What does product-market fit mean?
It depends who you ask. Some discuss it as if it is a discreet endpoint. Others give a more theoretical description that suggests it’s a function of many things.
Andy Rachleff, who first introduced the term, describes it as:
“A value hypothesis is an attempt to articulate the key assumption that underlies why a customer is likely to use your product. Identifying a compelling value hypothesis is what I call finding product-market fit. A value hypothesis identifies the features you need to build, the audience that’s likely to care, and the business model required to entice a customer to buy your product.”
A more succinct definition comes from Marc Andreessen in his famous post The only thing that matters:
“Product/market fit means being in a good market with a product that can satisfy that market.“
The first definition verges on the conceptual and doesn’t allow for instant comprehension. And although the second is more practical, it misses out on some important subtleties.
I propose a more nuanced definition that acknowledges that product-market fit is not a fixed destination, but a state your startup can flow in and out of.
Product-market fit is a state where you create value (product) for a sufficient number of customers that care about that value (market) with an effective means of getting it into their hands (distribution).
It’s a state that relies on an optimal relationship between the value your product creates, the efficacy of your distribution, and the size and dynamics of your potential market. All three elements are in flux, because of things you can control (internal growth efforts) and things you can’t (competition, new technology, consumer preferences).
Skype is a great example of a company that was temporarily in a state of product-market fit. It offered a cheap way to talk to friends online via its desktop. However, it failed to keep one eye on the market, and once mobile data became cheap, its unique value deteriorated, and it moved out of product-market fit.
The best way to think about product-market fit 'states' is in reference to the size of the market. The larger the number of customers your product creates value for, the 'larger' the state of product-market fit your company is in.
It's harder to achieve later-states product-market fit, as a larger pool of potential customers will have more diverse needs and tastes. This makes it more difficult to successfully create value for them all. I advise focusing on your initial market before scaling up, concentrating on building an amazing product and finding effective distribution channels for this niche. Over time, you'll start to evolve the product to bring in a larger audience.
Legal marketplace Lexoo (a Forward portfolio company) began targeting SMEs. Only after it successfully achieved product-market fit with this subset did it expand into targeting enterprise customers.
Fundamentals of product-market fit.
- Think about your market in the right way.
Your market is not a statistic pulled from an industry report, nor is it a subset of the population categorised by the year they were born. It’s a set of customers who have specific needs and wants. Your job is to understand those needs, build a product/service that meets them and figure out how to get it into their hands.
Sam Altman nicely frames this in the following post:
"In the first few weeks of a startup’s life, the founders really need to figure out what they’re doing and why. Then they need to build a product some users really love. Only after that they should focus on growth above all else.”
- Moving from advocates to mass market will be incremental.
You’ll go through different states of product-market fit on your journey to building a big business. In the beginning, you will often stutter through these states. Your early product might be useful to a few eager people. Then, as it gets more polished and delivers more value, you’ll move into larger states of product-market fit.
- External forces can push you in and out product-market fit.
External forces can push you into a larger market. Airbnb spent time iterating its product but benefited when the global recession came. Suddenly, many people were more willing to rent out their rooms to strangers. Equally, forces can move you out into smaller states of product-market fit. In this scenario, competitors may move into your market or offer a better product, forcing you to adapt or die.
- High growth doesn’t always equal product-market fit.
When you are in product-market fit for a large market, you’ll begin to feel the pull of the market. You’ll beat MoM growth targets, or see unusually high word-of-mouth referral. High growth, however, doesn’t mean sustainable growth. You may have built a product that is great at acquiring users, but is terrible at keeping them. In this case, topline growth isn’t a sufficient indicator of your company's success, nor is it a sufficient sign you’re in a product-market fit state.
Marc Andreessen makes a great observation about when in a large product-market fit state:
"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.
“And you can always feel product/market fit when it's 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.”
- Revenue indicates you’re in a state of product-market fit.
You don’t need to have revenue to have product-market fit, but 90% of companies do. The 10% exceptions are where there is an obvious way to monetise your product in the long term. Facebook and Google had product-market fit knowing they could monetise attention in the future.
These types of companies tend to have cheap distribution channels (like virality), Alternatively, they can raise lots of money because of the strength of their growth and the type of value they create. For example, 'search intent' for Google easily leads to advertising.
Going from ideas to product-market fit.
Some say that every startup starts with an idea. It would be better to say that every startup starts off with a market. Once you’ve found a market, you can get to work finding the idea that the market needs. Here’s a step-by-step guide for thinking about the market, building a product and getting into a good initial state of product-market fit.
Your market can make or break your startup.
- Think market before product.
The best way for a founder to start is to identify the market need and size before building any product. A large market where you can see a need will make it easier to identify the product you need to build. Go the other way and you’re guessing on the market side and introducing additional risk.
Look at it this way. If you build a great product that no-one wants, your startup dies. If you build an average product in a market where everyone wants a solution, you may still create a great business.
- Look for large markets with incumbents.
Going after a large existing market is recommended if you want to raise venture capital. VC’s business model works on getting big exits. And big exits only happen in big markets. Large markets are also better for you as they are often full of older incumbents ripe to be disrupted. It’s easier to pick off a niche and start building some momentum. Let’s take Monzo as an example. Banking is already a huge market and there are billions of people with smartphones and many older incumbents with old technology.
The same is true with Google. There were already search engines on the market before Google came along. They just came along with a better product that gave better search results and a radically different search experience.
From a desk-based research perspective, you should do a top-down and bottom-up analysis of market size.
- If you go for a new market, manage your runway carefully.
There are some startups that try to create new markets. While there are examples of successful companies doing this, you’re open to much more risk of your startup failing. Firstly, timing. If you build the best VR game, you have a limited pool of people to target. Your success will rely on deeper penetration of the technology. The market may be too small and may stay too small before you can be self-sustaining.
