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Product-Market Fit: what is this and why startup will not take off without it

Product-Market Fit: what is this and why startup will not take off without it

18 Oct 2019

It is hard to gain and easy to lose. It does not have a classic definition, however, you can easily determine if a product has it. Welcome — Product-Market Fit (PMF), one of the main metrics of startup successful work. In this article, we will figure out what PMF is about, why it is so important and how to achieve it.

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What is this?

The term was entered by investor and entrepreneur Mark Andressen in 2007. He is a co-founder of the IT venture fund called Andreessen Horowitz. In his opinion, product-market fit is the thing that determines the viability of a startup.

Marketer Sean Ellis, the one who “invented” growth hacking, considers product-market fit a key step in building a highly profitable company.

Dan Olsen, product management expert and author of Lean Product Playbook, understands PMF as the end result — when the startup finally created a product that has value for consumers. The product meets the real needs of customers and is in an advantageous position in comparison with analogues on the market.

Literally, product-market fit translates as “product-to-market fit.” If we delve into the theory, then PMF can be defined as the presence of a product that meets the needs of a particular market and has value for the consumer. PMF — customer awareness of product value: the consumer will be disappointed if your product suddenly disappears.

Achieving product compliance with the market is one of the most important goals for a startup. At the same time, usually no one knows how it can be achieved.

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How to achieve PMF: step-by-step manual

Product-market fit is achieved by creating a value proposition and cannot be born from the minor amendments in a product — for instance, changing a product design or colours, etc. Three PMF components — Client (you know who needs your product), Problem (you solve a client’s specific problem) and Solution (Client is ready to pay for this Solution).

Step №1 — studying a client. Segment the market to define and clearly understand your target client. In this case, saying “segment the market” we mean dividing the market into segments, consisting of similar clients with similar needs and behaviour. Personalize your target users — it will help you and your team to understand for whom you create a product.

Step №2 — define the client’s needs, moreover, the needs which are not satisfied yet, or are poorly satisfied.

Step №3 — defining the value proposition of your product: how you will solve the client’s felt need, what advantages in comparison to the competing products it has. The value proposition — one of the Stervalds Scheme components, a template of 9 blocks, and each of them is a key element of a business. This scheme is better to be done at the early stages of your project’s work, then you will have a structural representation about clients, your value proposition, partners, resources, expenses and income.

Step №4 — defining the functions, that your minimum viable product (MVP) will have.

Step №5 — creating an MVP prototype and launching the MVP. Creating a prototype is a necessity as you need to test your idea before launching the real product. After lauching the MVP, check out how users interact with it, study the reactions and ask to fill in the form about the product’s performance.

Step №6 — advertising a product. You endowed your product with unique characteristics, thanks to which the client is ready to choose your product. After this, by involving different means of advertising: PR, inbound marketing, SEO, contextual ads, social networks, referral programs, — you obtain customers.

Step №7 — studying the customer reaction (via Sean Ellis questionnaire, NPS — more details in the next block). Your goal is to ensure that users will not only become your regular customers but that will also recommend your product to their friends. So you will find out what percentage of customers you are fully suited to, and for who so far you are secondary. Based on this, you can modify your product to expand the segment of regular users.

Step №8 — developing a product. You keep developing your product so it will meet your customers’ needs and requirements. First of all, you should focus on the customer’s wishes on the account of the product quality, because the more it matches the market, the closer you are to PMF. Secondly, you should also focus on the usability of the product, because even if it is good, and users confirm it, but it isn’t convenient for some reason, the mass customer can pass by.

However, you should not stop at this step: user reactions should be studied regularly because competitors also do not stand still and they will create a better analogue of your product at some point. Thus, achieving PMF is a cyclical process consisting of creating/improving a certain value of a product, its scaling, attracting customers and studying their reaction.

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How to measure PMF

I know it when I see it — this statement suits perfectly when it comes to product-market fit measurement.

One of the reasons why it is hard to define PMF is that it does not present some specific metric, which you can track via Google Analytics or Yandex.Metric, in some time period, as it is, for instance, in Aha Moment, when the customer gets a profit from your product for the first time. PMF is the state of a product when customers are satisfied with it and recommend it to friends and the business itself. In our case, the startup is growing multiple times. Let’s figure out how to understand that you got to this state.

Product-market fit cannot be measured according to some specific rules However, there are some approaches to measure this metric.

1. Question the customers using Shaun Ellis’ method.

You need to create a questionnaire and communicate with the audience, who have used your product at least once, and you ask people about how they would feel if your product disappeared. If 40% say they will be disappointed, then you have reached PMF.
Experts advise dividing the respondents into several segments: those who have used the product at least once, those who have used the product for many times and those who got the core value — the main value of a product. According to experts, by doing so you can get the most accurate and detailed data about the product.

2. Study the market reaction to the product.

If consumers are satisfied with your product, sales are intensive and you simply don’t have enough specialists to meet the needs of the market — demand got so high and if leads are successfully converted into sales — most likely you have PMF.
At the same time, if you have many negative reviews, a lot of rejections on the landing pages, buzz marketing does not work, long sales cycle and leads do not turn into deals, that means that you are very far from PMF.

3. Defining Net Promoter Score (NPS) — index of product referrity, which shows how customers are willing to recommend it to their social environment.

