What is product-market fit, why product market fit is important, how do you determine the market fit for a product, and how to measure your success
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Product-market fit can make or break your startup.
If you have it, you're close to the stars. Sales and retention rates keep growing. People are raving about your baby on social media. Investors are knocking on your door.
If you don't have it, you're probably fading into the noise of better alternatives. Your startup is on its way to going under very, very soon.
Everybody in the startup world has "reaching product-market fit" on their goal board. But few know why product-market fit is so important, what product-market is exactly, how to determine the market fit of a product, and what you should do if you don't get to PMF.
That's why we created this guide about product-market fit. And we're not stopping at the theory. Startup founders throughout Latin America also shared with us their own difficult journeys to reach PMF, and what other startup creators can learn from their experience.
Product-market fit sounds pretty technical, right?
But it’s something that every founder knows deep down.
You can have an amazing product or service, maybe even the best one around the block. ✨
Guess what, Pedro? That's not enough. 💁🏻♀️
You need people who actually need that solution in their lives.
Here's how you should go about creating a startup that's ready to reach PMF:
1. Begin with a problem. It could be something a community knows it's currently struggling with. Or maybe something these people didn't even realize could be made easier. Either way, it should be something that makes them say OMG, I really want a solution for that right now. If enough people feel this way, you have market potential.
2. Then comes a hypothesis. "I think this product or service could be the right solution to this problem of Y market potential because of X."
3. Finally, you have to test your hypothesis.
Note that we didn't include building your dream team (we are still holding that job opening for you, Messi), or having a user experience so awesome that everyone will be amazed at how easy to use your solution is.
Everybody says that people are the most important thing ever. Engineers love to compete for the best product. But we agree with a16z's Marc Andreessen: having a great market, with lots of real potential customers, is the most important factor for your startup's success.
Your product just needs to work, in a market where people are knocking at your door to find a solution to their problem. Your team and product can be upgraded easily after the first sales so that you blow the competition out of the water.
But if you have the best talents, the best product, and the worst market, guess what? You just spent valuable time and funds building a solution with a lukewarm reception.
The money will run out. Your team will quit. Your startup will die.
Don't want that to happen? Then, the only thing that matters is sprinting to product-market fit. Push for PMF, and not for the glitz and glamour that comes with growth.
Product-market fit is being in a good market with a product that can satisfy that market. That's a definition from our friend Marc.
PMF is so important that the life of any startup can be divided into two parts: before product-market fit and after product-market fit.
Product-market fit is happening: customers are buying as fast as you provide products, expand services, and hire salespeople. Reporters are sending you e-mails because they felt the buzz. Investors want to know more about your solution. Life is good.
Product-market fit is not happening: customers aren't getting the value they expected, so word of mouth is kinda meh. The sales cycles take too long and deals often end up not happening. Press and investors are as silent as dead. The growth numbers go a little bit up or a little bit down. Knock knock, is anybody there?
Don't lie to Marc, to us, and to yourself here: you can feel if your startup has what it takes or not.
Still not sure? Well, there isn't a guide set in stone to assess product-market fit. But here are some processes and metrics to test your startup's PMF.
Here are nine steps you can take to determine and measure product-market fit in your startup:
1. Examine your product without the loving eyes of someone who’s been working on it 24/7, and trust completely in the build-measure-learn iterations you'll be making from now on. That's a promise you need to make, leaving your ego at the doorstep.
2. Get other people to try your product out. Without guiding them through it, witness them using the solution. You want the true user experience.
3. Jot down the roadblocks they face when using your solution. These are great insights into tweaks you can make down the line.
4. End the trial by asking them a simple question brought to us by Sean Ellis (you know, no big deal, just the fellow who coined the term "growth hacker" and ran early growth in the early days of Dropbox and Eventbrite 💅): "How would you feel if you could no longer use the product?"
5. Measure the percentage of people who answer "very disappointed". Ellis' magic number is 40%. If your product or service scores below that, your startup has a higher chance of struggling to find product-market fit. Startups with strong traction generally go beyond 40%. Just so you know, Slack got 51% in its test.
Net Promoter Score (NPS) is another established and great way to measure whether your product is prepared to survive. NPS subtracts the percentage of customers who are detractors from the percentage who are promoters, leaving you with a score between -100 and +100.
