When do you know if your product has achieved product/market fit?
One of our product goals had laid out a projected timeline to achieve product-market fit for one of our newer products. It piqued my curiosity to find out how would anyone know if their product has achieved product-market fit.
The reason you need to know if your product has achieved product-market fit is because only after that you can decide your next course of action. Sean Ellis, the marketer who coined the term growth hacking, shared the startup growth pyramid that explains what should you do after you achieve product-market fit :
The question this poses of course, is how do you know if you’ve achieved product/market fit?
This post is my research on finding an answer to the question.
Product--Market Fit
Product-Market fit is achieved when a product shows strong demand by passionate users representing a sizeable market.
Mark Andreesen defined Product--Market fit as "being in a good market with a product that can satisfy that market".
Steve Blank says, "Customer validation proves that you have found a set of customers and a market who react positively to the product".
Product-market fit requires three criteria to be satisfied:
The customer is willing to pay for the product
The cost of acquiring the customer is less than what they pay for the product.
There is sufficient evidence that the market is large enough to support the business.
All businesses need to reach revenue at some point, so all businesses must have a product--market fit milestone. If you cannot prove that you can acquire customers for less than what you earn from selling them your product, you have a fundamental business problem.
While the Product-Market fit definition may seem rather obvious and getting to revenue is a clear milestone, measuring product-market fit from a market acceptance perspective, is a bit more difficult.
So, how do you know if you achieved product-market fit?
Sean Ellis:
Sean devised a simple survey that you can send customers (available at survey.io) to determine if you’re ready for accelerated growth. The most important question in the survey is “How would you feel if you could no longer use this product or service?” In Sean’s experience, if 40% of people (or more) say they’d be very disappointed to lose the service, you’ve found a fit, and now it’s time to scale.
This threshold is a bit arbitrary but Sean arrived at this number after comparing results of around a 100 startups. Those that struggle for traction are always under 40%, while most that gain strong traction exceed 40%.
Achieving Product--Market fit requires at least 40% of users saying they would be "very disappointed" without your product.- Sean Ellis
Here’s why 40-50% is a reasonable number. First, if you buy into Moore’s technology lifecycle adoption curve, your target customer at this point is the early adopter. Your early adopter will care significantly more about your product than the early majority or late majority adopters will. Second, if you have waited to try and scale your business until achieving that mark (as Ellis recommends), then you want to be sure you have nailed it before you spend money on demand creation efforts (scaling up).
Brant Cooper:
You know you have fit if your product grows exponentially with no marketing. That is only possible if you have huge word of mouth. Word of mouth is only possible if you have delighted your customer.” Entrepreneurs too often confuse product/market fit with growth in what Ries calls vanity metrics (“numbers or stats that look good on paper, but don’t really mean anything important”). So what does? Net Promoter Score (NPS) as a great tool to predict the magnitude of customer love for one’s product/service — ideally a score of 40 or higher “to know you’re on the right track.” However, while NPS is a pretty good proxy for likely fit, it is “not nearly as accurate as having market feedback in the form of purchases.” People vote with their dollars, after all.
Marc Andreessen:
"You can always feel when product/market fit isn’t happening. The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of ‘blah’, the sales cycle takes too long, and lots of deals never close. And you can always feel product/market fit when it’s happening. The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can. Reporters are calling because they’ve heard about your hot new thing and they want to talk to you about it. You start getting entrepreneur of the year awards from Harvard Business School. Investment bankers are staking out your house. You could eat free for a year at Buck’s.” --Marc Anderseen
Chart Mogul
The point is to move from manual traction to automatic traction. A focused example of this: going from individually reaching out to prospects and getting them to try your product, to a flow of inbound prospects seeking you out. When that traction is automatic, your focus shifts from nailing a product that customers want to distributing your product and scaling to serve your growing customer base.
There are qualitative and quantitative metrics you can track. None are a litmus test; rather look at these as a matrix of indicators.
Customer dependency: Your customers do not want to, or couldn’t, function without your product. Sean Ellis released a survey based on this concept, to gauge your customer dependency.
User engagement: This is tied to customer dependency, but you can gather the data yourself rather than by surveying your users. Follow data points that show your customers are spending an exponentially higher amount of time within your product, using more features, or checking it at shorter and shorter intervals.
Reduced lead times and shorter sales cycle: These indicate that your potential customers need your solution and see the value in your product. They are willing — even eager — to try it.
Word of mouth/referrals: If current customers are recommending your product to others, you know something is working. For some insight on how to encourage this, check out this article on how B2B word of mouth works.
Conversion rates: Similar to above. As conversion rates increase, you know you are satisfying more and more of the market.
Higher initial order value: Customers sign on at a higher price point. They’re not just willing to pay for it, they’re paying even more than the cheapest option.
Revenue expansion (contract length, renewals, ACV, upgrades): Similar to above. Customer willingness to upgrade their service plan or commit longer reflects that your product not only solves their need, but that your business has the ability to retain and expand on its existing portfolio. Expansion business is key to scaling, eventually becoming the engine of your growth.
Standard SaaS metrics you can consider tracking as PMF indicators are CAC:LTVand Churn.
Resources:
https://a16z.com/2017/02/18/12-things-about-product-market-fit/