Many startup founders and marketers are wondering:“Have we managed to find product-market fit yet?”To answer that question, you have to conduct a product-market fit analysis.In this article, I am going to show you how to do exactly that (and much more):
- Product-market fit definition,
- Product-market fit example,
- How to get to product-market fit, AND
ContentsChapter 1: What is Product-Market Fit?Chapter 2: How to Find Product-Market Fit?Chapter 3: Product-Market Fit AnalysisChapter 4: Example of Product-Market FitChapter 5: Last Thoughts
Chapter 1: What is Product-Market Fit?Finding a market for your product is difficult. As you will see later on, it’s one of the most exhausting stages in a startup’s life. More on that later. For now, let’s try to answer the question: What is product-market fit (or PMF)?The product-market fit concept was developed and coined by Andy Rachleff, president and CEO at Wealthfront. He invented the term to describe the investing style of Don Valentine, founder of Sequoia Venture Capital firm and pioneering investor.It is a common mistake among many startup founders to believe that they can attain growth, without getting to product-market fit. However, the growth phase comes after a startup finds product-market fit. It is without a doubt that getting to product-market fit is crucial for any startup business. According to Marc Andreessen, an influential American entrepreneur, who runs the infamous Venture Capital firm, Andreessen Horowitz:“The only thing that matters is getting to product-market fit.”Why does it matter so much though?Well, because finding product-market fit means that a startup business found the way to add value to a set of customers and is now ready to scale, to grow. According to Eric Ries, the product-market fit is:“The moment when a startup finally finds a widespread set of customers that resonate with its product.”So, I guess that, by now, you have realized two things:
- That product-market fit is one of the most critical stages in a startup’s life
- You can seek growth only after finding product-market fit
- Stage 1: The Customer Discovery at which you get ready to sell. In this stage you prepare your company for scalability, you create a roadmap and develop a high fidelity MVP, based on your customer’s feedback.
- Stage 2: The Customer Validation where you get out of the building. When you start “test selling.”
- Stage 3: The Customer Creation where you develop positioning and decide on your brand and product positioning.
- Stage 4: The Verification when you verify that what you’ve done so far, the customer feedback that you have, the positioning you’ve chosen and everything in between, is right.
Chapter 2: How to Find Product-Market Fit?That’s a tough question even if you are in a good market. Marc Andreessen says that the only thing that matters is getting to product-market fit. And, that’s true. If you take a look at Crunchbase, you will see that funding for startups has been increased significantly. In fact, here is the investing activity for just one week:Can you imagine that?A total of $8 Billion in fundings and 303 funding rounds announced. Not in one year; but, in one week. This shows us that the interest in startups is rising. Thus, the interest in product-market fit.Before I delve any further I want to be uber clear about something:There isn’t a secret recipe as to how to find PMF. Yes, there are ways to measure it, but there isn’t a one-fits-all solution here. So, all I am going to give you is some best practices that will help you get to PMF.
1) Find a good marketMany startups fail because they can’t find a good market for their product/service. In fact, according to CB Insights, this is the No.1 reason why startups fail:The research found that a staggering 42% of startups fail because there isn’t a market need. It is critical that you are sure about the target market you are going to launch your minimum viable product. Finding a customer segment that feels dependent on your product/service is essential. This is why you should treat your early adopters with respect and be willing to listen to what they have to say about your product. Some tools you can use to discover a great market are:
- Google Trends – Explore what the world is searching
- Jungle Scout – Search for profitable Amazon niches
- Twitter Search – Standard search on Twitter
- Product Frameworks – Product development frameworks and more
- Keyword Niche Finder – Discover profitable keywords for SEO and PPC
- Amazon Best Sellers – Bestsellers in the Kindle Store
- YouTube Statistics – Statistics on YouTube channels
2) Choose a good value propositionIn a previous article, I’ve stressed the importance of creating a solid value proposition. UVP / Unique Value Proposition is a clear statement that describes your product’s benefit to the customer while differentiating you from your competition.According to CXL, a good value proposition:“Explains how your product solves customers’ problems or improves their situation (relevancy), delivers specific benefits (quantified value), tells the ideal customer why they should buy from you and not from the competition (unique differentiation).”Now, many people will tell you that you need to that before launching a product. And, they are right. Others will tell you that you have to do it after you’ve managed to find product-market fit. Those are right too. You see, your value proposition might change as your business evolves. Because, you may have to pivot, for example, several times until you manage to find PMF. Here is an example of a clear value proposition by Unbounce:My take here is this: let your potential customers and your paying customers tell you what your product is. This way, you’ll be sure that you are on the right path.
