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product market fit
For any business to survive, there must be consumers who will buy what it sells. As a startup founder, it’s crucial to assess the market’s demand for your product or service. Knowing whether your product satisfies market needs is the difference between a successful company and a failed product. That’s where product-market fit comes along.
What Is Product-Market Fit?
Product-market fit (“PMF”) means that you have what people want. It means being able to demonstrate that your service serves a need, and that people are willing to pay for it. PMF matters more to the future of your business than building the perfect team or creating masterful marketing tactics. It’s the lifeblood of any business. And every startup’s top priority should be finding PMF as quickly as possible.
When finding PMF, you should ask yourself what exactly your product or service is being hired to do. For example, it’s very clear what users want out of Pacaso. Consumers use Pacaso to help them pay less money to buy a second home. Recon Food (one of my other startups) is still finding its PMF – some people use it to post photos of food they’ve cooked, some use it to decide what to order at a restaurant, and some use it for entertainment to look at great photos of food. We are still asking ourselves what service Recon Food is being hired to do, and what features we should ship next.
When trying to discover if you really have product-market fit, here are some important questions to answer:
- Are people genuinely excited about your minimum viable product (MVP)?
- Are users finding and using your product organically?
- Are you retaining customers/users?
- Are your early users referring the service to other people?
- Are people willing to pay for it?
The measurement stage is vital as it allows you to learn whether you are on the right track or not and make changes accordingly. There are several data points and metrics that you can use to validate whether your product is headed in the right direction:
- Paid growth. How many new customers use your product via paid channels like Instagram, TikTok, Google Ads, etc.
- Organic growth. How many new customers are acquired without paying. For example, word of mouth or free referrals.
- Conversion. How many people who download or try your product actually use it or pay for it.
- Retention. Out of an initial user group, how many come back and keep using the product.
- Customer acquisition cost (CAC). How much you pay to acquire customers. The most basic way to calculate this is to divide your total marketing costs (including marketing and sales headcount) by the number of customers acquired.
- Customer lifetime. The average amount of time you can retain a customer on the platform (usually measured in months).
- Customer lifetime value (LTV). The total worth of a customer over the entire period of your business relationship. You can calculate this by finding your gross profit per customer each period and multiplying it by your customer lifetime. Your LTV:CAC ratio should always be >1 because otherwise, you lose money with each new customer.
Raising outside capital should enable you to build your minimum viable product and find product-market fit. You should ideally validate your market demand during the MVP phase. See below.
Once you’ve actually achieved product-market fit, you can start focusing on growth. Be proud if you make it to this step as it’s a hard one to achieve for many startups. But you’re not done here.
While the earliest version of Snapchat was a simple disappearing photo-sharing app only for iPhones, they’ve since evolved into a messaging platform and one of the world’s top media-sharing apps. As the market changes, your product needs to change as well to maintain its PMF. Snapchat is an excellent example that product-market fit is a never-ending journey. Once you have it, you must work hard to maintain it.
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It's just a few months into a new year — and you're already overwhelmed with resolutions and ideas you should be working on; but how can your team effectively prioritize projects and test out new ideas?
Here's one best practice, derived from "The Lean Startup" and my 10 years of expertise helping companies scale with product market fit, to help you in your product development or personal growth.
Get on the Same Page about Priorities and Scope
First, make sure you're working toward the same goal. This is one of the biggest challenges companies of all sizes have: teams with seemingly different goals and priorities need to collaborate to deliver a product. Whether you're half of a company working on your product -- or half of a team doing so, here's one way to get alignment that also builds rapport.
Start by having everyone contribute ideas, from most immediate to those pie-in-the-sky outcomes, to the backlog of the company-wide product board. What does success look like for your product in the next 3-6 months? How about for the next 2-3 years? And keep coming back to this step, adding new ideas and evaluating existing ones based on what you'll learn later in this process.
To minimize risk, extend your runway, and identify better directions to take, simplify each brainstormed idea into the smallest first step you can take towards this goal. It should be relatively straightforward to implement (such as a waitlist sign-up page in a Google Form), which will allow you to judge if there's enough demand in the market before it's fully built. We'll call this simplified solution the minimum viable test (MVT).
When everything is high priority, nothing is. One way to select the most viable, simplified idea is to quantify: (1) how much easier other ideas on the list become once this one is complete, (2) the potential profit/mission impact of the change, (3) the effort it would take to test it, and (4) the data required to see if it worked. (Considering the impact of a project indirectly accounts for wide customer reach. Why? If you don't solve the actual customer pain point and create value for your customers, they'll stop using your product.)
One rule of thumb to prioritize ideas is: sorting by those with the largest impact, then by smallest time to deliverable and most data availability, breaking ties by picking ideas that will make other goals easier to accomplish. The first item in the sorted list is your MVT -- and now everyone's on the same page that this is the direction you're going in next.
Agree on What Success Looks Like
This is the second biggest challenge: teams with different ideas on what the outcomes look like.
You and your team are on the same page about your goal and you know what you're testing; now you need to know who'll lead development, and who the key stakeholders are — the ones using this idea to actually create the impact. Work with them on what the test will actually look like once it's built (including inputs, outputs and technical details), how the outputs will be used to make the impact, and how you'll measure it -- to help you decide whether the idea is actually worth pursuing.
The success criteria should be based on: (1) how long you want the test to run, (2) what metric(s) can best summarize what you're looking for and what happened, (3) what the baseline currently is, and (4) what the metric should look like at the end of the experiment.
Build a Test with Clearly Defined Goals
You decided what your MVT looks like and now you get to create it.
Once the MVT is built, share it with a small number of customers to see what is and isn't working by checking your metrics every day, for the duration of the experiment. This makes it more manageable to do damage control when things don't work exactly as expected and catch any customer frustrations early. If you skip this step and something's not working, you won't know about it, your stakeholders may be blindsighted, and customers will go elsewhere.
Let Your Test Decide Next Steps
Now that the experiment is over, take 5-15 minutes to do a post-mortem on the process and results, discussing: what worked, what didn't work and what you'd do differently next time.
Here's a quick flowchart to help you decide what to do next:
You designed the MVT with clearly defined goals. Did you meet or exceed them in the time frame projected? If yes, then go ahead and share the MVT with more customers, monitoring metrics and responding to customer requests, as before. Share the MVT with more and more of your customers, as it continues to meet expectations — until it reaches 100% of your customers. Continue monitoring and responding to requests, as before. Once your MVT reaches 100%, it's time to get on the same page about scope and priorities for the next MVT, whether that's the next iteration of this idea -- or the first iteration of a new one.
More often than not however, the MVT won't meet the metrics specified in the time frame expected. I've found that the most common reasons tend to be: ambitious metrics, ambiguous customer value, changes in customer preferences, or errors in implementation (of MVT, its dependencies, or metric computations). A post-mortem will help you do better next time, as you and your team go back to prioritize and scope down the next iteration of this cycle.
As you go through this cycle, you'll find that different steps take longer to complete than others; some may feel as if you're stuck there forever. It's all part of the process. Skipping steps can end up with the cycle taking longer, creating more customer frustration, and missing revenue projections.
Here are two examples that walk you through how to apply this framework to:
Now you have a framework to help prioritize your ideas, align your team, minimize business risk and (hopefully) feel less overwhelmed. What idea will you test out next?
- Consider an Opportunity Solution Tree for continuous product discovery
- You can incorporate this cycle into your product market fit journey. Here's a slide deck and recording on my talk guiding you through how to think about, benchmark and improve your product market fit.
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