuous process.

Originally, the idea of Product-market fit was developed and named by Andy Rachleff (who is now the Cofounder and CEO of Wealthfront and the Co-founder of Benchmark Capital). When Andy talks about Product-Market fit, he focuses in on 2 key viewpoints

  1. Value Hypothesis
  2. Growth Hypothesis

Value Hypothesis: It is an attempt to articulate the key assumption that underlines why a customer is likely to use your product. The value hypothesis takes into consideration both the features and the business model to engage and nudge them towards conversion. There are several factors to note when determining the value hypothesis like product, pricing, and business models.

Overall, the Value hypothesis defines the what, the who and the how. i.e What are you going to build (what), who is desperate for the product (who) and what is the business model you are going to use to deliver it (how).

Andy Rachleff also mentions in his post “Why you should find Product-market fit before sniffing around for venture money” as Identifying a compelling value hypothesis is what I call finding product/market fit. A value hypothesis addresses both the features and business model required to entice a customer to buy your product.      

Growth Hypothesis: This constitutes the best thinking about how you can scale the number of customers attracted to your product or service. Companies often go wrong in testing their growth hypothesis before proving out Value hypothesis, sometimes even before getting out their Minimum Viable Product out to the market. Companies must nail the value hypothesis and then try and figure out their growth Hypothesis.

One point that Rachleff mentions is “world’s best startups don’t have growth hypothesis in their early days. They happened to have conceived or more likely pivoted into an idea that addresses the pain points of the customer who were desperate and looking for a solution.

Improving customer retention is easy if you identify the thing that makes them stick on your product or service i.e Value Hypothesis. Hence, it’s crucial to determine your Value hypothesis first and then you’re Growth Hypothesis.

Tren Griffin – you can never be wrong on this, “achieving PMF is an iterative and continuous process”!

Common misconceptions about PMF

Ben Horowitz provides a radical perspective to deeper understand what Product-Market fit is all about, through his 4 common myths

  • Product-market fit is always a discrete, big bang event
  • It’s obvious when you have the right fit
  • Once you achieve PMF, you can’t lose it
  • Once you have it, you don’t have to sweat the competition

Itamar Goldminz, from team Evergreen, wrote a piece that uses the metaphor of resonance from Physics to describe PMF – 

A good analogy for finding PMF comes from Physics: finding resonance with your customers and getting on the same wavelength as them. Note that this can be accomplished both by changing your product and by changing your customers (market pivot). Changing your wavelength is a gradual, continuous process (anti-myth #1), you know when you’re close to being on the same wavelength but it’s hard to tell if you’re exactly there (anti-myth #2). Since both your product and your customers constantly change (wavelength), it’s easy to get out of sync again (anti-myth #3) and it’s clear that your actions don’t prevent others from getting on the same wavelength (anti-myth #4).

Even though you have achieved Product-Market fit, it doesn’t mean the struggle ends there. Markets, competitors change every single day. Constant adaption is the ultimate key to retain your PMF. Steve Blank observes, “What matters is having forward momentum and a tight fact-based data/metrics feedback loop to help you quickly recognize and reverse any incorrect decisions.”

Apart from all these mindsets, companies often fail because of 1 factor, “Premature Scaling”, a term first used by Steve Blank. The concept is simple. He defines, a company is “Premature scaling if its spending huge amount of money on Growth before its discovered and developed PMF”. A study conducted by Startup Genome concluded:

“Startups need 2-3 times longer to validate their market than most founders expect. This underestimation creates the pressure to scale prematurely… In our dataset, we found that 70% of startups scaled prematurely along some dimension. While this number seemed high, this may go a long way towards explaining the 90% failure rate of startups.”

An entrepreneur quoted by the authors of the study said:

“Premature scaling is putting the cart before the proverbial horse…As an entrepreneur, there’s always the temptation to grow the sales team at the first sign of revenue traction, but there is always the danger that this early traction is coming from the subset of the market that are early adopters and not the actual market itself. Additionally, too often I’ve seen startups ramp up sales before they’ve figured out the most efficient way to achieve profitability. A vicious cycle ensues wherein the more a company grows, the more it farther away from profitability it becomes.” Some of the great examples of companies who fell into the trap of Premature Scaling are “Viddy” and “Cheshire Cat”. 

How do you achieve Product-Market Fit?

There is no conventional approach to accomplishing Product-market fit. It’s a test and trial continuous process. It can take anything in achieving it, changing people, rewriting product code, moving into a different market, telling customers no when you don’t want to, telling customers yes when you don’t want to, raising that fourth round of highly dilutive venture capital — whatever is required. When you get right down to it, you can ignore almost everything else.

Having said that, Dan Olsen, a product management expert proposed “Lean Product Process” that allows you to validate your assumptions step by step.

