Product-Market Fit 101
Product-Market Fit 101
Achieving product market business scale fit with relentless iteration
TL;DR
Finding product-market fit requires more than just traction. It is about validating the value hypothesis (the insight) the implementation (the product) and the growth hypothesis (the go-to-market strategy) sufficiently before scaling a business. Getting there requires lean and MVP focused thinking to maximise the learning cycles available given your startup’s runway.
As an advisor to early stage entrepreneurs, I often talk about product-market fit. I’ve been doing so informally and figured I’ll formalise some of lessons learned. While the content here will be trivial to seasoned entrepreneurs, it may contain a few interesting lessons.
Most of the post is based on Andy Rachleff excellent Stanford lesson Aligning Startups with their Markets. I don’t think you can find a recording of it as such but I’ve worked through various Youtube videos and posts to piece it together. Rachleff’s (who is said to have coined the term “product-market fit”) advice is both strategic and pragmatic, which is exactly what Startup Pragmatism is all about!
Understanding Product-Market Fit
Product-market fit (PMF) is tricky to define for many reasons. Often it is viewed quite narrowly to convey that the product resonates with the customer. But ultimately the way it should be used is in its broad definition - product-market-business-scale-fit.
To reach product-market fit, Rachleff urges founders to test the three parts of their company strategy that constitute a business:
The value hypothesis (the insight)
The implementation (the product)
The growth hypothesis (the go-to-market strategy)
We will talk about each of these steps in the following but note that last step of go-to-market strategy fit is something that 2nd time founders obsess over. They know that leaving it out of their product-market fit definition leads to a lot of issues.
Andreessen has a good way of describing before PMF versus after PMF:
You can always feel when product/market fit isn’t happening. The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of “blah”, the sales cycle takes too long, and lots of deals never close.
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.
Ultimately nothing else matters to your company when you are before PMF than getting it. This means you should do anything and everything needed to get there. Including changing out people, rewriting the product, moving into a different markets, trying many business models, shutting them down again and thereby “failing” publicly, raising more money… whatever is required. Most other things don’t matter much.
While it’s not advisable to ignore everything but PMF, you probably could. And sometimes it is a good exercise to think whether you really should spend time on the things that you are. I emphasise this, as it has been an expensive lesson I learned personally throughout my career.
Identifying Your Target Market
As an angel investor I often look at team, product and market when deciding to invest. One often likes to consider the team being the most important element of that constellation. Rachleff puts it this way:
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.
In other words, the #1 company-killer is lack of market, not a bad team or product.
No company has found product-market fit without a unique insight that their founding team either had from inception or discovered while working on a previous idea and then pivoted to. Unique insights usually occur when there is massive change happening to a market and/or a technology framework. “Without change, there's seldom opportunity,” says Rachleff.
The nature of insights varies. A startup might identify a market need that incumbents have ignored because it’s an unattractive segment to them. Others might identify a new technology that enables workflows not possible before. Either way it is good to look at markets that are in flux and at technologies.
In disruptive innovation theory (Christensen) There are two broad ways one can disrupt a market. New-market versus low-end disruption.
New-market disruptions target non-consumers, or those who have not had access to features and functions being offered because of lack of money or skill. An example of a new-market disruption is Midjourney. It created a new paradigm by introducing the notion of decent quality image generation for unskilled people, which previously was only accessible by paying skilled illustrators.
Low-end disruptions target customers who are over-served by an incumbent. These customers would prefer purchasing a product with less, but good enough performance if they could pay a lower price. An example of a low-end disruption was Uber’s launch of UberX, which offered a cheaper and more convenient solution to traditional taxis.
Finding the right market is the crucial first step in building a successful business. Studying different sectors to understand what change they are undergoing is the starting point. Pair this by looking at emergent technologies which are or very soon will be disrupting markets either by creating blue ocean opportunities or by changing the unit economics. The tricky bit is that you will have to choose a market long before you have any idea whether you will reach product/market fit. This is why despite all the rational factors you should pick a market and problem you love. That way at least if you fail, you focused on a passion.
The Value Hypothesis
You have your market, now you need your hypothesis. A value hypothesis attempts to answer the question: why a customer is likely to use your product? It identifies the features you need to build, the audience that’s likely to care, and the business model required for a customer to buy your product.
First you need to define and test your value hypothesis. And then only once proven do you move on to your growth hypothesis. The value hypothesis defines the what, the who, and the how. What are you going to build, who is desperate for it, and what is the business model you are going to use to deliver it:
What are you going to build?
For whom is it relevant?
How do you price the product?
Let’s focus on the what and who. The value hypothesis states the primary reason why a specific set of target customers might want to use your product. It is obviously important to find out whether people really want to solve the problem that you intend to fix. For example, you don’t want to enter a market where customers are extremely happy with how well the existing solutions meet their needs.
