TLDR | Actionable Insights for entrepreneurs and business people
- Product-market fit (PMF) goes way beyond finding a suitable product for a market.
- To know whether you’ve achieved PMF, “everyone” wants to use your product, you’d have so much money in your bank account and there will be thousands of press vans camping in front of your house.
- You can apply a methodical approach to achieving PMF based on value hypothesis and customer feedback.
- It is an iterative process.
Venture capitalists and angel investors constantly preach to startup founders about the importance of finding or having “product-market fit” for their products. On the surface, the word “product-market fit” is a compound word that can be interpreted to mean having a product suited for a particular business market. Well, in the world of technology start-ups, it connotes something completely different. As it is an English word, many people will be tempted to piece apart each component and apply reason.
In this post, we’ll look at how experts define product market fit and offer practical advice on how to get it.
What Product-Market Fit Looks Like
“Product-market fit, according to startup coach and investor Marc Andreessen, is being in a good market with a product that can satisfy that market.” When an entrepreneur identifies a need in the market and builds a solution that customers want to buy, that’s product-market fit.” Well, in case you are asking yourself, “So how is that different from my lexical interpretation of the word?” The answer lies in understanding what should be happening when a business has achieved product market fit.
According to Marc, you should notice the following once you have figured out your product market fit,
What Product Market Fit Looks Like | Marc Andreessen
- Customers are quickly adopting and purchasing the goods.
- Usage is rapidly increasing, needing infrastructure expansion.
- Positive cash flow is building up in the company’s accounts.
- The company is hiring more people, especially in sales and customer service.
- The media and reporters are eager for interviews about your hot new product.
- Investment bankers are showing interest, which could indicate a high valuation.
Marc also makes a lighthearted remark about getting loads of “rich people” privileges like free meals.
The problem is that many people believe they have found their product market fit after they make their first sale.
Symptoms of a Lack of Product-Market Fit:
The inverse of the aforementioned points might therefore look like the following:
- Customers aren’t getting enough value out of the product.
- The absence of spreading word of mouth indicates a lack of enthusiasm or satisfaction.
- Usage is not significantly increasing.
- The press reaction has been mediocre to unimpressive.
- The sales cycle is extended, and many deals do not close.
Components of Product Market Fit
While it appears to be an elusive idea, venture experts have devised a practical approach to it. According to Tren Griffin, building a successful firm requires a three-legged stool: people, markets, and unique goods.
“When a great team meets a lousy market, market wins. When a lousy team meets a great market, market wins. When a great team meets a great market, something special happens.” – Andy Radcliff.
Although having the right people and the right product matters, the market matters the most. In my books, the hierarchy will be Market > People > Unique product. To cut a long story short, even if you have a fantastic product and a great management team, if the market isn’t ready, it’s probably going to be a lost cause.
So, should we wait for the market to catch up? No. Getting your product in front of customers will improve your understanding of market needs and pain points. Sometimes, you won’t achieve product-market fit until other customer problems are solved. For example, without the internet, social media will still be an idea. This goes to show that the process of finding PMF is iterative and you’d pivot a couple of times until you finally achieve it.
How to Achieve Product Market Fit
- Draft your value hypothesis
- Draft your value proposition
- Enter the Build-measure-learn loop
Value Hypothesis
Value hypothesis is based on the school of thought that for a product or service to be successful, it must deliver significant value to its target customers. It is a set of assumptions and predictions regarding the specific value that a product or service will provide to its targeted clients. That is, you are making educated guesses about how your customers will react to a new product or adjustments to an existing product. It serves as a methodical and iterative approach to product development.
Value Proposition
Value proposition expresses the unique benefits and advantages that your product offers to clients. It captures why customers should choose your product over others.
Build-Measure-Learn Loop
This has three components:
“Build”, which explains what a Minimum Viable Product (MVP) is and its importance, “Measure”, which explains the process of collecting data and feedback from users of the MVP and “Understand”, which details how to analyze feedback data to unlock insights into customer preferences, pain points, and the feasibility of the product.
Startups must obtain feedback quickly, analyze data, and make appropriate changes to their business plans and their products. The ability to learn from customers faster than competitors provides an edge. It’s not about shipping features frequently, but going through the build-measure-learn loop faster than your competition. Startups can outperform larger, more established companies by simply being more receptive to client feedback. According to Andy Rachleff, “First to market seldom matters. Rather, first to product/market fit is almost always the long-term winner.”
Lenny Rachitsky | Product Market Fit Milestones
Lenny offers a mental model for thinking about the concept
Milestone #1: One person wants your product
Milestone #2: Many people want your product
Milestone #3: Many people continue to use your product
Milestone #4: You can acquire new users efficiently
Milestone #5: You make money from people using your product
Milestone #6: You make a profit from people using your product
Milestone #7: You can continue to make a profit while acquiring new users efficiently
Milestones 1 and 2 Indicators
There are several indicators that you’ve hit milestones 1 and 2.
- People are willing and able to pay for your product.
- The cost of a sale is much lower than the overall sale.
- High customer acquisition without corresponding acquisition costs. Acquisition through other factors like word of mouth, virality, and customer advocacy instead of customer marketing.
Milestone 4 Indicators
Key indicators here would be:
- Customer retention
- Customer lifetime value
- Customer attrition rate
By the time you hit milestone 7, who knows whether you’ll be getting free meals every time you walk into a restaurant?
To conclude this article, here is a word of caution from Tren Griffen because most founders start to scale long before they achieve product-market fit.
One of the most common ways that startups die is “premature scaling,” a term first used by Steve Blank. A business is “scaling prematurely” if it is spending significant amounts of money on growth before it has discovered and developed PMF – Tren Griffen
I highly recommend the following articles as additional readings on selecting KPIs, understanding the build-measure-feedback loop, and crafting your value proposition:
- How to Create a Simple And Effective Pitch Deck
- The Lean StartUp | Key Lessons Pt. One
- The Lean Startup Summary | Chapters 9 and 10
- The Lean Startup by Eric Ries | Summary – Part 3
- How to Market Your Instagram Business | Virality
- The Lean Startup | Summary Chapters 5 and 6
- 10 Common Mistakes People Make Validating Their Business Ideas
- Why is Customer Satisfaction Important?
- The Making of a Successful Marketing Plan: From Brand Awareness to Sales
