Anyone building a startup needs to figure out if their idea has product-market fit — that is, you need to validate that there’s a market for it and that people will pay for your product — before ploughing time and money into the company.
Finding out if you have product-market fit, or PMF, is important because it means you can justify investing resources during the next stage of growth. You need to know if you’re building the right product for the right customer in the right market. But how do you know when you’ve found it?
Sifted spoke to senior product and operations people at startups like Trouva, Birdie and Lightyear, as well as VCs, to understand how to find PMF.
What is product-market fit?
Product-market fit is achieved when a product and its value proposition solve the problem they’re trying to address, customers are willing to pay for it with their time or money and there is a big enough market to sell to. It's a continuous process in a startup — not only does the initial product need to find product-market fit, but as new features and products are created, they also need PMF.
Rajiv Tanna, cofounder and chief product officer at elderly care platform Birdie, says that to achieve PMF “a product also must have a clear path to monetisation that can support the long-term company goals and product strategy”.
But PMF is not just about revenue, according to Andris Berzins, partner at Baltics-focused VC firm Change Ventures: “Founders tend to think PMF is found when your revenue is growing. However, if, for example, you are a consumer business with excellent new user acquisition numbers, but lack retention, that is not sustainable growth. Or, if you’re a B2B startup with strong revenue growth but poor gross margins, then your unit economics are not sustainable. Real product-market fit requires there to be a business that is scalable.”
How do you find product-market fit?
There is no specific formula to find product-market fit, nor a timeframe within which to figure it out. However, according to Dimple Patel, COO of online boutique marketplace Trouva (which was acquired by online home platform Made.com), to find PMF you need to have the right mindset and follow a well structured process:
Don’t be tied to your idea — you may end up missing key indicators from the market that show that the idea isn’t working. You have to be open to change and ready to pivot. You need to be curious enough to listen to feedback. You’ll experience a number of setbacks, so you need to be resilient enough to keep trying.
There are three stages to finding product-market fit; the discovery phase, define and build, and test and iterate:
1. Discovery phase
This phase is extensive. Questions to ask yourself include:
- What problem are you looking to solve?
- Who is your customer and how widespread is the problem? Calculate your:
- Total addressable market (TAM): The size of the population that has the problem you want to solve.
- Service addressable market (SAM): The size of the population within the geographical region that you are targeting that has the problem you want to solve.
- Service obtainable market (SOM): The size of the market you can realistically acquire.
- How much pain is the problem causing? Are there any solutions or alternatives currently available? Do a competitive analysis of the market — which includes an assessment of the strengths and weaknesses of your competitors — and identify where your product fits in the space.
- Validate any assumptions that you might have about the space: interview potential customers, experts in the industry, industry analysts and investors.
- Define your value proposition by answering “what product or service are you providing and how does that solve the problem you’re looking to address?”
2. Define and build
Define your minimum viable product, or MVP — this is the most basic product offering you can start with. Write down how it will work, what features you need to build and what it will not do at this stage. Defining these parameters will keep the team focused on keeping it lean, so you can test out your assumptions in the market with the least amount of resources invested. Once you’ve defined your MVP, it’s time to build it.
3. Test and iterate
Get your MVP into the hands of customers as quickly as possible. “Don't spend a lot of time on an idea that might not be right. Build a first version, quickly, and get that in front of potential customers to validate. Don’t worry if it’s not perfect — it never will be at this stage,” says Martin Sokk, cofounder and CEO of investing app Lightyear.
Watch how they use your product to find the pain points and the “wow” moments that you can leverage, and collect user feedback — what works, what doesn’t, what features would they love to have?
Use this feedback to drive your next round of product iterations. Repeat this cycle as needed until you’re satisfied that you’ve reached PMF. During each cycle, persist with speaking to and collecting feedback from customers; constantly assess the effectiveness and usability of your product; and determine all potential routes to market.
Build a set of questions, specific to your product, to determine whether you have reached PMF. Examples of this, according to Patel, could be:
- Would customers pay for this product with their time or money?
- Do they come back to the product after first use?
- Is it better than a customer’s next best alternative? For example, if you’re building a recreational app, is it better than the alternatives like spending time watching Netflix?
- Do your early users talk about your product? Are they still enthusiastic?
- Are your early users loyal and enthusiastic enough to drive a referral mechanism?
- Can you acquire new customers for your product with your current offering?
- Is your customer acquisition cost expensive or does it take a long time? “This is a valuable indicator,” says Patel. “The uptake of your product is closely related to the strength of your offering.”
To figure out if you have product-market fit you have to engage with customers: are they returning to your product or do they stop using it after a certain point? If so, why? What are they saying about it? Are they telling their friends?
When have you hit PMF?
“Product-market fit is achieved when your customers love using and continue to use your product,” says Sokk. To measure this, you want to flatten the cohort retention curve — this is when the retained percentage of returning customers stays stable over a period of time. Obviously, you want the percentage level at which the curve flattens to be as high as possible. According to VC firm Sequoia Capital, “the higher the level at which the curve flattens, the higher the long-term retention and the healthier the product”.
The graph above shows three different scenarios for PMF. The declining curve illustrates a product without PMF, which will end up with few users. The smiling curve shows a product that has improved its offering and is experiencing a high-growth phase where churned users — customers who left the product — return again. The flattening curve indicates a product that has seen some churn, but which has a consistent base of users.
Tanna says that in the early days of a startup, the team’s focus must be on the users and the problems that they face: “Figure out why customers will buy and repurchase your solution over other alternatives,” he says.