When you develop a new product or improve an existing product, you want to address customer needs that aren’t adequately met: their under-served needs. For customers to risk or invest their time in adopting a brand-new startup’s product to satisfy a under-served need, they need to be desperate. Investors also call this the “hair on fire” problem. Desperation can manifest in many different ways. It can stem from boredom and frustration with existing tools or from a complete absence of choices preventing potential customers from taking any action at all.
Customers are going to judge your product in relation to the alternatives, so the relative degree to which your product meets their needs depends on the competitive landscape. For them to pay attention to a new idea that no one is talking about yet, it needs to be radically different from the status quo. This is why your product vision can’t be simply incrementally better than well established incumbents. “If you're just going to add incremental improvements to your product, it's unlikely people are interested, because there's a good enough alternative they already use,” says Rachleff.
As you are figuring out the details of the product, personas are a great way to describe your target customer so that everyone on the team understands for whom they should be designing and building the product. You may not have a clear definition of your target customer at the outset: that’s okay. You just need to start with a high-level hypothesis and then revise it as you learn and iterate.
Remember that it is OK to first be niche. Every technology has an adoption lifecycle. The chasm lies between early adopters (willing to take a chance on a new product if it solves a hair on fire problem) and the early majority. To cross the chasm, startups must first dominate a niche or create a beachhead and then expand from a position of strength. Don’t try to skip the early adopter stage and move to early majority.
Foursquare did a great job at finding a diverse set of early adopters who were in it for lists, gamification, deals, location diary, social elements etc. Unfortunately, we didn’t manage to ever get to the early majority due to competitive pressures and some botched product strategy. At one point we split the app because we did know that sacrificing some of those early adopters was the only way to get to the early majority. This was an important lesson in pivoting to get from a local maximum to a higher level of PMF.
The Implementation or Developing a MVP
You have a market you have a sense of a problem and a value hypothesis of how to address it, now you need to get out there. A startup is a hypothesis validation machine with a finite amount of learning cycles before it dies or fundraises (or becomes profitable). To be most efficient with those learning cycles you need to build a minimum viable product (MVP) to test the viability of your PMF.
This is a good place to quote Jobs, “People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully. I’m actually as proud of the things we haven’t done as the things I have done. Innovation is saying no to 1,000 things.”
Translated to the early days of a product, don’t focus on making it robust. Find product market fit first, then harden. How do we find the MVP feature set? While you build, err on the side of getting things out to get feedback. You won’t know exactly what is needed to create enough value in the eyes of your target customer. Quick iteration cycles to validate that you are heading in the right direction are the best bet. Customers may end up telling you that your MVP lacks an important piece of functionality. Or they may tell you that they wouldn’t use a particular feature that you decided to include in your MVP. The goal is to iterate until you have an MVP that customers agree is viable.
Create aggressive deadlines for yourself, otherwise, you’ll get swept away in unnecessary details that aren’t actually mission-critical (i.e. thinking about logo colour schemes). Aggressive deadlines help separate what’s a need-to-have from a nice-to-have. Your MVP should be about getting to the core of the problem you’re solving, not architecting exactly what the final workflow or product will be.
While you could build a live, working version of your MVP, it’s usually faster and more prudent to create an MVP prototype. A prototype is a representation of your product that you create without having to build your actual product. You can use a set of mockups of your product’s pages/screens to create a clickable/tappable prototype. Prototyping tools make it easy to simulate the user experience of the final product with enough fidelity and interactivity to obtain valuable feedback from customers.
Always remind yourself of what it is you are hoping to learn about the problem? User tests in batches or waves are advisable. You want to strike a good balance between too few and too many opinions to not over- or under-index on feedback. The goal is to identify patterns of similar feedback from multiple customers and prioritise any concerns that you’ve uncovered so you can address them. Side note but if you ask a customer if they’re interested in your product and they say, “Maybe if you had x features, I’ll buy,” they're not desperate, and might never buy your product. They might just be avoiding saying no.
There are moments where you want to revise your hypotheses based on what you learned and loop back to an earlier step in the process. The feedback will determine which step you should return to next. A UX design or feature set issue requires a different intervention than feedback that the value proposition doesn’t serve customer needs, or that the target customer needs to change. You may find that you just can’t seem to make much progress despite trying several iterations. If that happens, you should take a step back and revisit your hypotheses. You may conclude that in order to achieve higher levels of PMF you need to pivot. Products and ideas should be disposable at this stage. Don’t get stuck in a sunk cost fallacy. I know this is easier said than done but it’s the only way to think with a finite runway.
Serendipity plays a role in validating your value hypothesis but the process to get to serendipity is incredibly consistent: start with a hypothesis, test it, iterate until you prove it. Then move on to the growth hypothesis and do the same.
