Product-Market Fit Analysis: The Ultimate Guide
Many startup founders and marketers are wondering:“Have we managed to find product-market fit yet?”To answer that question, you have to conduct a product-market fit analysis.In this article, I am going to show you how to do exactly that (and much more):
- Product-market fit definition,
- Product-market fit example,
- How to get to product-market fit, AND
So, without further ado, let’s dive right in.
Chapter 1: What is Product-Market Fit?
Finding a market for your product is difficult. As you will see later on, it’s one of the most exhausting stages in a startup’s life. More on that later. For now, let’s try to answer the question: What is product-market fit (or PMF)?The product-market fit concept was developed and coined by Andy Rachleff, president and CEO at Wealthfront. He invented the term to describe the investing style of Don Valentine, founder of Sequoia Venture Capital firm and pioneering investor.
It is a common mistake among many startup founders to believe that they can attain growth, without getting to product-market fit. However, the growth phase comes after a startup finds product-market fit. It is without a doubt that getting to product-market fit is crucial for any startup business. According to Marc Andreessen, an influential American entrepreneur, who runs the infamous Venture Capital firm, Andreessen Horowitz:“The only thing that matters is getting to product-market fit.”
Why does it matter so much though?Well, because finding product-market fit means that a startup business found the way to add value to a set of customers and is now ready to scale, to grow. According to Eric Ries, the product-market fit is:“The moment when a startup finally finds a widespread set of customers that resonate with its product.”
So, I guess that, by now, you have realized two things:
- That product-market fit is one of the most critical stages in a startup’s life
- You can seek growth only after finding product-market fit
At this point, I could add one more aspect, one more element that is equally important and this is that: Finding product-market fit is extremely difficult and can be mentally exhausting. As Segment Co-Founder and CEO Peter Reinhardt remembers in a Stanford speech he gave, trying to explain how difficult finding product-market fit is:“The short version is that it actually feels like a bottomless, emotional free fall and when you are failing to find it, it sort of becomes a strange obsession.”
You can watch the full Stanford speech here: https://www.youtube.com/watch?v=_6pl5GG8RQ4&t=268sI don’t want to discourage you. I just want you to understand that you can talk about growth hacking and growth strategies only after finding a product-market fit and that to get there, it requires time and effort. Steve Blank is a Silicon Valley-based entrepreneur who has developed the “Customer Development” theory, which was the foundation for the Lean Startup movement.
According to Steve Blank, there are four stages before finding a product-market fit — four stages that a startup business has to pass through, to discover the scale potential of its business model. These stages are:
- Stage 1: The Customer Discovery at which you get ready to sell. In this stage you prepare your company for scalability, you create a roadmap and develop a high fidelity MVP, based on your customer’s feedback.
- Stage 2: The Customer Validation where you get out of the building. When you start “test selling.”
- Stage 3: The Customer Creation where you develop positioning and decide on your brand and product positioning.
- Stage 4: The Verification when you verify that what you’ve done so far, the customer feedback that you have, the positioning you’ve chosen and everything in between, is right.
Only when you reach the fourth stage — the verification stage — and you verify that your business model is repeatable and scalable, you can start growing.We are not going to cover these four stages in detail, but for now, I want to keep that:First, you have to find a product-market fit — then, you can test the scale potential of your startup business, and then seek growth.If you want to learn more about this, you can read the product-market fit pyramid concept by Dan Olsen.All these might sound overwhelming, but it is the only way to grow your business. One of the most common questions among startup founders or marketers is:Have we managed to find product-market fit yet?As Eric Ries puts it: “If you are wondering, you are not there yet.”In the next chapter, I am going to talk about best practices when it comes to PMF. So, if you want to learn more, then keep reading.
Chapter 2: How to Find Product-Market Fit?
That’s a tough question even if you are in a good market. Marc Andreessen says that the only thing that matters is getting to product-market fit. And, that’s true. If you take a look at Crunchbase, you will see that funding for startups has been increased significantly. In fact, here is the investing activity for just one week:
Can you imagine that?A total of $8 Billion in fundings and 303 funding rounds announced. Not in one year; but, in one week. This shows us that the interest in startups is rising. Thus, the interest in product-market fit.
Before I delve any further I want to be uber clear about something:There isn’t a secret recipe as to how to find PMF. Yes, there are ways to measure it, but there isn’t a one-fits-all solution here. So, all I am going to give you is some best practices that will help you get to PMF.
