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How to find product-market fit?
Even though Marc Andressen coined the term “product-market fit” back in 2007, it is still very unclear to many clients approaching our company what product-market fit (PMF) is. There’s an old saying, that the life of any product can be divided into two parts — before product-market fit and after PMF. This article will help you during the first part, while the following one will present some insights for the second part. At Startup Development House (SDH) we help our clients with the struggle of finding product-market fit. More importantly, we advise them on how to achieve and how to measure PMF.
Let’s define the product-market fit
Marc Andreessen defined the term as follows: “Product-market fit means being in a good market with a product that can satisfy that market.” Throughout our experiences, we have noticed that many startup founders interpret PMF as creating a minimum viable product (MVP) and launching it on the market. If you want to build a successful product, you need to be aware that there is a huge difference between product-market fit and an MVP. In fact, an MVP is just the first step to achieve PMF.
Another observation we have made at SDH is that many startup founders do not differentiate the product-market fit and problem-solution fit when measuring a company's success. Also, the vast majority of them do not understand what a market fit is. When assessing a customer's desire, founders need to be sure that they are measuring a need for their specific product or service — not just the desire for a solution. Misinterpreting a customer’s desire for a solution as the need for a particular company's product or service will end up being a false positive for product-market fit and will eventually kill the product.
How to measure product-market fit
First of all, product-market fit is not binary. For a fledgeling startup, a minimum degree of product-market fit will not be adequate in order to achieve market traction and business success. Rather, what is actually required, is a high degree of PMF or extreme product-market fit. At Startup Development House, we still debate internally how to determine product-market fit. Most of you are reading this article, since you are looking for the answer to the “how to know if you have product-market fit” question. Below you will find the description of two techniques that we use most often.
The 40 per cent rule by Sean Ellis
According to Sean Ellis, you just ask your customers “how would you feel if you could no longer use the product?” and provide them with 3 answers: ‘very disappointed’, ‘somewhat disappointed’, ‘not disappointed’. Then you measure the percent of users who answer “very disappointed.” After investigating nearly a hundred startups, Ellis found out that the magic number was 40 percent. A vast majority of companies that struggled to find a sustainable acquisition channel had less than 40 percent of users responding “very disappointed,”. On the other hand, startups gaining the desired traction almost always reached more than this threshold. Rahul Vohra, CEO of Superhuman has developed a survey-based model based on the 40 percent rule to help post-launch startups test and optimize for this metric. We strongly recommend reading the article how Superhuman built an engine to find product-market fit. You can find the link here.
The 5 metrics for PMF
We recommend measuring the metrics mentioned below in order to verify if you have achieved PMF:
1. User Lifetime Value (LTV) — User Lifetime Value captures how much money each customer generates your firm.
2. Pages per Visit — A high number of Pages per Visit tells you that the user’s experience with your product is good.
3. Retention Rate — If your retention rate is high, it means that the user comes back to your product. A product benchmarks report can tell you what the retention rate is for your industry.
4. Average time spent on the website per user — Obviously, in this case, a higher metric means that most likely the user’s experience was fine.
5. Bounce Rate — A high bounce rate indicates that users most likely encounter some problems while using your product.
If these 5 metrics are above your industry average, your startup has most likely achieved a product-market fit.
I bet you’re now wondering ‘Hmm… Why most likely?’ Again, PMF is not binary.
To sum up
Many startup founders do not have a proper understanding of product-market fit. I hope this article has put some light on what it is and that you will find our techniques useful while building your products. Below you will find a few highly recommended readings, if you want to further your understanding:
Kenny McQuarrie — "Evaluating Product-Market-Fit"
Steve Blank — "The Four-Step to the Epiphany”
Steve Blank — “Why the Lean Start-Up Changes Everything”
Best of luck to everyone finding product-market fit! Please reach out to us if we can help!