3) Pay attention to your productI want to be clear about this:You can’t find a product-market fit if you don’t have an excellent product/service. No need to have great product sense (at least when you are an early stage), you just need to focus on making your early adopters happy. Now, a product idea or product concept is just the tip of the iceberg. Why? Because you need to validate your startup idea if you want to find PMF. No matter what, your product or minimum viable product (when you are just starting) has to be awesome.
4) Choose a tested business modelWhy everyone nowadays is trying to reinvent the wheel? When a business model is tested by someone else, you can try to replicate it. No need to hustle about it. Of course, reverse engineering is not easy. However, you can research your business model. That will save you a lot of time and energy.For example, let’s assume that you want to build a new productized service — a design-as-a-service startup like ManyPixels:All you have to do is find a list of productized services examples and see how other businesses have structured their business model.
5) Pay attention to the network effect you’ve createdThis one is huge. The network effect is one of the four defensibilities according to the Venture Capital firm NFX, which are:
- Network Effects
Chapter 3: Product-Market Fit AnalysisIn an interview he gave to Stanford Business School, Steve Huffman, Co-Founder, and CEO at Reddit said that:“At Reddit, we were growing; despite not knowing anything about our business, knowing a little about our users, not really knowing how to run a business, not having a ton of product sense, being down a lot, we were growing.”So, when:
- The demand for your products and services is excessively high,
- When your user base is growing,
- When you have people who are engaged with your products.
1) Net Promoter ScoreOne of the best ways to measure product-market fit is by measuring your Net Promoter Score. So, what is the Net Promoter Score (NPS)?It is a metric that measures customer satisfaction and helps you understand how close you close you are in satisfying your customers or users. To calculate your NPS, you have to use the answers to a very critical question, using a 0-10 scale:How likely is that you would recommend [product] to your a friend or colleague?The responses can be grouped as follows:
- Promoters (score 9-10) – these are people who are happy with your products and are willing to refer you to others and thus fuel growth for your business
- Passives (score 7-8) – these are people who are neutral and would use another product if there was a competitive advantage like a lower price
- Detractors (score 0-6) – these are people who are unhappy with your business and can harm your brand’s reputation
- Very disappointed
- Somewhat disappointed
- Not disappointed
- I no longer use [product]
2) Retention CurveAnother way to measure your product-market fit is by taking a look at your Retention Curve. What is a Retention Curve?According to Amplitude: “It’s a line graph depicting the average percentage of active users for each day within a specified timeframe.”The following example, again by Amplitude, shows us how N-Day Retention for Products A and B shows us when a product finds product-market fit.This means that measuring your product retention and creating a graph like this one, can help you determine whether or not you’ve found product-market fit. Why? Well, because if users keep coming back to use the product, then it means that they find value in it and if they were to answer the question:How would you feel if you could no longer use [product]?They would answer: very disappointed.Thus, taking a look at your retention curve is a great way to measure product-market fit.
3) Product Usage IntervalThe product usage interval is the frequency (e.g., daily, weekly or monthly) with which you expect people to use your product.Why is this important? Because, if people keep coming back every day to use your product, it means that they are dependent on it. Roughly speaking, the more often users are keep coming back to use your product, the more likely they are going to stick with it for a more extended period. Here is how a retention curve on a week-by-week basis looks like: When you measure your retention on a week-by-week basis, you expect your users to come back during:
- Day 1 – 7
- Day 8 – 14
- Day 15 -21