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Product/market fit

Product/market fit, also known as product-market fit, is the degree to which a product satisfies a strong market demand.

Product/market fit has been identified as a first step to building a successful venture in which the company meets early adopters, gathers feedback and gauges interest in its product(s).

Contents

HistoryEdit

Marc Andreessen defined the term as follows: “Product/market fit means being in a good market with a product that can satisfy that market.”[1][2][3] Many people interpret product/market fit as creating a so called minimum viable product that addresses and solves a problem or need that exists.

Sean Ellis is often associated with popularizing the term. He placed product/market fit as a precondition for effectively scaling marketing for a company in his startup marketing pyramid.[4]

Steve Blank referred to the concept of product/market fit as a step in between customer validation (step #2 in his book The Four Steps to the Epiphany) and customer creation (step #3).[5][6][7][8][9]

InterpretationsEdit

In Alexander Osterwalder's Business Model Canvas paradigm, product/market fit could be interpreted as a business model's value proposition, customer segment, relationship, and channel are fixed without requiring additional pivots.

Popular metricsEdit

The 40% ruleEdit

One metric for product/market fit is if at least 40% percent of surveyed customers indicate that they would be "very disappointed" if they no longer have access to a particular product or service. Alternatively, it could be measured by having at least 40% of surveyed customers considering the product or service as "must have". Sean Ellis is noted for popularizing this heuristic after examining many startups.[10] Rahul Vohra of Superhuman has developed a survey-based model based on the 40% Rule to help post-launch startups test and optimize for this metric.[11]

Analytics metricsEdit

There are five metrics any online business can measure to empirically verify if they achieved Product / Market fit. They are 1. Bounce Rate, 2. Time on Site, 3. Pages per Visit, 4. Returning Visitors, 5. Customer Lifetime Value. Low bounce rates means a visitor's expectation is being met. High Time on Site and Pages per Visit indicate that the experience of the user is satisfactory. High Returning Visitor reflects the lasting impact a product has on their customers, causing them to come back, and Customer Lifetime Value measures the profitability each customer brings to the company. If these 5 metrics are above average and your 40% rule is met, you'll know you have a Product / Market Fit company.[12]

Growth metricsEdit

There are a wide range of metrics entrepreneurs can use to show that they’ve achieved product/market fit, and it's important that businesses pick the ones that are most relevant to their industry. For instance, software as a service (SaaS) companies primarily rely on gaining and retaining customers to grow their revenue stream. For these companies, there are two commonly-used growth metrics that indicate how well they are doing: customer churn, and monthly recurring revenue (MRR) churn.[13] Customer churn is the percentage of customers that cancel their subscriptions in a given time period. MRR churn is the monthly revenue lost from canceled contracts during that month.

Common mistakesEdit

It is important to differentiate between product/market fit and problem/solution fit when measuring a company's customer base. More specifically, when gauging a customer's desire, companies need to be sure they are measuring desire for the product or service—not just for a solution. Misinterpreting customers' desire for a solution as desire for a company's product or service will end up being a false positive for product/market fit.[14]

Product/market fit is not binary. For a fledgling startup, a minimum degree of product/market fit will not be adequate in order to achieve market traction and success. Rather, what is actually required is a high degree of product/market fit, or extreme product/market fit.[15]

See alsoEdit

ReferencesEdit

  1. ^ Andreesen, Marc. "Product/Market Fit - EE204". Stanford University. Retrieved 6 December 2018.
  2. ^ "How do you define Product-Market Fit?". Quora. Retrieved 6 December 2018.
  3. ^ Milton Mpinga. "The Pmarca Guide to Startups, part 4: The only thing that matters". Archived from the original on July 1, 2007.
  4. ^ Ellis, Sean. "The Startup Pyramid". Startup Marketing.
  5. ^ Steve Blank. "The Four Step to the Epiphany - 2006" (PDF).
  6. ^ Blank, Steve and Dorf, Bob (2012). The Startup Owner's Manual, K&S Ranch (publishers), ISBN 978-0984999309
  7. ^ Blank, Steve (2008-2015). Blog on entrepreneurship
  8. ^ Blank, Steve (2013). What I Wish I Knew About Startups - Steve Blank, Consulting Associate Professor at Stanford University (video, 30-min). The audience is composed of the CEOs of the portfolio companies of Khosla Ventures. Talk given in May 2013, posted on the official You Tube channel of Khosla Ventures in May 2014
  9. ^ Blank, Steve (May 2013). Why the Lean Start-Up Changes Everything, in Harvard Business Review
  10. ^ Venture Hacks. "How to bring a product to market / A very rare interview with Sean Ellis".
  11. ^ "How Superhuman Built an Engine to Find Product/Market Fit". Retrieved 2018-11-25.
  12. ^ "Find out if you have a Viable Ecommerce Business, Before it's too Late". eCommerce Genome by Compass. Retrieved 6 December 2018.
  13. ^ Erwin, Derek. "How to Establish Product-Market Fit: SaaS Growth Metrics to Focus On". The Startup Finance Blog. Retrieved 6 December 2018.
  14. ^ Kromer, Tristan. "False Positives and Product Market Fit". Lean Startup Blog. Retrieved 6 December 2018.
  15. ^ Wiener, Ben. "The Black Hole of "Meh."". Medium. Retrieved 6 December 2018.