The ultimate guide to product-market fit & how to achieve pmf?
Introduction
Product-market fit or PMF is probably one of the key concepts to understand if you’re part of the startup ecosystem. By startup ecosystem, I don’t just mean the people who work in startups, but also the investors, mentors, advisors, and ecosystem builders who enable startups to grow.
Finding product-market fit is essential for any startup. It means that you have created a product that people want, love, and are willing to pay for. This can be a difficult task, as it requires a lot of research and testing. But it’s worth it, because once you have product-market fit, you have a much higher chance of success.
Based on startup data from any part of the globe, you’ll notice that the biggest cause of startup failure is not finding product-market fit. If you take a step back you’ll also notice that many startups also fail at finding problem-solution fit.
The term “product-market fit” is a fantastic phrase since it accurately expresses what it means to develop a great product. The idea neatly encapsulates all of the elements that are necessary for product success. One of the most essential Lean Startup concepts is product-market fit, and this post will present the playbook that will show you how to achieve it.
Also, read our post on why you should achieve problem-solution fit before reaching product market fit.
What Is Product-Market Fit?
Marc Andreessen came up with the term product-market fit in a well-known blog post titled “The only thing that matters.”
In that post, he writes, “Product-market fit means being in a good market with a product that can satisfy that market.”
If you go a bit deeper, what it means is that you have built a product that creates significant customer value. This means that your product meets real customer needs and does so in a way that is better than the alternatives.
Some people expand the concept of product-market fit to include a validated revenue model—that is, one that has been proven to work—going beyond the basic definition.
The Product-Market fit pyramid
In his book, The Lean Product Playbook, author Dan Olsen presents an actionable framework called the Product-Market Fit Pyramid.
The five layers of the product-market pyramid are organized in this hierarchical model, which decomposes the product and market into its five core components.
The top portion of the pyramid contains three layers. The bottom section of the triangle is known as the market and is made up of two layers. Each layer in the product and market sections depends on the layer beneath. Product-market fit lies between the top and bottom sections of the pyramid.
The Market
Let’s start at the bottom section of the pyramid, which is the market.
A market comprises all of the present and potential clients who have a similar consumer need or set of related needs. The United States tax preparation market, for example, includes all those who must fulfill their income taxes in the country. You may use either the total number of consumers in the market or the total revenue generated by those customers to measure market size.
Customers in a market select varied solutions to meet their demands, depending on their budget and other circumstances. Some consumers in the tax preparation business, for example, may hire a professional service like H&R Block. Others may choose to do their taxes manually or with software like TurboTax.
You can examine market share in a specific market by comparing it to the competition. You may compare the market share of Apple and Samsung smartphones, for example. Or, you could segment the smartphone industry by the operating system (Android, iOS, and so on). Browsers are another way of segmenting the smartphone market.
As you walk into a supermarket, you notice different products in different market categories like toothpaste, shampoo, laundry detergent, cereal, yogurt, beer, etc. The life cycle stage of a market varies. Many of the products you notice like milk, bread, and eggs are in relatively mature markets with little innovation or change.
However, new markets also form. For example, Febreze created its own market with a new product that gets rid of bad smells from fabrics without the need to wash them. Before Febreze, this market never existed. On the other hand, you also see active competition in many markets, with companies trying to get market share through product innovation.
The Product-Market Fit Pyramid categorizes the market into two separate components: target consumers and their needs. The needs layer is positioned above the target customers layer in the model since it pertains to achieving product-market fit.
Identifying the needs that match a promising market opportunity is important when you’re attempting to provide value for customers. You probably don’t want to jeopardize your chance of success by entering a marketplace where consumers are overjoyed with the present solutions and meet their requirements. When you create a new product or improve upon an existing product, you want to meet customer needs that haven’t been fulfilled. That’s why the “underserved needs” label comes in handy.
To sum up, a customer has an unfulfilled need and you need to come up with a value proposition that helps fulfill that underserved need.
The Product
A product is a unique offering that is made to meet a customer’s needs. From this definition, it’s clear that product-market fit is applicable to both products and services.
The user experience (UX) is the top layer of the product-market fit pyramid. The UX is what the customer interacts with and brings the product’s functionality to life.
A product functions based on its multiple feature set, each made to meet a customer’s particular need. The feature set layer lises just below the UX layer.
To decide which features to build, you need to identify the specific customer needs your product should address. You want to determine how your product will be better than the others in the market. The set of needs that you aspire to meet with your product forms your value proposition, which is the layer just below the “feature set” in the Product-Market Fit Pyramid.
The value proposition is also the layer just above customer needs and fundamentally determines how well the needs addressed by your product match up with the customers’.
The three layers of value proposition, feature set, and user experience combine to define your product. Your aim in developing customer value is for them to cohabitate comfortably.