1) Find a good market
Many startups fail because they can’t find a good market for their product/service. In fact, according to CB Insights, this is the No.1 reason why startups fail:
The research found that a staggering 42% of startups fail because there isn’t a market need. It is critical that you are sure about the target market you are going to launch your minimum viable product. Finding a customer segment that feels dependent on your product/service is essential. This is why you should treat your early adopters with respect and be willing to listen to what they have to say about your product. Some tools you can use to discover a great market are:
- Google Trends – Explore what the world is searching
- Jungle Scout – Search for profitable Amazon niches
- Twitter Search – Standard search on Twitter
- Product Frameworks – Product development frameworks and more
- Keyword Niche Finder – Discover profitable keywords for SEO and PPC
- Amazon Best Sellers – Bestsellers in the Kindle Store
- YouTube Statistics – Statistics on YouTube channels
2) Choose a good value proposition
In a previous article, I’ve stressed the importance of creating a solid value proposition. UVP / Unique Value Proposition is a clear statement that describes your product’s benefit to the customer while differentiating you from your competition.According to CXL, a good value proposition:“Explains how your product solves customers’ problems or improves their situation (relevancy), delivers specific benefits (quantified value), tells the ideal customer why they should buy from you and not from the competition (unique differentiation).”Now, many people will tell you that you need to that before launching a product. And, they are right. Others will tell you that you have to do it after you’ve managed to find product-market fit. Those are right too. You see, your value proposition might change as your business evolves. Because, you may have to pivot, for example, several times until you manage to find PMF. Here is an example of a clear value proposition by Unbounce:
My take here is this: let your potential customers and your paying customers tell you what your product is. This way, you’ll be sure that you are on the right path.
3) Pay attention to your product
I want to be clear about this:You can’t find a product-market fit if you don’t have an excellent product/service. No need to have great product sense (at least when you are an early stage), you just need to focus on making your early adopters happy. Now, a product idea or product concept is just the tip of the iceberg. Why? Because you need to validate your startup idea if you want to find PMF. No matter what, your product or minimum viable product (when you are just starting) has to be awesome.
4) Choose a tested business model
Why everyone nowadays is trying to reinvent the wheel? When a business model is tested by someone else, you can try to replicate it. No need to hustle about it. Of course, reverse engineering is not easy. However, you can research your business model. That will save you a lot of time and energy.For example, let’s assume that you want to build a new productized service — a design-as-a-service startup like ManyPixels:
All you have to do is find a list of productized services examples and see how other businesses have structured their business model.
5) Pay attention to the network effect you’ve created
This one is huge. The network effect is one of the four defensibilities according to the Venture Capital firm NFX, which are:
- Network Effects
Now, there are different types of network effects:
Let me give you an example. Facebook is a social network with a direct (personal) network effect. In this network, the total number of users affect the value that other users take from the platform.
Uber, on the other hand, is a company that operates as an asymptotic 2-sided marketplace. Here, the total number of users (e.g., the number of drivers), doesn’t affect the value that other users get from the platform.
Think of network effects as bondings between you and your customers. And, instead of just trying to build your customer base through various customer acquisition techniques, focus on the network effects of what you are creating. What I want to keep here is this:Try to provide your customers with a great overall experience, to add value to their lives, to try to satisfy their needs and solve their pain points. If you do, then chances are you are on the right way.
Chapter 3: Product-Market Fit Analysis
In an interview he gave to Stanford Business School, Steve Huffman, Co-Founder, and CEO at Reddit said that:“At Reddit, we were growing; despite not knowing anything about our business, knowing a little about our users, not really knowing how to run a business, not having a ton of product sense, being down a lot, we were growing.”
- The demand for your products and services is excessively high,
- When your user base is growing,
- When you have people who are engaged with your products.
Then you’ve probably found product-market fit. As Twitch CEO Emmett Shear mentions:“Asking if you’ve found product-market fit, is like asking: how do you know when you are in love — trust me, you know.”
Many startup businesses die before they manage to find product-market fit. This shows us that product-market fit isn’t an idealistic situation, a natural step in every startup’s existence since many startup businesses never get there. Another point of view regarding product-market fit is that:“Product-market fit is when people sell for you.”This quote coming from Josh Porter indicates the level of engagement and loyalty people have with your products and services. Let’s skip the quotes for now and let me give you some practical ways to measure product-market fit.
1) Net Promoter Score
One of the best ways to measure product-market fit is by measuring your Net Promoter Score. So, what is the Net Promoter Score (NPS)?It is a metric that measures customer satisfaction and helps you understand how close you close you are in satisfying your customers or users. To calculate your NPS, you have to use the answers to a very critical question, using a 0-10 scale:How likely is that you would recommend [product] to your a friend or colleague?The responses can be grouped as follows:
- Promoters (score 9-10) – these are people who are happy with your products and are willing to refer you to others and thus fuel growth for your business
- Passives (score 7-8) – these are people who are neutral and would use another product if there was a competitive advantage like a lower price
- Detractors (score 0-6) – these are people who are unhappy with your business and can harm your brand’s reputation
According to Sean Ellis, a supplementary question to the one that we just saw is the following:How would you feel if you could no longer use [product]?The answers here can be:
- Very disappointed
- Somewhat disappointed
- Not disappointed
- I no longer use [product]
As Sean Ellis suggests: If more than 40% of your current customer base would find it “very disappointing,” then it means that you’ve managed to build a must-have product.And, having a must-have product means that you can start seeking growth. These two questions, are the first step towards discovering if you’ve found product-market fit or not. Something that I want you to keep in mind is that you have to send your questions only to people who are somehow engaged with your product. Sending it to someone who hasn’t logged in for the last six months or hasn’t opened the last 10 Emails you’ve sent will give you a false impression over the satisfaction of your customers.
