The Elusive Art and Science of Finding Product/Market Fit β Part I
Written by Harpal Singh; Last updated: December 11, 2022
1. What is Product/Market fit?
2. The Four Pillars β Market, Product, Channel & Business Model
3. Where do startups go wrong?
It's been many years since my tech startup failed after years of constant sweat, blood, and tears. We built a machine learning powered fashion recommendation engine and acquired almost 200K users through a series of mobile and web apps. The early traction, multiple rounds of funding and a fast-growing team gave me great hope, and yet it all came crashing down right in front of my eyes.
Thankfully, I've also had great success in taking many startups from early stage to scalability and decent exits. I've built many successful products in my role as CPO at multiple organisations.
This experience has given me a unique perspective and deep knowledge about the crucial early stages of building a successful startup, distilled into this guide about Product/Market Fit (P/MF).
π This guide introduces the P/MF Flywheel process to find and track the Product/Market Fit systematically.
I have iterated and refined this process by successfully applying it to over a dozen startups. It heavily draws upon the groundbreaking work of Brian Balfour, Steve Blank, Ash Maurya and Eric Ries, who have deeply shaped my understanding of this subject.
1. What is Product/Market Fit?
The exponential growth you experience when the market pulls the product out of your hand is an indicator of Product/Market Fit like the story of Stripe.
π Product/Market Fit is having a great product that deeply satisfies your customers and they love it so much that they can't stop selling it for you.
Andy Rachleff, who coined the term P/MF, says βYou can screw up everything else and still be successful if you have P/MF. How else would you explain a 25-year-old running a billion-dollar business?β.
"Do we have Product/Market Fit?" is a question founders inevitably ask themselves at one point or another. It's a problematic question as it reduces the answer to a binary yes or no.
π The best way to think about P/MF is as a spectrum instead of a discrete singular point in time.
A startup goes through four stages, as shown in The Startup Lifecycle diagram:
Minimum Viable Product (MVP) β MVP is a product with just enough capabilities to attract the early adopters and validate an idea to see if there's a market for it. It's built cheaply to gather maximum feedback and establish if it's worth building the idea further. Startups are frequently opting for MLP/MSP/MMP (Lovable/Sellable/Marketable) over MVP to align with the evolving customer needs.
Problem/Solution Fit β In this stage, you have some traction and evidence that your product is addressing the customer needs to some extent. Your customers are a real mix and product usage among them is random at best. You donβt really know who the right customer is and whether the current ones are going to stick around.
Product/Market Fit β P/MF means you have built a strong value proposition and business model for a specific set of customers, many of whom pay, and that the process can be repeated to find more customers and grow the business consistently.
Scale up or Growth β It means your product is resonating with a wide variety of audience and you are growing crazy fast. The growth stage is all about adding fuel to the fire to grab a large market share and take over the competitors.
Each stage is a wide spectrum that generally requires a minimum of six months before moving on to the next stage.
The Startup Lifecycle tends to correlate with raising money pretty closely. As a rule of thumb, seed funding comes after validating the initial MVP, and venture funding comes after finding the Problem/Solution Fit and ideally with early signs of Product/Market Fit.
Investors look for evidence of reaching certain milestones at each stage before funding. When you raise too early by any means, you have another problem of spending that money with raised expectations across the board. You would likely have to give away more of your company as well in that case.
MVP isn't Product/Market Fit
The Build-Measure-Learn loop for building an MVP introduced by Eric Ries of the Lean Startup movement has been sadly reduced to fit a narrow and convenient narrative. Ask a person involved with building an MVP and they will often talk about launching, iterating, and learning fast, while making something people want but nothing about the realities of the market, customer acquisition, or business models.
π MVP is the first step in proving your idea/solution has some merit.
You simply can't iterate an MVP i.e. continue to go through Build-Measure-Learn loop over and over and stumble upon P/MF on the way.
π You need to incorporate other elements like distribution, people, technology, and business model in order to transition from an MVP to Product/Market Fit.
The journey to achieving Product/Market Fit is a long one. Each startup follows its own unique path to get there making it hard to replicate the success. Michael Seibel, Y Combinator's CEO, reminds us that the vast majority of YC founders never find P/MF, resulting in only a few of them becoming huge financial successes.
π It takes an average of 2-3 years to achieve Product/Market Fit from the day of inception for most startups.
Problem/Solution Fit isn't Product/Market Fit
When things generally seem to be going in the right direction like hiring new employees, signing up new users, growing demand, acquiring paying customers, developing new partnerships, and gaining investors, you may think that you've achieved P/MF. When in fact, you may have only achieved Problem/Solution Fit.
π Problem/Solution Fit is often mistaken as Product/Market Fit.
