What is Product/Market Fit and why is it so important?
Team, Product or Market? What is more important for a startup to succeed?
In the startup ecosystem, almost every investor or entrepreneur has a different definition of the Product/Market Fit concept. The Product/Market Fit concept was created (in the post "The only thing that matters") by the legendary entrepreneur and investor Marc Andreessen, Co-Founder and General Partner of the venture capital firm Andreessen Horowitz.
Which is more important, the Product, the Team, or the Market? While all 3 are very important, Marc Andreessen thinks the following:
"For me, the Market is the most important factor in the success or failure of a startup. Why? The market must be satisfied, and the market will be satisfied, with the first minimum viable product that comes along. The product doesn't need to be great; it basically has to work."
"The market doesn't care how good the equipment is, as long as the equipment can produce that minimum viable product. In short, customers are knocking down your door to get the product; the main goal is to answer the phone and respond to all the emails from people who want to buy. And when you have a large market, it's very easy to upgrade equipment on the fly."
"Conversely, in a terrible market, you can have the best product in the world and absolutely incredible equipment, and it doesn't matter, you're going to fail."
What is Product/Market Fit?
In June 2007 Marc Andreessen defined it as: "Product/Market Fit means being in a good market with a product that can satisfy that market". A very 'simplified' definition of the true scope of this concept.
He further states: "It is easy to sense when you are not having Product/Market Fit: Customers are not getting value from the product, word of mouth is not spreading. Product usage isn't growing as fast, customer reviews are a bit 'bah', the sales cycle takes too long, and many sales never close."
"And you can always sense when the Product/Market Fit is happening: Customers are buying the product as fast as you are able to give it, or usage is growing as fast as you can add capacity to the servers. Customer money is piling up in your company's checking account. You're hiring sales and customer service people as fast as you can. The press is calling because they've heard about your company and want to talk to you about it. You start receiving Harvard Business School Entrepreneur of the Year awards. Investment bankers are watching your house. You could eat for free for a year at Buck's."
Most startups fail because they don't reach Product/Market Fit.
Marc Andreessen says: "I think the life of any startup can be divided into two parts: before Product/Market Fit (let's call it "BPMF") and after Product/Market Fit ("APMF").
"Do whatever it takes to reach the Product/Market Fit. Including changing people, rewriting your product, moving to a different market, telling customers no when you don't want to, telling customers yes when you don't want to, raising that fourth round of highly dilutive venture capital, whatever it takes."
A market that can no longer live without your product
Probably you are familiar with the term Lean Startup, which in recent years has become a fundamental methodology for those who want to become entrepreneurs.
While it is true that it was Eric Ries who with his book Lean Startup spread and further developed what this entrepreneurial method was, all this work is based on the previous work of Steve Blank and his development of Customer Development: a scientific approach to creating a company.
Steve Blank defines Product-Market Fit as: "The process in which you have found a group of customers and a market that reacts positively to your product: you solve a problem and you get paid for it".
When your customers sell for you
A complementary definition is found in Josh Porter's Principles of Product Design. Josh's idea is that the level of dedication and enthusiasm of your customers is an indicator of Product/Market Fit:
"Product/Market Fit is a funny term, but here's a concrete way to think about it. When people understand and use your product enough to recognize its value, it's a big win. But when they start sharing their positive experience with others, when you can replicate that experience with every new user, who brings in one of your existing users, then you have Product/Market Fit on your hands. And when this happens something magical happens. Suddenly, your customers become your salespeople.
The 3 pillars of Product/Market Fit
Therefore, Product Market Fit is the process of adjusting the product in the market, based on user feedback, and being able to evaluate its profitability. This process confirms and verifies that you have located a group of potential customers and that they react positively to your service/product. In other words, you offer something of interest and start selling it.
The Product/Market Fit is used in the Lean Startup methodology as the 'eureka' moment after a process of iteration from Plan A, to B, C, etc... until you find the plan that really works before running out of resources.