To find out the NPS of your product, you need to ask your customers to rate on a scale from 0 to 10 the likelihood that they will recommend your product. Then you divide the received answers into 3 segments: the first — grades 9 and 10 — these are the “promoters” of your product; the second — grades 7–8 — are the neutrals that use your product, but are not its followers; third — 0–6 — are critics, they do not like the product and, most likely, they undermine your image in the market.

Based on the received data, you calculate NPS. It is equal to the difference in the percent of promoters and percent of critics; it can be both positive and negative. If it is greater than zero, it means that your customers praise and promote your brand, if it is negative, consumers criticize you.
Interestingly, different market segments have different average NPS. In Internet services and eCommerce, NPS is the highest, while in banking and auto insurance it is the lowest.

4. Studying the revenue metrics.

The simplest metric. Without going into detail — creating special questionnaires, defining NPS, analysing the market — you can simply look at the revenue curve. If the revenue is not just growing, but perform an exponential growth — then, most probably, they will achieve PMF. Now, it is important not to lose it.

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A key metric of matching the market

The way of achieving product-market fit is not calculated with formulas. However, there is a metric, which signifies how close is your startup to achieve PMF.

This is retention — a stage when a client has developed a habit to use a product or service, which your startup offers.

A growing customer base is a key indicator that your product has reached PMF. How to use this metric correctly?

First of all, you have to choose the correct time period for tracking: how often a client comes back? If your product is more orientated on a B2C market then the time period for retention tracking will be smaller (from one day to a week), if it is orientated on a B2B market then the time period will be bigger (from a few weeks to a few months).

Secondly, it is necessary to identify the reason: why does your client come back? Why are you valuable to him? Question yourself: which mechanisms will help me to bring back more users? How can I use them for a product advertising?

Knowing the cyclical nature of regular customers’ appeals to the product and their goals — why they do this — you can increase your customer base since satisfied users will subsequently recommend you to their friends, as well as shorten the customer return period.

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Example learning: the road to PMF

Actually, any successful project can be taken as an illustration of product-market fit. For example, one year after launch, Uber received one driver for every seven trips, and no marketing expenses were spent; Instagram received 25,000 signups on its first day; Dropbox moved from 5,000 to 75,000 registrations to the waitlist in one day after launching the beta video. we’ll look at a few real cases below. Basically, how companies achieved their PMF.

Touchstone Semiconductor: winning the clients’ loyalty

Touchstone Semiconductor is an American company — manufacturer of integral micro scheme components for industrial control, household appliances, medical appliances, telecommunications. This is an example of how they have achieved PMF.

As soon as the production began, the company set a goal to convey the information that the product already exists and can solve their specific problem to the maximum number of potential users . Google Adwords was chosen as a tool, and thanks to a well-tuned advertising campaign, traffic to the site increased significantly. Task №1 — informing potential customers — has been solved successfully.

The next step was the conversion of site visitors to product users. The latter could be obtained for free by placing an order on the site and providing some personal information about yourself as a user. The reaction of real users was more than positive. So the company received its first customers — Problem number 2 has also been solved.

As a result, over time, as the product met customers’ needs and solved their problem perfectly, it achieved PMF. Thanks to a competent product and marketing strategy of the company, the project continues to develop and maintain its PMF.

Airbnb: work with referrals

In order to achieve PMF, the famous Airbnb booking company has come up with a special referral program with a step-by-step analysis of users’ actions. The essence of the program was that all users who recommended the service received $25 in their account after paying for the reservation. The same amount was credited to the account of those who were invited to the application by the previous users.

As a result of the campaign, the number of users has grown multiple times.

Slack: personalized advertising campaigns

Slack is one of the leaders among apps for teamwork, also Trello and Basecamp competitor. It is successful at maintaining the PMF thanks to the segmentation of users. So, they are divided into 3 big groups:

1) those who use the app daily and know about all its functions;

2) those who use the app from time to time and use it in tow with other applications;

3) those who use other Slack-like applications regularly and do not see any significant functional differences between them.

The Slack team carries out a regular analysis of who uses the program, defining what functionality is lacking for regular customers. They offer updates and additional features to the first group, to the second and third groups — the benefits of the application in comparison with competitive programs.

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PMF pitfalls

Imagine the situation: customers like your product, they are ready to recommend it to friends and acquaintances, respectively, you have good retention and NPS. However, the expected significant growth of the project is not observed. You may have truly achieved PMF, but your market is not large enough for the product.

In order to avoid this, analyse your market at the very beginning of the project. Is it big enough? Won’t you find yourself in the situation of a dealer who opened a car sales office on a tiny island?

Another situation: you and the whole startup team has a great mood. You have invested in promoting your product and — cheers! — Traffic to landing pages has increased, potential customers are actively registering. Can you assume that you have almost achieved PMF? I hasten to disappoint you, but no. Traffic, the number of registrations, orders for free product samples are weak metrics for product-market fit. They do not guarantee that the user will eventually buy your product and become a regular customer or will recommend you to friends.

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Conclusion

Every startup strives to achieve product-market fit regardlessly whether it develops special methods for this or just perfectly analyses the market. Actually, the path to PMF begins with the latter: you study your market and your customers, their problems and then make your product in a way that it maximally corresponds to the market and solves customer problems.

PMF is not a metric and not a specific moment, it is a state when the market started to “like your product”. Product-market fit is the basis for hyper-growth of the product, therefore the main factors indicating that you have reached this state are significant growth in sales and, accordingly revenue, satisfied customers who are ready to use your product regularly.

18 Oct 2019

 

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