  • Identify your target customer: 
    The first step to achieve the product-market fit is to determine your target customer. Do market research and more specifically market segmentation to understand and define your audience. Segment them appropriately and cater to them in terms of content, product functionalities, etc. 

    “Start with some rough hypothesis, and then iterate it later”
  • Understand the big customer needs: 
    The second step of this process is identifying underserved customer needs. Here, what can help you is to divide your hypothesis into the “problem space” vs the “solution space.”

    Dan defines problem space as a customer problem, need or benefit that the product should address. In contrast, in the solution space, there is a specific implementation to address the customer’s needs or requirements, thus serving as an excellent market opportunity.
  • Know what you offer as your Value Proposition
    Once we understand what the big customer needs are, we now head towards defining the Value proposition – The needs are we going to claim our product delivers on?
    Dan advises using the Kano model to articulate your value problem. Kano model works by answering a few questions like
    • What benefit are you providing to your users?
    • How are you better than your competitors?
      He lists out a simple activity to understand the Value proposition.

Step 1: List a row per row what are the most important benefits for your product space;

Step 2: Create a column for each of your key competitors;

Step 3: Rate your competitors.

The idea here is to identify the key differentiators because that’s the part where your product can play a part in and be the best in the market.

  • Specify your MVP feature Set
    Minimum Viable Product is a product that houses the basic functionalities to entice the early adopters and validate a product idea early on in the product development lifecycle. It can serve as a great document of different user feedback to iterate and improve the product.

    But in this day and age, do you think a minimum viable product is enough to attract a customer at the first place? 

    The answer is “not anymore”! Users feel the constant need to use faster and sophisticated tools and techniques to improve their daily tasks. They are not ready for a product that offers minimum functionalities.

    What customers now need is “MVAP or MVLP” i.e “Minimum Viable Awesome Product or Minimum Viable Lovable Product“. 

    The best practice is to build a product that just doesn’t have the core functionalities, but has something magical to entice the customer to stay. Again, the companies get to choose, what functionality/feature will use to turn their product from MVP to MVAP or MVLP.
  • Create your MVP Prototype
    The next step in the lean-product process is the creation of the MVP prototype. Use good UX design practice to create a prototype, understand how it is going to work, and then test your MVP with the target customer. Don’t code until you have Prototype in hand.

    After all, the product you build the cumulation of all the assumptions you and your team have made along the way. Make sure to validate and verify your assumptions beforehand. Test the Prototype with your potential customers and iterate on them. Once your customers are happy with your prototype, go ahead and code.

How do you know if you are quite there?

“What gets measured gets managed” – Peter Drucker 

How do companies measure Product-market fit? This isn’t an easy question, and there are no perfect answers, but there are few metrics that can guide your journey towards Product-market fit.

Do your Customers Suggest your product to their Friends?

Net Promoter Score is a market favorite metric to find out if you have achieved PMF. NPS is a simple survey, asking customers to rate them 1-10, “How likely are they to recommend your product/service to their colleagues”.

One question that measures PMF is “How would you feel if you could no longer use the Product?

a. Very disappointed

b. Somewhat disappointed

c. Not disappointed

d. N/A, I do not use this product anymore.

If 40% of your surveyed customers say that they would be “Very disappointed”, if they could no longer use you’re Product/service, then you are on the winning side.

Customer Lifetime Value is the Average profit from each customer during the entire time they remain your client. If you want sustainable business you need to have repeat customers who are ready to pay.

Apart from these metrics, Churn and Retention rates are some other metrics you can use to measure Product-market fit.

How do we get there without launching a product?

If you thought, achieving PMF applies to startups that own a product; you might want to rethink again. PMF is never completely reliant on the Product rather it relies on your Product conception coupled with the problem that it solves.

A few steps help you analyze if your product can achieve Product-market fit.

  1. Forget MVP, Define your MVC – Minimum Viable Customer: The audience you choose to try your latest product should be early adopters so they can provide you ample feedback. More importantly, they are the people who feel the pain point, your product is trying to solve, so much so that they are willing to pay with just your initial offering. 
  2. Start pitching to your potential customers: This is exactly what we did at Ampliz. We built a product mockup initially and showcased that to our potential customers at various conferences and events. We collected a whole bunch of feedback and we made sure to incorporate those changes during our product build. It’s very easy to overbuild a product when there’s no clear understanding of the customer, which is why this is so important. As we were very clear with our Value propositions (before actually writing the first line of code) we started pitching about our product. After all, part of the pitch process is about learning more about your customers to assess if you’re on the right track.

What’s next?

A common question may arise – How long does it take to achieve PMF?

The answer is simple, It depends! Product-Market fit is not the destination but a continuous and iterative process.

In entirety, build products that your customers would love to use. Work on their requests, feedbacks and most importantly make them feel valued. After all achieving Product-market fit is all about making your customers happy.

So, what’s your take on this?