2) Retention Curve
Another way to measure your product-market fit is by taking a look at your Retention Curve. What is a Retention Curve?According to Amplitude: “It’s a line graph depicting the average percentage of active users for each day within a specified timeframe.”The following example, again by Amplitude, shows us how N-Day Retention for Products A and B shows us when a product finds product-market fit.
This means that measuring your product retention and creating a graph like this one, can help you determine whether or not you’ve found product-market fit. Why? Well, because if users keep coming back to use the product, then it means that they find value in it and if they were to answer the question:How would you feel if you could no longer use [product]?They would answer: very disappointed.Thus, taking a look at your retention curve is a great way to measure product-market fit.
3) Product Usage Interval
The product usage interval is the frequency (e.g., daily, weekly or monthly) with which you expect people to use your product.Why is this important? Because, if people keep coming back every day to use your product, it means that they are dependent on it. Roughly speaking, the more often users are keep coming back to use your product, the more likely they are going to stick with it for a more extended period. Here is how a retention curve on a week-by-week basis looks like:
When you measure your retention on a week-by-week basis, you expect your users to come back during:
- Day 1 – 7
- Day 8 – 14
- Day 15 -21
Product usage interval is a reliable indicator of finding PMF, and I strongly recommend that you use it when conducting your analysis.
4) Growth Rate
This is the last one. As I mentioned earlier, when a business is growing (especially exponentially), then it might have found product-market fit. And, it’s no wonder why. Let’s assume that your growth rate for the Q1’ of 2019 is 15%. Even though there are other significant factors like the total expenses for that same period, it’s a good indicator of a business that is growing. I know what you are thinking. That this might be the outcome of a special promotion or an upsell/ cross-sell that you offered. This is why growth rate is not an absolute indicator, and you always have to use it combined with another way of measuring PMF. Here is a tool you can use to calculate the compound annual growth rate online:
In the next chapter, I am going to give you an example of product-market fit. It’s really interesting, so don’t skip it.
Chapter 4: Example of Product-Market Fit
How finding product-market fit looks like? Well, let me illustrate this with an example.One of the best product marketing examples right now.I am sure that you know Drift—a conversational marketing platform for online businesses. Here is how Drift looked like back in 2016, when it first started:
This snapshot was taken on January 10th, 2016. And, here is how their website looks like today:
Did you notice something? “More than 150,000 businesses are using Drift to connect with their customers.”Getting from zero to 150,000 accounts (including free accounts, as Drift offers a free plan as well) is not easy. In fact, it is extremely difficult. And, especially with clients like:
But, does the fact that Drift has more than 150,000 businesses using the platform indicate that Drift has managed to find the product-market fit? It could be, but let’s dive a bit deeper. Here is the organic search traffic for Drift, according to Ahrefs:
And, keep in mind that this rough estimation of traffic comes solely from organic search results. Which, means that more and more people visit Drift’s website and become aware of the product. And, as Drift’s Head of Growth Guillaume Cabane said:“20% of that traffic will turn into 80% of Drift’s revenue down the road.”So, it is safe to say that as Drift’s traffic is growing, so as the revenue for the company. But, still, that’s not an indication of finding product-market fit. After all, we don’t have data that prove such a thing. Let’s see what customers have to say about Drift:
I know what you are thinking. That anyone can have customers’ testimonials or case studies on their websites. If you take a close look at the case studies and the data, you will see that many customers take value out of the platform. This means that Drift has managed to add value to a significant number of customers, or as Eric Ries would put it:Drift managed to find a widespread set of customers that resonate with its product.Thus, it is safe to say that Drift has managed to find the product-market fit. It is of paramount importance that PMF depends on several things. This is why you have to analyze several factors before discovering if you’ve found it or not.
Chapter 5: Last Thoughts
As I hope it is evident by now, conducting a product-market fit analysis is not easy. It can be easier though if you are following a specific process. The process I shared with you today. Regardless if you are in a good market or not, this is something you need to do. Because finding a product-market fit means that you can start growing. So, take the next step and use everything you learned to conduct your product-market fit analysis. People Who Read This Article Also Read:
- How to Measure Product-Market Fit: A Simple (But Complete) Guide
- Problem-Solution Fit: When it’s the Right Time to Pivot?
- Product-Market Fit Myths and Facts (You Wish You Knew Earlier)