Product Market Fit: Why It Matters, and How to Achieve It?

Before, we embark upon the why part ... let's first understand


What is Product Market Fit?


According to wikipedia, Product Market Fit (aka product/market fit or PMF) is the degree to which a product satisfies strong market demand. Product/market fit has been identified as a first step to building a successful venture in which the company meets early adopters, gathers feedback, and gauges their interest in its product.


Product Market Fit Definition, in brief!

The apt description for the product/market fit is covered in this article, which paraphrases "Determine Your Value Hypothesis Then Your Growth Hypothesis" i.e.

  • You must first develop and test a value hypothesis, which is "why would your target user use your product, and will they pay for it?"

  • And, once when your value hypothesis is proven, only then should you move on to the growth hypothesis, which is about "how you can scale the number of customers attracted to your product/service?"

Identifying a compelling value hypothesis is what it terms as finding the product/market fit. A value hypothesis addresses both the features and business model required to entice a customer to buy your product.



So, Why Should Product/Market Fit Really Matter?


Because, not getting to the Product/Market Fit (PMF) is the most common reason, why startups fail? Many entrepreneurs build amazing products/services, which nobody or very few people want i.e. there's no market for it. You must've heard/read it several times, build products/services which are "must to have" i.e. aspirin instead of "nice to have" i.e. vitamin.

In fact, finding the Product/Market Fit is the hardest challenge for all early-stage startups, and most of them fail because they couldn't get to their PMF. Yet, it's disappointing to see that 90% of early-stage founders scout for fundraising, despite not getting to their PMF. And, thus never get funded!


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 actually kill your startup - Rajan Anandan, Sequoia India.

I would add on to say, do not raise funding until you find the product/market fit. Failure with bootstrapped funds is always a better option than to fail using investors' money!


Interestingly, many startups that have raised their $5 Mn - $10 Mn Series A funding, assume that just because they’ve raised funding, they’ve got a product-market fit. Not necessarily, why do you think 70% of startups that raised Series A still fail, because of lack of PMF!


In 1999, I built a failed dot com. Raised from F&F. Scaled before product-market fit. Never did find it. Raised $3 M, then $20 M on $100 M valuation. Hired dozens of high- priced executives, fancy space in LA, even made an acquisition. Don't be like me. - Micah Rosenbloom

So, if you're an early-stage startup then product/market fit should be your only focus in your journey from idea to growth stage, in fact, do it quite early if you could. It's not without any reason that Marc Andreessen stated, "Product/Market Fit is the only thing that matters!"


"The most successful technology companies (i.e. Facebook, LinkedIn, Twitter, etc.,) first got their product/market fit right before stepping on the accelerator."



How do you find out if you've achieved the Product/Market Fit?


David Rusenko, the founder of Weebly has succinctly illustrated his own journey of finding the product-market fit in this video. Using that as a case study, I'm highlighting both the scenarios i.e. when the PMF isn't happening and when it does.


a. You can always feel when the product/market fit isn’t happening.

"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" - Marc Andreessen.


So, just to give you an idea of how long it can take to achieve the PMF. Weebly despite 18 months in its journey still didn't have PMF, and the reason they kept going is that they'd raised $650K Series A funding in April-2007 on YC's demo day. How many startups can really sustain for that much time period?


b. Likewise, you can always feel when product/market fit is indeed happening!

“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


"Product/market fit is said to be concrete when people (users) understand and use your product/service enough to recognize its value. Subsequently, they begin to share their positive experience with others, and when you replicate the same experience with every new user, who your existing users referred, then we can say that you've product-market fit on your hands. And, 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.



How do I know, whether I've achieved Product/Market Fit?


David Rusenko recommends that all founders should really be focusing and tracking the below 3 metrics to evaluate product-market fit:

  1. 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.

  2. Net Promoter Score or NPS (some say anything > 40 is good enough but I think it should be > 50, it means you’re doing really well).

  3. Paying Customer Renewal Rates or Retention: Renewal rate is defined as the number of people who are eligible to renew and what percentage of those 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.


Another great way of finding PMF has been depicted in the below picture termed as "3 Axis of PMF" from Sequoia Surge program.


3 Axis of Finding PMF

Also, here's an article by Rahul Vora, on how he used a "simple metric" to indicate Superhuman's Product Market Fit.


Survey all your users with a simple question:


Q. How would you feel if you could no longer use Superhuman?

  • Very disappointed

  • Somewhat disappointed

  • Not disappointed

According to Sean Ellis (Growth hacker at Dropbox, Eventbrite), the magic number is 40%. Companies that struggled to find growth almost always had <40% of users respond as “very disappointed,” whereas companies with strong traction almost always exceeded that threshold. 51% of Slack users responded that they would be very disappointed without Slack, revealing that it had indeed attained product/market fit.


Rajan Anandan MD, Sequoia India recommends two simple methods to evaluate, whether you've achieved the product/market fit:


1. Retention Curve

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 your number of old users reaches 0, then that's a declining curve, which hints 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.


2. Do Customers Care for You?

This is in fact a complementary question to NPS and/or retention i.e. "what percentage of customers would be deeply disappointed if they couldn't use your product/service?"

The magic number to that is anything above 40% (I agree with David that it should be > 50% instead.) If this number exceeds to 80%, then you’ve an amazing product-market fit. But if the number declines to 20% or below, then you don’t have it. It's that simple.



Ways to increase the odds of finding Product/Market Fit?


Let's say you don't have a product/market fit or you’re an pre-revenue company and you want to make sure that you launch and quickly get to your product/market fit. Then, here are a few things you should be doing:


1. Who is your target customer?

Very clearly define the user persona(s). Being deeply and clearly aware of who’s going to be the user of your product/service that you're building, is very important. By creating user persona/s, you inculcate a very deep understanding of users and their need/s.


2. Why will your customers love you?

What is that core user need that you're going to meet, and what differentiates you from the competition? Why will they use and buy your product/service, and most importantly how are you going to delight your customers?


3. And, why will your customers keep coming back to you?

What factors will drive retention? Now you may be able to delight your users and create a wow moment once but why will they keep coming back to you?


It takes time to get to your product-market fit, there's no secret sauce other than "talking to your customers," absorbing facts, and really doing something about it.



What, if you don't have a Product/Market Fit?


Talk to your users every single day, and conduct the user/customer interviews the right way.

Use these interviews to gather real insights.


Talk about their problems, instead of your collected idea. Get a thorough understanding of what are they struggling with, their problems, or core needs. Here's the thing, listen to their problems but never to their solutions because often they generally aren't that great.


Ask about facts, ask about how are they solving this problem/pain, in a subjective way. Try to understand their current behavior i.e. what kind of product/service do they use today or how are they solving this problem? Evaluate, how can you help them get it done faster or better this is really important.


Lastly, truly listen, when talking to your users you should be doing very little of the talking, instead, they should be doing most of their talking.


These actions will actually help you to think through, how you can build a 10X better solution? Then, start generating data on what's working and what's not i.e. are you really delivering core value to those users asap or not, are they coming back and using the product/service, are they selling for you, so on and so forth. Do these and you’ll eventually get to product/market fit!


According to Elizabeth Yin, the co-founder of Hustle Fund, 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!


"If you haven't reached Product/Market Fit, avoid growing your team above 10 people. With a huge seed round, you may be tempted to grow the team. But small teams can adapt/iterate much quicker. At Bank Mercury, we raised a $6 Mn seed, yet didn’t grow above 9 till we launched 1.5 years later." - Immad Akhund, Co-founder & CEO, Mercury.


 

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