The difference between problem-solution fit and product-market fit
Product-market fit is when your product meets the needs of a market. Problem-solution fit is when your product solves a specific problem for a customer. Although both are important, problem-solution fit is often more important in the early stages of a company when you are still trying to find your product-market fit. Once you have found a product-market fit, you can then focus on improving your problem-solution fit.
There are a few key things to keep in mind when trying to achieve problem-solution fit:
1. Define your customer’s problem: The first step is to clearly define the problem that your potential customer has. This may seem obvious, but it’s often overlooked. Make sure you really understand the problem and can articulate it clearly.
2. Find a way to solve the problem: Once you have defined the problem, you need to find a way to solve it. This may require some trial and error, but it’s important to find a solution that actually works.
3. Validate the solution: Once you have a potential solution, it’s important to validate it. This means testing it with actual customers to see if it actually solves their problem. If it does, then you have found your problem-solution fit!
4. Focus on the problem, not the solution: It’s important to remember that the focus should be on the problem, not the solution. The solution is just a means to an end. The real goal is to find a way to solve the customer’s problem.
5. Improve your problem-solution fit over time: Even after you have found a problem-solution fit, it’s important to continue working on it. As your product and market evolve, so too should your solution. By continually improving your problem-solution fit, you can ensure that your product is always solving the most important problems for your customers.
Finding Product-Market Fit
The product-market fit of your company is evaluated by how well your product (the top three layers of the pyramid) meets the market (the bottom two layers of the pyramid).
Your target consumers will influence the degree to which your product meets their needs. Customers will assess how well your product fits in comparison to other similar offerings on the market. To achieve product-market fit, your creation should better fulfill underserved demands than the competition.
The Lean Product Process
Now that we’ve established a solid product-market fit model, how do we go about achieving it?
The Lean Product Process guides you through each layer of the pyramid from the bottom up. It allows you to express and test your key product-market fit hypotheses for each of the five components.
Here are the six steps of the Lean Product Process:
1. Determine your target customers
All of it begins with the people you want to reach with your product, who will ultimately determine whether or not it meets their needs. To be more precise about who your target customer is, use market segmentation. Personas are an excellent method to define your target customer so that everyone on the product team understands for whom they should be designing and developing.
You may not know your target consumer with absolute precision at first, and that’s fine. All you need to do initially is make a high-level hypothesis about who your target customer is and then adjust it as you learn and iterate.
2. Identify underserved customer needs
The next stage is to figure out what your target consumers want. You want to know the specific demands that correspond to a promising market opportunity as you attempt to provide value for customers. For example, you’re unlikely to pursue a market in which clients are very satisfied with the current solutions that meet their needs.
When you create a new product or improve an existing one, you should focus on customer wants that aren’t currently being met: the “underserved” needs of your consumers. Customers will compare your product to comparable alternatives when making purchasing decisions, therefore the degree to which it satisfies their demands is contingent on the competitive market.
3. Define your value proposition
Your value proposition is your strategy for better meeting customer requirements compared to the competition. Which of the potential customer demands do you want your product to focus on?
You must figure out how your product will set itself apart from rivals. How will you make your product outperform the competition? What innovative characteristics of your product will appeal to clients? This is the heart of a company’s product strategy.
4. Specify your minimum viable product (MVP) feature set
You must next determine what functionality your minimal viable product will have. You don’t want to devote too much time and effort to a project only to discover later that consumers dislike it. The MVP method is designed to create just enough value in the eyes of your target customer for you to be sure you’re on the correct track.
Customers may be critical of your MVP’s lack of a certain capability. Alternatively, they might tell you that they would not use a particular feature included in your MVP. The objective is to iterate until you have an MVP where the customer feels that it’s good enough.
5. Create your MVP prototype
In order to test your MVP hypotheses with customers, you need to show them a version of your product so they can give you feedback on it.
A prototype is a static representation of the product that you create without having to build your actual product. Although you may construct a live, functional MVP, it’s usually faster and more sensible to make an MVP prototype. A prototype is a simplified version of your product that serves as a model for future development.
There’s a lot of discussion on the debate on what an MVP prototype should look and feel like. You will need to apply user experience (UX) design to bring your feature set to life for your customers.
An MVP prototype can vary from high fidelity prototypes like the first version of an app, a live e-commerce site with a few products, the first version of your hardware, etc, to low fidelity prototypes like wireframes, landing pages, sketches, a quiz, etc. The key point here is that the MVP should create some kind of utility for the customer to either become a regular user or be willing to pay, even if it’s just a tiny percentage of the price you are planning to charge for the real product. An MVP should help the customer ‘one’ underserved need really well.
6. Test your MVP with customers
After you’ve completed your MVP prototype, it’s time to put it to the test with consumers. It’s crucial in this stage to ensure that the individuals from whom you’re soliciting comments are part of your target demographic. You run the risk of receiving consumer feedback that will send you down a bad path if you don’t verify this.
