The only thing that matters in a Startup
August 30, 2022
But like much of startup terminology, we often fall victim to its ambiguity. We may be theoretically clear about the meaning of the concept and its importance, but we fall into absolute doubt about when exactly we reach Product-Market Fit. We come across various metrics and criteria to determine it, but we are not sure what to see and how to see it.
So, the aim of this article is to compile some market "signals" that can give us a clue and help us confirm whether we have reached such a precious moment. It is worth clarifying that the Product-Market Fit often follows a combination of criteria rather than a single overall metric.
Without further ado, here we go!
Before listing the various criteria that help determine whether or not the Product-Market Fit was achieved, I believe it is necessary to briefly review the concept and why it is important.
In a nutshell, the Product-Market Fit (also simplified as PMF) is the moment when our value proposition fully addresses the unmet needs of our target segment.. In other words, what your product offers at a functional level is 100% aligned with what users really want and need.
Typically, the value proposition of a new product in the market undergoes a series of iterations in order to make it more attractive to users, defining our offering based on what we learn about what the user values most.
It is likely that your idea will initially generate some interest in your target segment, but brief interest in novelty is not synonymous with acceptance of your business model.. For that reason, you may have solved some user pain points, but there is still some noise that needs to be refined to reduce scepticism about your solution so that more users have the conviction that your product will entirely solve all their needs.
In perspective, a startup develops in two main phases:
Each phase has its own dynamics and rules of the game. It is precisely the Product-Market Fit that marks the transition between the two. Hence the importance of identifying it quickly, as it often involves remodelling a set of strategies focused on validating your value hypothesis for those that are more related to monetisation and growth.
Product-Market Fit then enables opportunities for scale. It means that, in part, the major problems of validating your business are over and the challenges of growth begin.
For all of the above, it is a very special moment for the entrepreneur and the whole team working behind the product. Now, let's list some criteria that will serve as a guide to know if we have reached the PMF or not.
Let us review, in a quantitative way, some indicators/metrics and criteria that can give us an indication that we have reached our desired goal:
1. Organic user acquisition: It is natural that at the beginning the acquisition of new users depends heavily on paid channels. Ultimately, nobody knows us and we need a quick way to attract our first users.
But in the long term, reliance on paid channels should decrease in favour of a more scalable and profitable strategy. A strategy that focuses on organic growth and motivates the users themselves to be the engine of your product's growth.
There is no clear number that indicates that the Product-Market Fit has been reached, because each industry and product type has its own dynamics, but a steady increase in the percentage of new users acquired from organic sources is a good benchmark, especially when it represents more than 50%.
The presence of growth loopsa higher number of users acquired per month organically and a high virality (a large number of referrals) can give us clear clues about the stage of our product.
2. High retention rates: it is not enough to explain Product-Market fit with acquisition metrics, because if all our new users eventually stop using our product after a short time, we are doing something wrong.
We know that we have probably reached PMF when our retention curve flattens over time.. That is, when we manage to retain a solid base of active users over time.
The retention curve of a product without PMF never evens out and tends to decrease week by week, so most of the users acquired some time ago will decide to stop using our solution.The retention curve of a product without PMF never evens out and usually decreases every week, so most of the users acquired some time ago will decide to stop using our solution.
Beyond retention, other criteria to consider is a high user activation rate. If we manage to activate new users as early as possible and convert them into repeat users, thus avoiding early attrition, then we are on the right track.
3. Presence of power users: it is not only important to observe whether or not our users return to use our product, but also to analyse the frequency with which they return and their intensity of use.
A good sign of Product-Market Fit is the existence of power users. The power users stand out for their intensity and frequency of use, which is much higher than the average power user.. A product with a solid value proposition should have the capacity to transform recurring users into passionate users and evangelists.
As a sign of PMF, we can check the curve of power users. This graph refers to the percentage of users on the Y-axis and the number of days, weeks or months a user was active on the X-axis.