Product-market fit is found when you can prove the defensibility and repeatability of selling to your target audience. A key metric he uses to measure this is one learnt from Sean Ellis, author of Hacking Growth. He asks customers: “Would you be disappointed if you could no longer use the product?” If 40% say “yes, they’d be very disappointed”, this is a sign of having found product-market fit.
Significant growth through word of mouth is also a strong indicator of PMF. Create referral links or codes to track where new customers are coming from. Also ask early customers, “How likely are you to recommend our product to a friend, family member or colleague?” and get them to score between 0 and 10 (with 10 being the highest). Use these results to work out your Net Promoter Score, or NPS — a popular measure of customer loyalty and satisfaction.
To calculate your NPS:
- Segment customer results into three groups, based on their likelihood to recommend your product:
- Customer scores between 9 and 10 are known as Promoters. These customers love your product and are most likely to recommend it.
- Passives choose a score between 7 and 8. The product did its purpose but the customer wasn’t blown away, or they had a few issues with it.
- Detractors choose a score below 6. They didn’t like the product, had troubles with it or couldn’t use it at all. They may try to dissuade others from using the product. Detractors can have a louder voice, and a bigger impact on referrals, than Promoters.
- Calculate the percentage of Promoters, Passives and Detractors.
- Minus the percentage of Detractors from the percentage of Promoters to find your NPS score. The results can range from −100 to 100. A high result can be a good indicator of being on track to having PMF.
- Use the NPS score to benchmark against other players in the market, says Patel.
“In the early days of defining your product roadmap, the key information is in each and every conversation your team is having with potential customers,” says Tanna. You want to understand what emotions are created by the problem you are trying to solve — “strong emotions can help you gauge the usefulness of the product against a problem,” says Sokk.
It also helps you to identify how useful feedback is. If there is too much emotion attached, it may not be an accurate reflection of the product’s usefulness.
Questions to ask users
When you’re gathering feedback from users you need a combination of quantitative and qualitative feedback:
- How often do customers use or interact with the product? Does the customer journey make sense? Can a customer use the product as intended?
- How many people have the problem you’re solving? This could be the TAM or SAM.
- What do your early customer take up numbers look like? How much does it cost to drive this? This could be your customer acquisition cost, or CAC — the overall cost of acquiring a new customer. It’s calculated by adding all the costs from the beginning of a customer journey to a purchase, divided by the number of acquired customers.
- Would customers recommend your product? This could be your NPS score or direct questions to customers.
“Strong qualitative questions can build out the world your product would be competing in,” says Patel. Qualitative metrics include:
- Customer interviews — spend time with your customer base, understand how they use your product and get feedback. This is essential for business growth. In the early days at Birdie, the team would collect and triage every customer conversation against problems it needed to solve to get to product-market fit.
- What are some of the key phrases customers use when talking about your product? Does this match your product’s value proposition and positioning?
- What works well? What could be improved?
- How does your product rank against others in the market?
Before you start conducting user research, it's important to limit bias in the questions you ask and the answers you hear, says Tanna, so that you have more accurate and useful feedback. A resource to help with this is the popular The Mom Test book.
Taking feedback on board
“During the early stages of a startup, all feedback is useful as long as it has been processed in the right way,” says Tanna. You have few data points in the beginning of a company, so customer feedback becomes your most useful data set.
Listen to customers that love your product — they show that you’re solving a real problem and highlight what's working well. Also, listen to customers who don’t love it — constructive feedback is your competitive advantage.
For example, you may not have reached product-market fit because the problem isn’t pressing enough for the customer at this point in time, or they’re not ready for the solution you’re providing — this can help you map out and pivot to a slightly different product that better meets their current needs.
What happens if you don’t find product-market fit?
If it becomes apparent that your product does not have product-market fit — a common occurrence for new startups or products — you have three options:
- Persevere. Keep iterating on the solution. It commonly takes various iterations to achieve PMF.
- Pivot. Take the learnings and pivot towards a new solution. Set aside your ego and start again. When founders don’t pivot, teams often “stick to the initial idea until the money runs out or they decide to shut down prematurely,” says Anh-Tho Chuong Degroote, founder of open source billing platform Lago. Spend time speaking to customers, don’t force a new idea and be transparent with your team — give them the option to stay or to leave if they’ve lost conviction. You need energy to pivot.
- New venture. Drop the current problem, solution and market you're working on and start something completely new. If you have raised venture funding, you want to manage your investors carefully — communicate that this isn’t a definitive failure rather a step in the journey. Clear answers and proof that you will “nail it this time” can’t be expected immediately, according to Chuong Degroote. If you have the runway to do so, offer to return the money and part ways with an investor that is not onboard with the change.
Some products won’t reach PMF, however, because the sector isn’t ready yet — maybe there’s a barrier to entry that can’t be overcome due to cost, technology or access. Or maybe customers don’t find the problem pressing enough, as mentioned above.
The feedback you collect from your conversations will be crucial to understanding what is holding the product back, and whether it is insurmountable. If you don’t find product-market fit this time, it’s not the end. Founders set out to solve problems they’re passionate about, and it can take years for everything to align and for you to find PMF — “just because it’s not been solved yet, doesn’t mean it never will,” says Patel.
And, Sokk says, that doesn’t mean the company can’t exist: “The stronger PMF you have, the easier it will be to expand your product. If you don’t quite have PMF, you’ll use more resources, time and effort to see results.”