This is the most exhaustive and practical guide you can find on Product Market Fit.
Let's start with ...
What is Product Market Fit?
Product/Market Fit can be concretely defined as a scenario:
When users/customers begin to use/buy your product/service and recognize its value proposition.
They continue to buy from you (high retention)
They rave about the great experiences with your company and encourage others to buy from you (strong word of mouth).
And, you are able replicate to this same experience with every new referred user/customer.
We can then say that you've achieved the product/market fit
How Do Experts Define Product/Market Fit?
"Product Market Fit means being in a good market with a product that can satisfy that market" - Marc Andreessen.
"Product-Market Fit is all about making something that (lots of) people want" - Paul Graham, Y Combinator.
"Product/Market Fit is when (people) your customers sell for you (strong word of mouth)" - Josh Porter.
Product/Market Fit is the only thing that matters - Marc Andreessen.
Why is Product Market Fit so important?
90% of startups and 70% of startups that raised Series A end up as failures!
Lack of Product/Market Fit is the most common reason behind "why startups fail."
"Finding the Product/Market Fit is the hardest challenge for all startups", not now as this guide will help you find PMF.
If you're an early-stage startup then product/market fit should be your only focus in your journey instead of fundraising. Start working on the PMF if you still haven't.
Scaling a Pre-product market fit startup is almost a sure-shot way to kill it!
In 1999, I built a failed dot com. Initially raised from F&F, and scaled before product-market fit. Never did I find it (PMF). Kept on raising in future - $3 M, then $20 M on $100 M valuation. Hired dozens of high-priced executives, bought a fancy space in LA, and even made an acquisition. Don't (ever) be like me - Micah Rosenbloom.
"The most successful technology companies (i.e. Facebook, LinkedIn, Twitter, etc.,) first got their product/market fit right before even stepping on the accelerator (of growth)."
How long does it take to achieve Product/Market Fit?
It takes time for a startup to find product/market fit. In my experience, it roughly takes 1-5+ years. And "it's much easier to do this with a small team, low burn, and extreme focus" - Michael Siebel, Partner-YC.
Harsh Truth: 3 out of 5 startups would never find their PMF, and would fail.
How to determine if you have the Product/Market Fit?
People often say funnily, "Product-market Fit is like porn...when you see it, you just know."
In qualitative terms ...
You don't have it
"When the customers aren’t quite getting much value out of the product/service, word of mouth isn’t spreading, usage isn’t growing that fast (spikes in the months where you advertise), press reviews are kind of “blah”, the sales cycle takes too long, and most of the deals never close" - Marc Andreessen.
Most startups that have raised ($5-$10 Mn) Series A funding, assume they’ve got a product-market fit, just because they’ve raised funding. They're wrong, why do you think 70% of startups that raised Series A still fail, because the no.1 reason was lack of PMF!
You have it ...
On a high level, you've found product market fit when you can repeatably acquire customers for a lower cost (CAC) than what they are worth (LTV) to you - Elizabeth Yin
“You can always feel 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's 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.” - Marc Andreessen
When product-market fit occurs something magical happens, all of a sudden your customers become your salespeople i.e. they sell for you - Josh Porter.
What metrics to track and analyze, whether you've achieved the Product/Market Fit?
Let's delve into quantitative metrics of finding Product/Market Fit:
a. Product/Market Fit Metrics for SaaS Businesses
David Rusenko recommends that founders offering SaaS should track the below f metrics to evaluate Product/Market Fit:
Returning Usage (Day 1,3,7,30 retention): Look at people who sign up to your site/app and then look at the number of people who return back within 1,3,7,30 day/s. This should indicate whether things are working or aren't.
Net Promoter Score (NPS) of > 50 means you’re doing well.
Paying Customer Renewal Rates or Retention: Renewal rate is defined as the number of people who are eligible to renew and what percentage of people actually renewed is a lot better metric than churn. Churn rate (Churned customers / total customers) is a lot easier to measure, but it can be deceiving at times.
Growth Rate: Consistent growth of at least 15% in MRR and ARR is a strong indicator of Product/Market Fit. Irregular spikes, flattening, or declining growth are some of the red flags to watch for.
Market Share: How quickly are you gaining/losing the market share?
Customer Lifetime Value (CLV) vs. Customer Acquisition Costs (CAC): Ratio of 3X and a CAC payback of < 18 months is ideal for SaaS startups.
4 Greenlights for Product/Market Fit.
b. Product/Market Fit Survey
Rahul Vora in this article shares how he used a "simple survey" to assess whether his venture (Superhuman) has achieved the Product/Market Fit. Here's how you can replicate it:
Survey all your users with this simple question:
Q. How disappointed would you feel if you could no longer use our product/service?
Very disappointed
Somewhat disappointed
Not disappointed
The magic number that indicates the Product Market Fit is when > 40% of users respond as “very disappointed.” The companies that struggle on the same can barely even touch 40%.
51% of Slack users responded that they would be very disappointed without Slack, revealing that it had indeed attained product/market fit.
c. Retention and Customer Love
Rajan Anandan MD, Sequoia India recommends two simple methods to evaluate, whether you've achieved the product/market fit:
C1. Retention Curve
The retention curve is what percentage of your users keep coming back over a period of time while using your product/service.
Essentially, there are 3 kinds of retention curves, and you should plot this curve by day, week, or month, once you launch your product.
a. Declining Curve (dark grey line), let's say you’ve launched a consumer internet app on day 0, and every week your retention rate declines by 10%, which essentially means that by the end of 3rd month, all your initial users would have churned, then that's a declining curve, which indicates that you don’t have a product-market fit.
b. Flattening Curve (orange line) is actually good, although it kind of varies depending upon the category (HealthTech, EdTech, etc.,) but generically speaking if the retention curve flattens between 20%-40% that could be quite good.
c. Finally the best one is the Smiling Retention Curve (green line), which means that retention drops but then as time goes on you keep reactivating users, which indicates that you're getting close to your product-market fit.
C2. Do Customers Love You?
Net Promoter Score (NPS) is a metric that organizations use to measure customer loyalty toward their brand, product or service. NPS works by asking your customers a single question: "How likely are you to recommend our products/services to others?"
NPS = % Promoters (score 9-10) - % Detractors (score 0-6)
The magic score is = 70% or more, then you have an amazing product-market fit. But if the number declines to 40% or below, then you don’t have it. It's that simple!
What if you don't have a Product/Market Fit?
Encourage founders to continue to talk to customers, care about their customers, learn about their problems, and solve them effectively - Michael Siebel, Partner-YC.
Most founders seek ineffective shortcuts to achieve Product/Market Fit (PMF) i.e. hiring a ton of engineers, bringing on senior executives, running after key partnerships, etc. These shortcuts never work.
If you don't have Product/Market Fit, keep your burn low, and keep iterating fast with a lean team. You may get pressure to spend from your VCs (this usually happens), push back hard - Elizabeth Yin, Co-founder of Hustle Fund.
If you haven't reached Product/Market Fit, avoid growing your team above 10 people. Post-raising a seed round, most founders are tempted to grow the team. Smaller teams can adapt/iterate much quicker - Immad Akhund, Co-founder & CEO, Mercury.
Until you’ve found your product/market fit, do not scale up, do not grow the team, and don't drive for blistering/rapid growth, as this is the fastest way to kill your startup - Rajan Anandan, Sequoia India.
Finally some Dos & Don'ts for Pre-PMF Startups!
Resources:
Struggling to Raise Funding? Click here for expert assistance!
Register here to connect to our 1,500+ strategic investors.