This objective can be achieved by conducting a screener, which is a quick survey to ensure that research participants are representative of your target audience. Then you set aside time to chat one-on-one with each respondent.
During the user test, you want to carefully observe what the customer says and does as they use the prototype. You should also ask clarifying questions when appropriate to gain deeper learning. Asking questions is an important skill to gain the most value from user tests. A good moderator will avoid asking leading questions such as, “That was easy, wasn’t it?” or asking closed questions such as, “Do you like that feature?”.
Instead, you should ask open-ended questions such as “Could you please tell me what you thought of that feature?” Non-leading, open-ended questions give customers latitude in their answers and also encourage them to tell you more.
To conduct user tests, you want to talk to at least 10 users. Look across all the feedback you’ve received, both positive and negative. Identify patterns of similar feedback from multiple customers and prioritize any customer concerns that you’ve uncovered so you can address them.
7. Iterate to Improve Product-Market Fit
The Lean Product Process is an iterative process. In this stage, you may observe the feedback from the previous steps, evaluate it, and adjust your hypotheses based on what you’ve learned. The feedback will tell you which step to return to next. For example, If only your UX design needs to be improved, you can simply return to step 5. But, if your hypotheses about the feature set, value proposition, underserved customer desires, or target client needs change, you have to return to the earliest stage and proceed from there.
Not every product or feature requires all six steps. Some stages are necessary only when you’re starting from scratch with a new product. Take, for example, determining your target customers and identifying underserved needs. Once you’ve successfully gone through these two steps, you don’t have to revisit those areas for a while. But after launching your first version of the product, you would continue to improve by going through the three remaining steps: determining which features to pursue, building the features, and testing the features with potential customers.
Example of Product-Market Fit
Intuit’s Quicken personal finance program is a fantastic case study for demonstrating how to attain product-market fit in an overstuffed market.
When Scott Cook and Tom Proulx launched Quicken, there were already 46 personal finance products in the market. The company’s founders then conducted customer research and discovered that no previous products had achieved product-market fit. The products didn’t meet customer needs and were difficult to use.
The cofounders had a hunch that a checkbook-based style would be successful since everyone was already familiar with writing checks. Their hypothesis proved correct: the UX they constructed utilizing the checkbook basic design connected with consumers, and Quicken quickly became the industry leader in personal finance software.
Let’s assess Quicken using the Product-Market Fit Pyramid.
- With so many customers in the market, the product certainly met real consumer needs: People wanted assistance balancing their checkbooks, keeping track of their balances, and seeing where their cash was going.
- Customer demands were still unsatisfactory, despite the fact that computer software was well suited to assist with that. There were 46 items on the market, yet customer requirements remained unfulfilled.
- The cofounders spoke with customers to make sure Quicken’s feature set met their needs.
- With its user-centered design approach, Quicken was able to create a more intuitive UX that customers loved. Quicken’s value proposition depended on this significant increase in ease of use.
- By achieving product-market fit, Quicken succeeded amidst huge competition, which led the founders to joke about having a “47th mover advantage.”
Another interesting case study you might want to check out is that of Superhuman.
How to measure Product-Market Fit?
Measuring product-market fit can be a difficult task, but there are a few key indicators that you can look for. Let’s look at a few ways you can figure out how to measure pmf.
- One way to measure product-market fit is to see whether customers are actually using your product.
- Another way is to track whether customers are referring your product to their friends or colleagues. You can also look at customer satisfaction surveys to see if people are happy with your product.
- Another method for measuring product-market fit is the Net Promoter Score (NPS). This is a customer satisfaction metric that measures how likely customers are to recommend your product to their friends or colleagues. To calculate your NPS, you survey your customers and ask them how likely they are to recommend your product on a scale of 0 to 10. The NPS is then calculated by subtracting the percentage of people who are detractors (those who score your product 0-6) from the percentage of people who are promoters (those who score your product 9-10).
- Finally, you can look at your AAARRR funnel and see how users are moving along the funnel. The AAARRR stands for Awareness-Acquisition-Activation-Retention-Revenue-Referral and helps measure how you convert a visitor to a regular engaged paying user.
Use the Product-Market Fit Canvas
The product-market fit canvas is a way to track the progress of your product-market fit. It can help you to identify when you have achieved product-market fit, and it can also help you to track the progress of your business over time. The product-market fit canvas is a tool that allows you to think about different aspects of your customer and your market to help ensure that you create something that is likely to achieve pmf. We have covered the product-market fit canvas in great detail in our post here.
Finding product-market fit is essential for any startup. It means that you have created a product that people want and are willing to pay for. This can be a difficult task, as it requires a lot of research and testing. However, there are a few key indicators that you can look for to help measure whether you have achieved pmf. These include customer usage, customer satisfaction, Net Promoter Score, and funnel conversion rate. By paying attention to these indicators, you can make sure that your product is one that people want and are willing to pay for.