6. And what do you do after having these numbers in your hands? Look for the people who gave you the best and the worst scores. The highest marks give you an insight into which users you should target, while the lowest marks deter you from pitching to nay-sayers. Discover who are your personas, what they love and hate about your solution, and how they want your startup to communicate with them.
7. Serve them accordingly, while measuring the cost and impact of each new development.
8. Ta-da: you just conquered your first fans. Now you have to keep working on their changing needs to retain your PMF.
9. Pay attention not only to acquisition but to engagement and retention metrics, as our friends from NFX have already warned you. No use getting customers on the top of the funnel if they all leave by the end of it (a.k.a. churn). 💀
With a strategy as solid as this one, you'll blow the competition out of the water.
What if you made Ellis' scary question and discovered that not enough people love you? 💔
Sure, we'll lend you a shoulder to cry on. 😢
But remember: after grieving that loss, you gotta move, Fernanda 🏃♀️
Knowing you don’t have product-market fit now is better than discovering it later down the road. Take this as an opportunity to pivot.
That's when you go back to find what your market really needs and reformulate your hypothesis. Rather than looking at your own ideas or at what competitors might be launching, it's once again time to pay attention only to your users.
What's different, then? Just like the water flowing through a river is never the same, you're also not the person you were when you first started. Now you have information on users and their needs. Whether you’re starting from scratch or making adjustments, it’s not like you're walking blind.
Pivoting can be the moment to realize what’s really going to make you stand out in the crowded market, focusing on the one thing nobody else has thought of.
In theory, the journey to reach product-market fit is a straight arrow: ideation, MVP, and then PMF. Probably, with some investment tagging along.
But the reality is that you'll probably have to hit the reset button – and the best advice comes from founders who had to face this hard decision. Simone Azevedo, the founder of Xingu Health, talked to us about her ups and downs on the journey to PMF, and the biggest lessons learned:
Xingu Health was created back in October 2020. The business started with the idea of connecting patients to physical therapists and orthopedists.
The startup had physical therapists as advisors, interviewed patients and health professionals, and spent more than six months developing its MVP. The idea was to test if customers would use the platform, if it could be monetized, and if that could be a sustainable business.
But the startup made its minimum viable product much more complex than it needed to be, says Simone. That was a big mistake in terms of costs and time: less is more in an MVP.
"When I presented it to our advisors, they basically said they wouldn’t use what they told us to develop. It blew my mind."
After facing the advisors' rejection, another lesson came to Simone: go not only wide but also deep to really understand your customer.
"Market research may guide you. But only in-depth interviews will really show you the customer journey and if your solution addresses their problem. This is even more important if your solution will require customers to change behaviors."
In Xingu's case, the first impression was that caregivers were concerned about keeping patients' information accessible beyond their own memory. But a further investigation led Xingu to discover the same caregivers felt that adding all that info on the platform took too long and that it could be postponed in favor of daily tasks.
After the reaction from advisors and customers, Xingu started studying opportunities and assessing areas of interest, market size, and ability to launch first in the US (where Xingu has its structure). These criteria will define how the startup will make its pivot, probably during the first quarter of 2023.
Simone also cautions founders to pay attention to their end of the runway (learn all the fundamental financial concepts for startups). Businesses in highly regulated markets might take a lot of time to get on the ground. That was Xingu's case, working in the healthcare segment.
The startup's metrics were customer adoption and the ability to close with a large patient organization in Brazil. Just the second part was already a nightmare in terms of time and costs.
"From the Letter of Intention to the contract signed, it took 14 months. Then it took them another five months to make their first post on social media telling members they were now using our platform. We knew it would take time, but this is way too much when you are bootstrapping," says Simone.
Taking runway into consideration, Xingu will simplify its structure from C-Corp to LLC in the US. And at this point, the startup decided to close operations in Brazil. "We can’t get our company up and running in Brazil without someone fully dedicated. And today, we don’t have this person nor a way to hire someone, as we've decided to bootstrap."
We've said this before in our letter for founders in 2023: now's the time for tech entrepreneurs to do what they should always have been doing. Assessing each line in your balance sheet, evaluating every effort, and extending your startup's runway so that it can survive in any economic environment – and reach product-market fit while at it.
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