Demystifying Product Market Fit

Product Market Fit is the holy grail of early-stage startups, but it is so poorly understood. It’s why I’ve previously posted on Why PMF is a bad target. Since then, I’ve refined my thinking around how to make it more measurable, and, therefore a better target.

It needs to be much more specific and measurable than “a feeling” or “if you have to ask you don’t have it” nonsense. It’s also more than just a high NPS score or “a pull” that are completely unactionable. Or a willingness to pay that is obvious but hard to find signal in the noise. A good set of measures for PMF should be unambiguous and actionable.

Startups are all about building solid fundamentals. The way you define and measure PMF should be a measure of those fundamentals. Ultimately, you need to have 3 things: (1) growing demand from users who (2) regularly receive value and (3) stick around. What that means is…

It’s worth noting that as the name suggests, product market fit is relevant to a specific product, in a specific market solving the needs of a specific customer segment. As one of those change, you’re going to need to optimise for another PMF and it’s not the case that once you have it you will always have it.

Aiming for PMF is also most relevant to early-stage, pre-Series A startups. That’s because it is the clearest indication of a startup having solid fundamentals at this stage. After Series A, revenue, margins, & profit, etc become clearer to track and a more reliable indicator.

ASIDE: Revenue in the early stage is often a very misleading measure to focus on (despite some investors loving it…) This is because some revenue can be generated from highly inefficient businesses that won’t scale well or falsely inflated by paid media where growth stops when you stop paying.

Definition of Product Market Fit

The most useful and definitive description of PMF that we’ve found is based on the Trifecta from @bbalfour:

1) Double-digit user growth. (i.e. you are rapidly acquiring new users.) For different businesses, this may be over a week, month or quarter. You’ll know what is right for you

2) Meaningful engagement. Once again, what is meaningful will differ per startup, but it’s useful to think of it as the frequency of core value delivery. What is the most valuable action that customers take on your platform? Can you get them to take it every day for a week? Forget the other fluff.

3) Solid retention. Are people sticking around? If you have week on week engagement, do they do that each month? What is the customer’s lifetime for using your product? For B2C company 20–40% is good, for B2B good is 40–60% of users who sign up stay for an extended period (years). Have a look at this post by Lenny for a more detailed breakdown.

Only when you can show a (1) rapidly growing user base that are (2) actively engaged and (3) getting enough value so that they stick around for a long time can you claim to have Product Market Fit.

It’s also important to note that PMF depends on a specific combination of a Product, to a specific customer segment, in a specific market. When you change any of those, you are aiming for a different PMF. These “different PMFs” are the inflexion points in your Master Plan or Company strategy.

Example of a Master Plan
(1) Build a high-end sports car for wealthy people in the US
(2) Build a mid-range family car for that same audience & slightly lower in a small number of US & EU markets.
(3) build a mass-market car and expand sales globally.
At each step of its Master Plan, Tesla needed a new PMF target.

So, although it can be quantified and clearly defined, PMF may change as your business grows. And that’s OK. That’s the point of strategy. But the most valuable thing for a startup to do in the early stages is to focus on getting to PMF in order to build solid fundamentals.

In Summary:

1. Identify the inflection points in your Master Plan as a combination of Product to a Customer segment in a Market.
2. For the next inflection point define what rapid user growth, meaningful engagement and solid retention will look like.
3. Start with optimising for engagement, then acquisition, then retention.
4. Reach PMF and repeat for the next inflection point.
5. World Domination.

If you want to read further on this and the processes around how to deliver it, I highly recommend A tool to help African Startups systematically find PMF.

Huge hat tip to Steve Waidelich and the wider Studio team at Founders Factory Africa that have been with me on this journey for clearer measurement and definitions.