When you introduce a new product, you don’t know right away if it will be successful.
A successful product solves customers’ problems in a way they will pay for. You want to make sure your product meets that definition of success before you pour a bunch of resources into scaling your ability to deliver your product. Product-market fit represents the point when you have a product that has a fairly good chance of being successful.
Here’s a look at product-market fit, what it is, why it’s important, how to get it, and how to know when you’ve reached it.
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Product-market fit is the point where you can prove that your product solves your customer’s problems well enough that they will pay for it. It's basically the inflexion point when you switch from determining if you have a viable solution to scaling your ability to provide that solution.
That’s one interpretation of product-market fit based on the variety of definitions that exist for the concept. Here’s a look at some of the more frequently referenced explanations of product-market fit.
Andy Rachleff, the co-founder of Benchmark Capital, coined the term product-market fit based on what he learned from Don Valentine at Sequoia Capital, as described in this episode of the Starting Greatness podcast:
I actually defined it in terms used by Steve Blank and Eric Ries. They were the first to apply the scientific method to business and I think that Steve's great contribution to the entrepreneurship business was the idea that first, you have to prove a value hypothesis and only once you've proven the value hypothesis should you test a growth hypothesis. To me, product-market fit is when you have proven the value hypothesis. So the value hypothesis is the what, the who, and the how. What are you going to build? For whom is it relevant? How's the business model?
Marc Andreessen popularized product-market fit in his 2007 essay The Only Thing That Matters: Product/market fit means being in a good market with a product that can satisfy that market.
Elizabeth Yin defined product-market fit from the perspective of marketing costs: “You have found product/market fit when you can repeatedly acquire customers for a lower cost than what they are worth to you.”
The key point with all of those definitions is that your product has a product-market fit when you’ve found a market in which people find your product valuable.
It’s important to confirm that people find your product valuable - that it provides a suitable solution to their problem - before you try to scale your delivery of that product.
This is what Steve Blank referred to when he said that you should prove your value hypothesis (people find your product valuable) before you test your growth hypothesis (what you need to do to expand your market share.)
If you don’t focus on finding product-market fit first, you could end up spending exorbitant amounts of money on scaling your product before you even know whether people find it valuable.
The path to product-market fit is different for every product and every company. First, choose what market you want to play in.
You could look to create a completely new market, which means you don’t have any competitors, but you are not sure if there are any customers willing to pay to have their problems solved.
Alternatively, you can enter a pre-existing market where you know you have customers, but you also have a lot of competitors.
Andrew Chen, a partner at VC firm Andreessen Horowitz, suggests “A more balanced approach may be to clone 80% and innovate on 20%. Build something that consumers understand, but with a clear innovation that you can market around.”
To identify what market to enter, and where to innovate, you’ll need to talk to customers and potential customers, a lot. Discover what problems they currently have and how they’re trying to solve those problems. Then uncover what could make those solutions better. In other words, continuous discovery.
Once you have a product idea, you think will be valuable, Marc Andreessen suggests you do whatever you need to find that product-market fit.
Do whatever is required to get to product/market fit. Including changing out people, rewriting your product, moving into a different market, telling customers no when you don’t want to, telling customers yes when you don’t want to, raising that fourth round of highly dilutive venture capital—whatever is required.
When you get right down to it, you can ignore almost everything else.
Because you’re willing to change up a lot of things as you hunt for the sometimes elusive product-market fit, you don’t want to gold plate your product. This is the stage in the product life best suited for the Minimum Viable Product (MVP).
As you experiment with the right product functionality, features, even the right customer problem, spend effort to make sure your product works, but don’t worry about making it too robust. As Jeff Lawson says, “In the early days of a product, don’t focus on making it robust. Find product market fit first, then harden”
Since the product-market fit is that point where you’ve confirmed that people find your product valuable and you can start growing it, it’s helpful to know how you can know when you’ve found product-market fit.
For consumer products, you can look at organic growth through word of mouth or Net Promoter Score. Of these two options, looking at organic growth is probably a more reliable indicator.
For enterprise products, Andy suggested looking at your sales yield curve. When your sales yield (contribution margin of a sales team divided by the total cost to field the sales team) is greater than one, you’ve reached product-market fit. This factor was first discussed in a Harvard Business Review article by Mark Leslie and Charles Holloway.
Another measure for enterprise products is to pull proof-of-concept trials after 30 days. If the enterprise customers that are on the trial don’t scream that they need your product, you don’t have a product-market fit.
A kinder, gentler version of taking something away from your customers to determine product-market fit is the product-market fit survey.
A product-market fit survey is one way to measure whether you have product-market fit. Superhuman CEO Rahul Vohra popularized this approach based on the work of Sean Ellis. Rahul describes how he uses survey responses to measure product-market fit:
Ellis had found a leading indicator: just ask users “how would you feel if you could no longer use the product?” and measure the percent who answer “very disappointed.”
After benchmarking nearly a hundred startups with his customer development survey, Ellis found that the magic number was 40%. Companies that struggled to find growth almost always had less than 40% of users respond “very disappointed,” whereas companies with strong traction almost always exceeded that threshold.
If you want to try this approach, here’s the actual survey question:
How would you feel if you could no longer use [product]?
Not disappointed (it isn’t really that useful)
N/A — I no longer use [product]
The true value in product-market fit is using it as a milestone in the life of your product.
Before you find product-market fit, your focus should be on validating that people find your product valuable.
After you reach product-market fit, you can drive growth to capture more market share. Scale too early and you’re potentially wasting money on a product that no one wants.
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