Produt Market Fit – What is it and how important is it for startups?
Have you ever heard of the term “product market fit” or PMF? It is used to evaluate the performance of a product within a given market. Key factors which shape PMF are consumer loyalty, competitor qualification, and the ability to deliver value.
According to Andreesse, the creator of the concept, good PMF means fitting into a strong market while offering products that satisfy a niche. In other words, the solution offered by your brand must solve the persona’s problems. Of course, this level can only be achieved if you have a thorough understanding of the consumer’s motivations and needs. You should also consider the ability of your competitors to offer added value to customers. The higher the quality of your competitors’ products, the higher yours must be.
Thus, we can understand Product Market Fit as a tool that enables a mapping of your position in the market. Ultimately, it is possible to draw a parallel between the degree of consumer need and the suitability of the product offered by your company.
How to define your company’s PMF
One of the biggest mistakes made by startups is to invest all their resources in solutions that are not yet sure about their market fit. This action probably depletes a good part of a company’s investment, and even increases the time it takes for the product to be available.
To avoid this mistake, some steps are important to define Product Market Fit:
Understand and identify the needs
One of the pillars of this concept is the identification of the pains and needs of the persona, the representative of the audience that your startup hopes to reach.
In the old days, products and services were developed from the company and business vision. After that, there was a strategy to create a market for such a solution.
Nowadays, the Customer Centric concept is gaining more strength and the customer is at the center of the whole process.
Therefore, understanding the real needs of this persona is fundamental for the development of a solution that really meets this demand and is perceived as a value for these people.
Value proposition is the main characteristic that differentiates and makes the offered solution really relevant and functional to meet the persona’s needs. Thus, we can say that it is this proposal that will make your brand be chosen and remembered in the market.
MVP / Prototype
Before launching the solution into the market, it is essential to conduct tests to analyze the performance and public acceptance of this innovation. The best strategy for this process is the development of MVPs.
MVP is the acronym for Minimum Viable Product. These are simpler versions of the solution, offered to the public for them to validate, test, and get feedback on improvements.
An MVP is one of the main ways to define Product Market Fit. If the response to the test version is totally negative, it is a sign that some points need to be reviewed.
To reap this result, it is fundamental that the startup invests in a direct and effective line of communication with consumers. They are the main agents of this definition and who should be heard at all stages of the life of a company.
Rule of 40% – understand if there is Product Market Fit
The rule of 40% consists of constructing a questionnaire about an audience’s reaction to a feature or solution itself. If the positive response is greater than 40% it is a sign that your business is on the right track.
If the result does not reach this percentage of acceptance, it is an indication that it is necessary to look at some points of the solution more calmly and make adaptations or adjustments.
Entrepreneur Sean Ellis, recognized for having led the marketing strategy for Dropbox, LogMeIn and Uproar from early stage to high-growth and also the person who coined the term Growth Hacker explains why 40%.
Sean Ellis conducted extensive research with startups and the finding was that startups that succeeded in creating sustainable high-growth businesses had a customer base of at least 40% that would be very disappointed in not being able to use their products anymore.
Raul Vhora, founder of SuperHuman, used Sean’s teachings as a mantra to achieve PMF. The company sent the following questionnaire to its Beta Users:
Source: How Superhuman Built an Engine to Find Product/Market Fit
Raul explains how looking at this data changed the entire company and product strategy in order to achieve PMF. For all entrepreneurs, it is a must-read and a lesson on how diving into this data can be beneficial for your company.
Another interesting example was a survey of 731 Slack users in 2015 (when the company had around 500,000 paying users). In that survey, conducted by Hiten Shah, the pattern of Product Market Fit among users was noted. Another 51% of the base would feel very disappointed if they could no longer use Slack.
Source: 731 Slack Users Reveal Why It’s So Addictive
For those interested, here are the two surveys:
Sean Ellis Survey: https://pmfsurvey.com/
Raul Vohra Survey: https://coda.io/@rahulvohra/superhuman-product-market-fit-engine
A retention cohort analysis is essential for understanding Product Market Fit. An interesting exercise is to analyze a group of users who used your product over a period of time. Then seek to understand how many of those people continued to use your product. When you do this, it is not a problem if the user curve has a big drop at the beginning, the output you should seek to understand is if the user usage curve stabilizes at some point. If the answer is yes, then there is a group of users who are finding value in the recurring use of your product, which indicates PMF (at least for that audience or market). The graph below exemplifies this more clearly:
Source: Brian Balfour
Once you understand which are those customers that retain a high value from your product, your role will be to understand how large that segment is and how you would work to monetize around that base (from there you will get a better sense of your company’s unit economics)
To do an analysis properly, the company should choose a metric that reflects the main value taken by customers from their product, in addition to how often the user is expected to use it. Some real-world examples:
For Airbnb, what matters is to optimize the number of housing bookings in the year per user. Whereas for Facebook, monthly active user has always been the northstar metric while for Ebay it is the amount per user spent weekly in the marketplace.
Unlike Sean Ellis’ case, in this one there is no exact number (like the 40%) that correlates or not with Product Market Fit. The study makes sense to understand how the usage pattern is and also works as a map for companies to investigate which customer segments are getting the most value out of the product.
A good benchmark to compare is Pendo’s product studies, which analyzes the bottom and top quartile of retention, shown in the chart below:
It is worth noting that it is also a good exercise to graph retention for both the number of customers, revenue and LTV, which will thus provide even more input for the discovery of Product Market Fit.
While user surveys act as a snapshot of the moment, retention charts are real-time metrics for understanding how customers are taking ownership of your product’s value proposition.
So, summarizing the two tips from this article:
Use Sean Ellis’ or Raul Vohra’s framework to understand if your company has evidence of PMF;
Make a user retention graph to understand who is deriving the most value from your product.
The clarification of this concept allows for greater assertiveness in the stages responsible for delivering the product. Thus, it is possible to have a better direction for the entire startup, bringing it closer to good results.