Imagine going to work only to find that your inbox is flooded with customers telling you how happy they are with your software. People are in such a hurry to download your app, you need to scale your servers to meet the demand before the infrastructure crashes. Your phone rings: it’s a tech journalist trying to book an interview with you about your company's growth.
This is the dream for every business owner and entrepreneur.
But the reality is often in stark contrast to the scenario above. You’re dealing with a number of customer complaints and returns. It’s unclear why demand is down this quarter and people simply aren’t using your app. And the media is definitely not calling you about your latest product launch.
So, what makes some companies thrive, while others barely survive? The answer is product-market fit.
“Product-market fit means being in a good market with a product that can satisfy that market.”
That’s how Marc Andreessen, the lucrative venture capitalist who coined the term ‘product-market fit’ (PMF), defined it in his now notorious blog post The only thing that matters.
Breaking down the definition above, we can see that product-market fit boils down to three main components:
But what does this mean for a company in concrete terms? Andreessen vividly characterized how PMF impacts businesses:
“You can always feel when product/market fit is not 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 is 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.”
PMF is not just beneficial for your PR points and checking accounts, it also has tangible consequences for your business’s bottom line.
Achieving product-market fit has several perks:
Is there a way of knowing when a company achieves product-market fit?
We’ve already mentioned a couple of indicators that a company has achieved product-market fit: PR coverage, organic growth via word-of-mouth, high demand that outperforms supply, and awards from the Harvard Business School.
Unfortunately, all of these indicators are lagging metrics. That is, once the investment bankers stake you out, you have already achieved PMF.
What we need are leading metrics, aka, indicators that tell us whether we have reached PMF before we cross that line.
Several quantitative metrics have been suggested:
The problem with the metrics above is that they are not easily transferable across companies and industries. Website performance metrics only matter to companies who use digital channels as their growth machine. NPS, on the other hand, varies massively across industries.
As a result, neither can be used as a yardstick to determine whether or not you have reached PMF.
Sean Ellis was the first to introduce a qualitative metric that is transferable across different business operations. He is responsible for the early growth and scaling of household names such as Dropbox, LogMeIn, and Eventbrite. In his quest to understand PMF, he benchmarked hundreds of startups with his customer development survey, in which he asked users:
How would you feel if you could no longer use the product?
He then measured what percentage of all users answered “Very disappointed”, as these are the people who see the value of the product and the company. In other words, they’re the customers with whom you have achieved product-market fit.
And the benchmark? Turns out that the magic number is 40%. When 40% of your target audience say that they would be very disappointed if they could no longer use your product, that means you have reached PMF.
The survey is now an accepted measurement for PMF. Slack, for example, used it on a sample of 731 users, and found that they had hit the honey pot: 51% of their users claimed that they would be extremely disappointed if they could no longer use the platform.
Companies often fall into two traps when measuring product-market fit:
Measuring is not enough. We also need to know how to improve this metric.
When developing a product, companies often choose the Lean Product Process. This process iterates over six steps to develop a product that satisfies a big market need:
1. Determine your target customer. This is your buyer persona. Segment the market and/or your target audience to understand who your target customer is.
2. Identify underserved customer needs. Interview your target customer, check out the negative reviews that they’ve left for your competition, run UX questionnaires, and distribute product-market fit surveys. Do all of this with one goal in mind: to understand which current need is being neglected and underserved by products that are currently on the market.
3. Define your value proposition. Your value proposition is the solution to your customers’ needs; it’s the benefits that your product will bring. Let’s look at a couple of examples:
Unbounce – A/B Testing Without Tech Headaches
Slack – Be More Productive at Work with Less Effort
Lyft – Rides in Minutes
Mailchimp – Send Better Email
4. Specify your minimum viable product (MVP) feature set. Expand your value proposition (which is abstract) to a set of features which transform that proposition into something tangible. These features need to be minimal: no extras, just the smallest number to achieve the value proposition. But keep the product viable: the set of features must address the customer need. In other words, you need to specify your Minimum Viable Product. Think of it as a proof of concept. What is the minimum set of features which would prove that you can fulfil your customers’ requirements?
5. Create your MVP prototype. A prototype is a less detailed representation of your product that you can build without actually building your product. If you're working on an app, you could just prepare the mockup screens which would be a part of it. If your product is a manufactured good, you could create a handmade version of it (and not set up the entire manufacturing process).
6. Test the MVP with real customers. Get the product into the hands of your target customers. Listen to their feedback as they use it. Check that there is a clear understanding of what the product does and what problems it solves. If there is no “Aha!” moment, go back to Step 2 and iterate.
Once we loop through the stages, we measure PMF and repeat the process until we are satisfied with the results.
So, how does this apply to companies that are not startups and are already on the market?
Whether you choose to measure product-market fit with the Sean Ellis questionnaire, NPS, bounce rate, or UX interviews, you will have to collect data.
Once the data has been collected, you will also have to clean it. The entire process of data cleaning and transformations represents approximately 80% of any data project. It is long-winded and laborious, but removing outliers and wrong answers, categorizing responses into appropriate groups, standardizing scores, and carrying out all of the other work that goes into data cleaning are necessary steps for analyzing data.
Sadly, this process is even longer when testing for PMF, because you have to repeat it several times for every batch of MVP tests that you do. So how can you speed everything up?
Rely on tools like Keboola.
Keboola is an all-in-one data operations platform, which helps startups to speed up and automate their work. In just a couple of clicks, you can: