The product market fit concept developed by Andy Rachleff (the CEO and cofounder of Wealthfront and one of the co-founders of Benchmark) is an important concept of lean startups. The lean startup is basically a methodology aimed at reducing the product development cycle and discovering swiftly if the proposed business model is viable for developing new products or starting a new business. The requirement for Product market fit or PMF grows over time when a business matures, so it’s vital to understand the same in early years of your startup.
Product market fit-The history
As the co-founder of VC Benchmark, Andy Rachleff says, the founder of Sequoia Capital, Don Valentine was the one who invented this concept of product market fit. The Venture Capitalist of American VC Andreessen Horowitz, Marc Andreessen later popularized this term around the mid 2000s. He credits Andy Rachleff for the theory and called it as the “Rachleff’s Corollary of Startup Success”.
What exactly does product market fit mean?
In simple terms, the product market fit happens for any company when its value composition, distribution channels and consumers, all three align together. This means all of these should be perfectly balanced and even if one of them is away from the alignment, it could result in short term profits. You can also see it as that stage for any company where they have precisely identified the target customers and would provide them the product ‘they need’.
Well, this was the understanding part about what it is, but the more pivotal question is how it is measured. The product market fit is needed to be calculated and tracked correctly as it indicates the startup growth. And even for the established organizations it is a good idea and crucial to see the product from the product market fit view to determine its success in the market.
Measuring the product market fit
Measuring the product market fit will be more like a hypothetical term or process because there is no certain metric that decides which properties will make a product suitable for the customers. Also, for every product, the demand and requirement is different so there can’t be shoes that fit every product. However there are certain ways in which you can get an idea of it. It would include both Qualitative and Quantitative aspects that define what the customers are looking for in the product you are offering.
The qualitative measures give you the idea about what problem your product aims at solving and what is the target market for the customers you are aiming for. This can be done in the form of surveys, interviews, direct questions from a set of people, statistics or any measure that makes the solution feasible and accurate for the customers. You can use a few quantitative measures like Net Promoter score, churn rate, growth rate parameters for the quantitative analysis.
Achieving Product market fit
Dan Olsen, the author of Lean Product Playbook and a renowned product management expert defines the PMF as the end point where a business has successfully created a product with a significant customer value. He explains the process of achieving Product market fit in six steps known as the “Lean Product Process”. These steps are:
- Determining the correct target consumer value
The target customers are the people who will exactly decide whether they will use your product or not. So it is an important segment to do the market research and define your customer specifically. Segmentation is about dividing the whole market into small segments and then researching their needs and behavior. This process helps in defining the needs of customers and then describing them in your product so that you can actually build the product people need.
If you don’t have an exact idea about your target customer you can start with a high level hypothesis and iterate it later with your choices.
- Identifying what the customer needs
An important step about any business plan is defining the customer needs. For achieving the product market fit as well, it is as essential as any other step. You need to determine the needs of the customers you are targeting. And if you find the specific needs it can help you create the perfect market opportunity for your business.
- Defining the value proposition of your product/business
Defining the value proposition for your product means how your product will meet the needs of customers better than the available alternatives in the market. You can also say what makes your product different from the others. It can be the unique selling point which can drive the customers to your product.
- Specifying the MVP set for your product
MVP or the Minimum Viable Product focuses on the features which can attract an early customer and can validate any product earlier in the development cycle. This step is aimed at developing only what is needed to create value for the target customers to confirm if you are developing the product in the correct direction.
- Creating the product prototype for the MVP
The next step is creating the MVP prototype. If you want to test if your minimum viable product matches with the needs of customers you have to show them a smaller version of your product so they can provide you feedback for the same. A prototype can help you know the opinions of customers. By observing their behavior you can determine what is lacking in your product or which feature is mostly liked by your target customers.
- Testing the MVP with the customers
When you have the MVP prototype it’s time to test the same. You have to carefully observe what the target customers tell about the product and how they react while using your MVP prototype. The test can be conducted by interviews, one to one questionnaires, surveys etc. Once you are done conducting the tests, analyze the feedback received and interpret similar pattern feedback to prioritize the needs of customers accordingly.
This six step process will ensure clarity for building your product. With each of the customer feedback you can observe new patterns and view the picture of product market fit more clearly.
Testing if your product is market fit
There are two popular metrics used while testing the product market fit:
- The 40 percent rule
- Analytics metrics
40 percent rule
This metric says if among the people surveyed, 40 percent of them say it would be ‘very disappointing’ for them if they cannot access your product anymore, then your product or business is on the winning scale. Or if 40 percent of the audience says it considers your product a ‘must have’ for them. And the same is applied for the negative feedback as well.
Analytics Metrics
There are five main measures that can verify on the basis of observations if a particular product is product market fit. These are:
- Time on website: As the name states this measures the time a particular user spends on your website. As per the industry standards, 2-3 minutes is seen as a good time on a website.
- Bounce rate: The bounce rate is calculated by page sessions for a single page divided by the total sessions or the percentage of total sessions on your website in which people viewed just one page or triggered only one request over the analytics server. A bounce rate between 40% – 55% is average. And 55% – 65% determines a good improvement.
- Pages per visit: This is another analytic measure which is determined by how many content pieces or web pages, viewers view on a website. It is mostly given as average which is obtained by page views by total visitors. 4.4 points will categorize you in the top 20 percent of the websites and above 5.7 in the best 10 percent.
- Customer Lifetime Value: CLV or Customer Lifetime Value is tracked in the customer experience program. It determines how valuable a consumer is for your organization. It is helpful in understanding the cost involved per acquisition.
- Returning Visitors: When a customer visits your site for the first time, they are a new visitor. Returning visitors are the customers that head back to your website after they have visited it once. 30 percent of the visitors coming back to the site is a good count and if the number hits the 50 per cent mark, it positions you in the right situation.
If the above five metrics are marked at above average for your product, and the 40 percent rule is satisfied you can say you have a “Product market fit’ enterprise.
When you are aiming at Product Market fit, you need to observe the consumer behavior, needs, and demands from all the viewpoints. Considering a single metric won’t be the appropriate way if you want to achieve longer market value for business/ product.
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