A product with a solid base of power users should be expressed in a smile graph, where we can see that no smaller percentage of users are active virtually every day, or at least more intensively than the rest of the user base.
4. High recommendation and satisfaction rate: Indicators such as NPS can give us an indication of how satisfied our users are with the product and how likely they are to recommend it to colleagues and friends.
Objectively, an NPS greater than 0 is positive, but its interpretation really depends on the industry. For example, an NPS of 10 in an industry whose competitors average an NPS of 50 is not a good result.
When taking this metric as a criterion to define whether PMF has been achieved, we must first understand whether it is positive and then compare it to the industry average to see whether we are above or below it.
When conducting satisfaction surveys, if we have a large base of users who rate us positively, then we are probably on the right track.
5. Revenue: It may sound a bit obvious, but a steady increase in product revenue can be an indicator of Product-Market Fit.
Of course, this condition is not exclusive, as many products have reached MFP even before having a monetisation model in place. For example, the case of Twitter, whose business model was defined below, is well known.
Even so, the fact that there is a growing base of users who actually choose to pay for the product indicates that what we offer is of value to the user. Not only should we look at revenue growth itself, but also at how CAC (customer acquisition cost), ARPU (average revenue per user), profitability margins and conversion rates are changing and evolving. The positive evolution of each of these financial metrics month by month can indicate that we have achieved Product-Market Fit.
It is now time to mention some qualitative criteria, which although difficult to determine with certainty due to their difficulty to quantify, can give us a clue about the stage of our project.
1. Interest from investors and other groups: when you stop looking intensively for investment, and focus your efforts on improving your product to a level that starts to be accepted by a significant mass of users, the investment attractiveness of your product increases and investors do not want to miss the opportunity to support this growth.
Of course I don't speak for all investors, as there are those who invest at very early stages when there is no PMF yet. But investor interest can be a signal that our product has reached a certain stage where we have validated the key assumptions and are ready to grow.
On the other hand, increased media coverage or a steady increase in interest from other major groups gives us greater visibility and can serve as a vote of confidence about the positive impact we are making.
2. Communities: when your own users form communities and gather in groups to share news and opinions about your product, especially when they are positive, then you have been able to create a community, a network, of users involved in the solution.
Communities are only built on the basis of a high level of user involvement with the product, otherwise what would be the point of belonging to one? The scope of the Product-Market Fit can be deduced from this social value.
3. Need to scale the team: When we are faced with the reality that our current resources are not sufficient to operate the business and we need to increase the capacity of the team, it is a sign that we have reached the Product-Market Fit, since, in part, one of the reasons why more team capacity is required is due to increased user demand and a growing volume of new customers.
4. Momentumrefers to the feeling that things are on track, that our actions are flowing towards our goals, we are satisfied, motivated, energetic and happy.
This feeling that feels like a positive boost of good energy can be due to several reasons, but it can refer to the Product-Market Fit moment, because reducing uncertainty and making our product grow in a stable way is something very comforting that provokes this feeling.
5. Love: constant displays of affection from users, positive comments, constructive feedback and a brand ambassador base can make us think that we may have reached PMF.
So, in short, there is currently no formula for calculating and quantitatively determining the Product-Market Fit, at least not one that includes all the variables that should be considered and the necessary flexibility so that it can be adapted to each industry. However, we do have some signals, criteria or metrics that allow us to understand if this moment has been reached, if we are close or if we still have a long way to go. For all of this, the ideal is to analyse several fronts, listen to our own team, conduct satisfaction surveys, observe user communities, and look at monetisation, retention and acquisition metrics.. The sum and consideration of various criteria will help us make sense of where we are and determine whether our value proposition is 100% aligned with the needs of users, or at least our first target segment.
Just to mention, the Product-Market Fit is one of the four "Fits" that exist, the remaining three being: Product-Channel Fit, Channel-Model Fit y Model-Market Fit.
Perhaps an idea for a future article? We shall see.