The Growth Hypothesis
Don't go after the growth hypothesis until you've proven the value hypothesis. “If you don't lay a strong foundation — if the dogs don't want to eat the dog food — it doesn't matter how cost-effectively you can acquire customers. They're not going to stay and it's not going to be effective,” Rachleff says. “Almost no one's initial value hypothesis is correct. And that's true for every successful company.”
Comprehensively speaking about how to test a sustainable and scalable go-to-market strategy is going to be beyond the scope of this post. That said it is of utmost importance to ensure that the growth engine of your business is sustainable. Otherwise you ain’t got PMF. Many startups have made it to millions of users and revenue as well as lofty valuations but didn’t have a sustainable business or scale model (heck some products have billions of users like Google Maps but are still not sustainable without being cross subsidised). While I’m not suggesting to not take advantage of momentum, you should always be honest with yourself about where your business is on the PMF journey.
But how do you know that your growth hypothesis is working and you’ve reached PMF? If you can generate exponential organic growth in retained users — not paid growth. You can always “fake” growth by spending money. “The only way to generate organic growth is through word of mouth. And the only way you generate word of mouth is through delight,” Rachleff says.
We had a strong organic growth engine at Citymapper, because we took a daily active user behaviour (city transport) and improved on the experience way beyond the benchmark experience (Google and Apple Maps). We also added fun and delight to a product that was perceived as a boring utility. This made us a home screen app and therefore a word of mouth phenomenon.
On the enterprise side, if you have a top-down sales motion, a good metric for PMF is hitting a sales yield of greater than one repeatedly. The term sales yield refers to the sales learning curve, defined as the ratio between your annual net revenue and the fully loaded cost of your sales team. In other words, if you are generating more net revenue than the cost of your sales team you likely have PMF.
I will write a go-to-market 101 post to go deeper on this. In the meantime, check out this a16z presentation on GTM best practices.
Common Pitfalls and How to Avoid Them
The number one problem for startups that achieve escape death momentum is that they don’t have product/market fit, when they think they do. One of the most common ways that startups die is “premature scaling.” Startups need 2-3 times longer to validate their market than most founders expect.
We scaled way too fast at Foursquare. Getting a big check from Andreessen Horowitz and Union Square Ventures got us giddy. We hired far too many people too quickly, while we should have stayed lean.
In general, hiring before you get PMF fit slows you down, and hiring after you get PMF speeds you up. Until you get PMF, you want to live as long as possible and iterate as quickly as possible.
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. Getting product right means finding PMF. It does not mean launching the product. It means getting to the point where the market accepts your product and wants more of it. First to market seldom matters. Rather, first to PMF is almost always the long-term winner.
At the risk of annoying early potential customers, it’s important to keep digging for the truth. Rachleff says he would rather annoy 100 early potential customers than risk not reaching a potential market of 10 million customers with the right product.
Startups can all too easily get caught in the trap of tweaking their product instead of focusing on the more important issue: identifying the customer they’re creating a unique product for. Prioritising well-known customers over desperate ones is often a distraction early on. Of course it is great to have a slide with recognisable logos in your pitch deck but not if you waste tons of time to acquire them and they churn fast.
Maintaining an inflexible business model or GTM will lead to issues. Many startups fall into the trap of rigidly adhering to their initial strategy, often driven by a strong vision or commitment to a specific approach. Markets are dynamic, and customer needs evolve. Don’t stick to a plan without adapting to market feedback, emerging trends, or competitive pressures. This can hinder your company's ability to find the right PMF. Flexibility and adaptability are key; startups must be willing to pivot, tweak their offerings, or even overhaul their approach based on real-world data and customer interactions. This agility differentiates startups from corporates and enables them to respond effectively to market demands. Not falling for sunk cost fallacies increases your chances of success in a competitive landscape.
We tried more than 10 different business models with Citymapper. We failed publicly when we shut down out Smart Bus and Smart Ride services. But we were unemotional about these experiments because we knew that what matters is to get to PMF.
Conclusion
We've explored the multifaceted journey towards achieving product-market fit, a crucial milestone for every startup. If you take one thing away from this post, remember the importance of validating the value hypothesis, implementation, and growth hypothesis. PMF is not just a static goal but a continuous process of adaptation and evolution, shaped by market changes and customer feedback.
For first-time entrepreneurs, understanding and navigating these dynamics can be daunting, yet it's essential for the survival and success of a startup. Remember, it's not just about creating a great product or assembling a talented team; it's about finding a market that eagerly awaits what you have to offer and is willing to embrace it enthusiastically. As we've discussed, this often involves challenging assumptions, being open to pivoting, and always prioritising the quest for PMF above all. Strong execution aside, success will come to an open minded listener because as Rachleff would say "When you find a good market, the market pulls the product out of the startup."