In a new market, you have to define a product from scratch without any other similar products you can benchmark against. This means more product iterations and time spent until you reach product-market fit.
Andrew Chen talks about this and the concept of Time To Product-Market Fit. This is how he defines it:
"Let’s define a new term: TTPMF – the “Time to Product/Market Fit. You want to get TTPMF down to the point where you can achieve it, scale up the business enough on traction to either reach profitability or to raise your next round. If your plan for TTPMF exceeds your funding runway, you’re already dead.”
All of this means you need to manage your money more carefully and/or make a very compelling case to VCs that the future is not that far away.
Find your core user.
- Learn as much as you can about current user behaviours to understand current frustrations and needs.
Once you have a market size, you need to understand the experience of people or customers. The easiest way to do this is to observe and interview potential customers. The more pain or friction in the current process, the stronger the pull of the market is for a product.
Top tip: Try to solve the problem yourself using all the competitors and alternatives. Deliveroo’s competitors are not only Just Eat, but also cooking at home.
- Define early adopters and make a product they’ll love.
When you start on a product, you should strive for a subset of your market to be disappointed if your product didn’t exist. You want some people to love what you’ve created rather than a lot of people liking your product.
Making something people find indispensable is hard. If you do this with a tightly defined set of users, you’ve built something with a good chance of finding product-market fit in a wider market. This is a far better route than a product a lot of people feel is just OK, then trying to improve things. Why? Because the needs of the larger group will be more diverse. Your product will end up doing lots of different things to a mediocre level as opposed to creating significant value in a core area. As a result, users will be indifferent and you’ll be unable to outcompete other offerings.
As Paul Graham says in this famous post:
"Ideally you want to make large numbers of users love you, but you can't expect to hit that right away. Initially, you have to choose between satisfying all the needs of a subset of potential users, or satisfying a subset of the needs of all potential users. Take the first. It's easier to expand user-wise than satisfaction-wise. And perhaps more importantly, it's harder to lie to yourself. If you think you're 85% of the way to a great product, how do you know it's not 70%? Or 10%? Whereas it's easy to know how many users you have.”
Stay focused and learn while building.
- Use design thinking and lean startup principles to develop your startup idea.
Design thinking places emphasis on user research and learning about your customers, then using rapid prototyping to test ideas quickly before you start building something. Lean startup methodology focuses on launching something quickly and thinking of your startup as experiments where you search for a product-market fit state. The key takeaways are:
- Use the Lean Canvas to identify your assumptions.
- Test your assumptions around the problem, customers, and existing solutions through user interviews and observations.
- Test your unique value proposition and solution while trying to create as little product as possible.
- Use prototypes or concierge service to start seeing whether your product ideas resonate with your target customers.
- Start building your product once you have early signs of positive customer feedback.
- Keep learning from your users through both in-person interviews and capturing analytics data on your product.
- Test distribution channels early alongside product development.
- Stay focused on your core value proposition.
In the early stages, it’s important you stay focussed on refining your product's core value proposition. Don’t just throw out plenty of features and hope more of them will make people like your product. Adding more features only adds an additional layer of complexity that obscures your ability to meet the core need. It also confuses users about the purpose of the product.
In general, people will either love or leave your product within the first or second use, so adding many new features won’t help. Instead, spend time polishing and simplifying their first experience so they understand the value the product offers.
Top tip: Consider whether your product is naturally a painkiller, vitamin or candy.
What gets measured gets managed.
- Use the PMFit survey to how what you can improve
Sean Ellis created the product-market fit survey. The key question is:
How would you feel if you could no longer use [product]?
- Very disappointed.
- Somewhat disappointed.
- Not disappointed (it isn’t that useful).
- N/A – I no longer use [product].
What Ellis discovered was that if more than 40% reply “very disappointed”, you’re in a state of product-market fit for those types of users. In another article, Superhuman CEO Rahul Vohra wrote about how he used the PM Fit survey to drive product improvements and change the proportion of “very disappointed" from 22% to more than 51%. He managed to move into a state of product-market fit.
Ideally, you should get 30-100 responses to this survey to be confident of the score.
Top tip: Make sure you include open-ended questions. This is often where you get the insight to really help prioritise your road map.
- Continue to speak to customers in person and observe them using your product.
While I love surveys for quantitative numbers, you should also reach out to customers and speak to them in person. Why? Firstly, the people who don’t use your product are less likely to respond to the survey. Secondly, you can uncover a richer set of market needs by digging deeper into the reasons why they love your product or don’t. These deeper needs are often emotional needs that people will rarely offer in a survey.
Iterate, iterate, iterate.
- Don’t be afraid to change everything about your product.
During this phase of searching for product-market fit, don’t be afraid to make big product changes if you don’t get the response you’re hoping for. I meet many founders who stick to their initial product idea and won’t make the necessary changes based on what they learn from their customers.
Those changes might be in the core value proposition, the onboarding experience and the market you are going after. It should all be on the table.
Top tip: Continually refer to your Lean Canvas and identify the assumptions you’ve now proved or disproved.
- Double down on things people love about your product as well as new features they may need.
If you have customers highly or somewhat disappointed in your product, pay attention to what they love about your product and double down on it. If they love how quick the product is compared to competitors, make things even faster. This is how you build up a base of customers that rave about your product to others and accelerate growth.
Top tip: A lot of founders I see fail to do this. They always want to add a new feature or move on to the next shiny thing. Your customers came to you because you helped them do something better than before. You should get this to a place where they are raving about this to their friends.
- Continually test your distribution channels while iterating on your product.
Ideally, in parallel with product development, you should think about how your product will be distributed. The fastest-growing startups have found distribution channels baked into the product and not reliant on paid marketing.