It is based on three concepts:
- A product that solves a problem.
- A customer who needs to solve that problem and is willing to pay for that product.
- A market open and wide enough to allow the entry and growth of your product.
The role of the team
Every member of the team has an important role to play in finding it. From the developers who build the product to those who make strategic decisions or interact with customers. When you understand customers in depth and from different perspectives, you receive insights that could potentially make a better product. Here, it is constant experimentation that will lead to the ideal product.
What is experimentation? It is the iterative process of trying new things based on insights with customers and evaluating their impact. It is a 4-phase process:
- Understand how the product is solving the problem: interview and survey customers, analyze usage rates, analyze purchase and repurchase rates, satisfaction analysis (e.g. NPS), heat maps, CLV.
- Define new hypotheses and new actions: functionalities, pitch, business models, distribution channels.
- Build and implement new actions.
- Customer testing and validation: A/B testing, analytics.
Product/Market Fit Stages
First there is a stage called Customer Discovery. This is when you are reflecting, testing, iterating until you find the right customer. Then, you move on to the Customer Validation stage, when the fit between customer and product takes place. At this point is when you start selling and everything you have devised is working and you start to really grow.
When this validation is achieved is when we reach the Product/Market Fit and the traction point that will take us to the transition phase to be able to scale. It is the proof that the product has fit and has been successfully introduced in the market.
On the other hand, you should keep in mind that Product Market Fit is not a static concept.
On the contrary, the revision of this process must be constant in order to be able to adapt to new market demands and not fall behind the competition.
The power of data: How to measure Product/Market Fit?
Another difficulty when dealing with Product Market Fit is how to measure and evaluate it.
There is no recipe for measuring product/market fit. Testing it can be a complicated task. There is no concrete and globally accepted metric that determines whether or not the objective has been achieved.
However, there are some common metrics that can help:
- Conversion and sales level:
In your validation phase, you will typically target a limited number of leads. And it is important that you get your first sales, your "early adopters".
If they are good leads, i.e. qualified, quality leads that somehow already know you, you should aim for a conversion rate of at least 10% to 25%.
- Survey: "Would it bother you if this product disappeared?
This survey, developed by Sean Ellis, is to determine whether a product has been successfully introduced to the market.
It is based on the question "What would be your degree of disappointment if this product ceased to exist tomorrow?".
In his book, Hacking Growth, Ellis lays out this question with four possible answers:
- Very disappointed
- Somewhat disappointed
- Not at all disappointed (it wasn't really that useful)
- N/A (I don't use it anymore)
If the proportion of the response "very disappointed" is more than 40%, then congratulations; that means you have reached the right Product/Market Fit product/market.
- Net Promoter Score Survey
This is a way of measuring customer satisfaction. It consists of asking your early adopters to rate on a scale of 0 to 10 the following question: "Would you recommend our product or service to a friend or colleague?
Surveys have the advantage that they are quick to implement and can provide you with your first data on your Product/Market Fit.
However, you should not rely entirely on surveys. They are a first indicator, but it is much safer to make decisions based on data from what people do than from what they say they would do.
In addition, surveys do not help you to measure the size of the market, which is a fundamental data when deciding on the potential of your business.
For that it is important to manage two other metrics:
- Engagement metrics:
You need to confirm that the customer is actually using your product or service.
- Retention and churn rates
Know if your customers repeat or leave (churn rate). For this you need to spend the necessary time and sample on a cohort basis.
Then you can refine the data for the most relevant segments of your market and deepen your knowledge of those who stay and those who leave through specific surveys.
In short, the Product Market Fit seeks first to reach a target market segment, aims to estimate the potential that the startup can reach and to achieve this it has a set of tests with which to assess whether it can move to a growth stage.
Making small changes on a continuous basis helps to understand where your product/service should go. Customers start to understand its value and will share their positive experience with other users. You will realize that things are happening naturally. You'll know you have your Product Market Fit. And when this happens, the magic begins.