What is Product-Market fit? How to find one?
What is Product-Market fit? How to find one?
Wisdom from Marc Andreessen, Andy Rachleff, Steve Blank, Brian Balfour on what matters the most for a startup
The term Product/Market fit is quite popular in the startup world. You will often find founders, PMs, and product teams burning their midnight oil to get the product/market fit right.
In this article, we will explore this popular subject - Product/Market fit.
Note - As we advance, I will refer to Product/Market fit as “PMF” for the rest of the article just for my convenience😊
This is what we will cover -
What is PMF
An example of PMF
A tale-tell sign of lack of PMF
How to achieve PMF
How to measure PMF
Myths about PMF
What PMF is not
Premature scaling
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The PMF concept was originally developed and named by Andy Rachleff. He is currently the CEO and co-founder of Wealthfront and is a co-founder of Benchmark Capital. Here he is. The core of Rachleff’s idea for PMF was based on his analysis of the investing style of the pioneering venture capitalist and Sequoia founder Don Valentine.
What is Product-Market Fit
Product/market fit means being in a good market with a product that can satisfy that market.
- Marc Andreessen
There are a couple of important elements in Marc Andreessen’s definition -
PMF is all about being in a substantial(big) and growing market. Product success begins with the market. Unless there is a substantial market, no product will ever be successful.
“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 Rachleff
PMF is achieved when a product satisfies the needs of the market
“If you address a market that really wants your product — if the dogs are eating the dog food — then you can screw up almost everything in the company and you will succeed. Conversely, if you’re really good at execution but the dogs don’t want to eat the dog food, you have no chance of winning.”
- Andy Rachleff
The following diagram explains the definition pretty well - Your market is all about your target customers and their needs. And then you have your product - its user experience, feature sets, and value propositions. When your product's value propositions perfectly align with and caters to the market's need, we can say that it has achieved the PMF.
Source: medium
In one of my earlier posts, I discussed how to develop PMF hypotheses. Here is a recap of different elements of PMF hypotheses along with the Product - Market alignment
Credit - brianbalfour.com
Product-Market Fit Example
Let’s take the example of Netflix.
Before Netflix, people wished to get rid of the late fees they paid at DVD rental stores in earlier times. Netflix proved to be a product-market fit by mailing the DVDs to the users on a subscription basis and keeping the DVDs without any time constraints.
With the DVD trend fading, Netflix again pivoted the business model by shifting to the subscription-based model for the streaming service, thus providing a better and cheaper way for entertainment. Netflix modified the business model several times to meet the customers’ changing demand, setting a perfect example of how a product-market fit should be achieved.
See more examples here.
A tale-tell sign of lack of Product/Market fit -
Qualitatively -
One great characteristic of PMF is that it gives away certain indications when a product has achieved PMF(or not). Companies that don’t find a PMF typically show the following symptoms:
Customers who don’t understand the value of the product;
An insignificant number of sales;
No repeat sales;
No word of mouth;
Too-long sales cycles;
Difficulty in getting the word out and attracting media attention, and so on.
Contrary to that, this is what it feels like when you have the PMF.
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. Reporters are calling because they've heard about your hot new thing and they want to talk to you about it. You start getting entrepreneur of the year awards from Harvard Business School. Investment bankers are staking out your house. You could eat free for a year at Buck's.
- Marc Andreessen
Quantitatively -
You can also figure out the PMF from the retention curve. A company that has achieved PMF often experience steady customer retention.
Credits - brianbalfour.com
How to achieve Product-Market fit?
In The Lean Startup, Eric Ries speaks about the leap of faith hypothesis (the idea behind any product), which has two components - value hypothesis and growth hypothesis.
The value hypothesis defines the what, the who, and the how - what will you build, who is desperate for it, and what business model will you use to deliver it?
The growth hypothesis defines how the company will achieve growth.
The PMF requires startups to continuously iterate on their market and value hypotheses until perfect alignment is achieved. And the process is mostly based on discovery and experimentation. There is no value in building something that people don’t want to buy.
Andreessen argues that “The product doesn’t need to be great; it just has to basically work. And, the market doesn’t care how good the team is, as long as the team can produce that viable product.” If nearly everyone at the business is focused on trying to fulfill product demand instead of “siting around” trying to dream up new feature to create demand, there is almost certainly PMF — but the reverse is not the case.
Andreessen says that the life of any startup can be divided into two parts: before product/market fit (what he calls BPMF) and after product/market fit (APMF):
“When you are BPMF, focus obsessively on getting to product/market fit. Do whatever is required to get to product/market fit. Including changing out people, rewriting your product, moving into 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 is required. When you get right down to it, you can ignore almost everything else. I’m not suggesting that you do ignore everything else — just that judging from what I’ve seen in successful startups, you can.
Here is the famous startup curve depicting the happiness quotient of customers. Most startups find an initial spike because of the enthusiasm from the innovators or early adopters. Then the reality sets in, and the happiness quotient takes a deep dive until the startups start to experiment and pivot. The PMF is the inflection point beyond which startups can scale exponentially.
How to measure Product-Market fit?
Rachleff suggests Net Promoter Score (NPS) as a great tool to predict the magnitude of customer love for someone’s product/service — ideally a score of 40 or higher “to know you’re on the right track.”
There is a simple question that you can ask your customers to check your PMF.
How would you feel if you could no longer use [product]?
- Very disappointed
- Somewhat disappointed
- Not disappointed (it isn’t really that useful)
- N/A — I no longer use [product]
If you find that over 40% of your users are saying that they would be “very disappointed” without your product, there is a great chance you can build sustainable, scalable customer acquisition growth on this “must-have” product.
Myths about Product-market Fit
While a lot has been spoken and discussed regarding PMF, here are some of the myths about the PMF that one should be aware of -
Myth #1: Product market fit is always a discrete, big bang event;
Myth #2: It’s patently obvious when you have product/market fit;
Myth #3: Once you achieve product/market fit, you can’t lose it; and
Myth #4: Once you have product/market fit, you don’t have to sweat the competition.”
- Ben Horowitz
What Product-Market fit is not
Does achieving PMF guarantees success? No. It signifies an important milestone that is necessary but not sufficient.
A PMF does mean that you have a viable product that satisfies the need of the market. But, you still have to find a sustainable growth model and create a moat against a competitor, and so on. (By the way, growing a startup before PMF is dangerous. It’s called Premature scaling. We will see in the next section👇)
But definitely, PMF does help prevent businesses from spending money trying to grow a business in a way that is doomed to fail.
Beware of Premature Scaling
One of the reasons for startup failure is premature scaling. When a business starts to spend significant money on growth even before discovering and achieving Product-Market fit, we can say that the business is scaling prematurely. And this is a recipe for failure.
“Premature scaling is putting the cart before the proverbial horse…As an entrepreneur there’s always the temptation to grow the sales team at the first sign of revenue traction, but there is always the danger that this early traction is coming from the subset of the market that are early adopters and not the actual market itself. Additionally, too often I’ve seen startups ramp up sales before they’ve figured out the most efficient way to achieve profitability. A vicious cycle ensues wherein the more a company grows, the more it farther away from profitability it becomes.”
Viddy is the company often cited as an example of premature scaling. Viddy was able to use Facebook OpenGraph to grow its user base to millions of users before it ever had PMF.
Premature scaling caused Viddy to wither away like the Cheshire Cat. Friendster, Orkut, and Digg are some other examples of premature scaling.
Regards,
Arkapravo
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Reference -
Probably the most exhaustive article I have read about Product-Market fit. Good one. Like the way, the pearls of wisdom from various experts have been stitched together.