The increasing level of chaos, as your startup and customer base grows, makes it hard to distinguish between the two stages. In this chaos, the focus on finding the Product/Market Fit gets lost, only to be hit with the reality of not having P/MF a few years later when it's already too late.
Examples
Let's look at the following examples of startups at different stages to test your understanding of the concept. Do you think they have Product/Market Fit?
Series C B2B startup
They have paying customers, raised millions, hiring at full throttle and growing at 5% YoY.
B2C Fintech startup
They have excellent engagement with their product and built something people want.
API-as-a-service startup
Product Hunt has generated a massive waitlist of 100K people and they can only accommodate few hundred at a time.
All of these are a reasonably good position to be in. Yet, none of them have achieved Product/Market Fit. Let's break it down.
Example one is a classic smokescreen that can make anyone think they have already hit a jackpot. B2B startups are capital intensive with months-long sales cycles. Although these are good signals, it's not enough to conclude they have achieved P/MF.
Example two is what people fall for all the time i.e. build a great product and everything else will follow. The market is where the rubber meets the road and unless this startup solves that puzzle, they don't have P/MF.
Example three can over-inflate the need for this startup. Product Hunt users are early adopters, tinkerers and makers who like to be in the know. This is a great for building confidence but not for finding P/MF.
2. The Four Pillars β Market, Product, Channel & Business Model
Product/Market Fit is a misleading and incomplete term because
P/MF suggests Product comes first. Wrong. Market comes first.
P/MF suggests itβs only about Product/Market Fit. Wrong. There's more.
Market comes first
You are guaranteed to fail with a kickass product if you pick a wrong market that doesn't have a need for your product for which customers are willing to pay. By discovering the market first, you are finding an audience first with an acute problem they want to be resolved and are dying to pay for the fix. By building a product for that market with a validated need and demand, your chances of success are much higher.
π Without figuring out the market first, you end up building product features for an audience who don't have a dire need for your product.
Product/Market Fit isn't enough
Brain Balfour introduced the four fits model a couple of years ago and explained in a multi-part series at length. I recommend adding the series to your reading list.
The four pillars and the fits between them are essential for your startup's success. Let me illustrate it with Dropbox and Box example, two similar products in essence when they began.
1. Market/Product Fit
You need to think about the market (customers) first, not the product. That's why it's on the top-left in the model.
| Startup | Market | Product |
|---|---|---|
| Dropbox | Individuals with data portability and sync needs | Cloud sync tool for desktop and mobile; Value Proposition: A folder that syncs |
| Box | Enterprise teams with the need for cloud collaboration | Cloud sync and team collaboration tool |
2. Product/Channel Fit
Your product won't work on just about any channel. A channel is how you find your customers e.g. SEO, events, partnerships etc. Products are built for specific channels and they can't be treated in silos.
| Startup | Product | Channel |
|---|---|---|
| Dropbox | Cloud sync tool for desktop and mobile; a folder that syncs | Viral i.e. share with a friend, both get free cloud storage |
| Box | Cloud sync and team collaboration tool | Direct sales and outreach to enterprises |
3. Channel/Business Model Fit
Your startup's business model will most likely be influenced by your primary customer acquisition channel. For example, you may have to modify your business model to comply with the App Store guidelines, or you may need to change your pricing and commission structure to accommodate affiliate partners, if your channels are App Store and partners respectively.
| Startup | Channel (Customer Acquisition) | Business Model |
|---|---|---|
| Dropbox | Viral i.e. share with a friend, both get free cloud storage | Individual SaaS pricing based on the amount of storage space |
| Box | Direct sales and outreach to enterprises | Enterprise SaaS pricing based on size of the team |
4. Business Model/Market Fit
Your business model must fit with the market's pain and perceived value of your solution. For example, a monthly subscription-based SaaS may not be right for your business type no matter how tempting it is.
| Startup | Business Model | Market |
|---|---|---|
| Dropbox | Individual SaaS pricing based on the amount of storage space | Individuals with data portability and sync needs |
| Box | Enterprise SaaS pricing based on size of the team | Enterprise teams with the need for cloud collaboration |
Both startups used a completely different strategy to acquire their customers to achieve Product/Market Fit. Box aligned itself with the complicated enterprise sales process, service level agreements etc. whereas Dropbox built a viral strategy to target individuals.
Although there were plenty of instances where Box was used by individuals and Dropbox was used by corporations, it wouldn't have likely worked as well as it did for either startup if their acquisition strategies were switched.
It would be a mouthful to call Product/Market Fit, "Product/Market/Channel/Business Model Fit". It doesn't make sense to change it to Market/Product Fit either or invent a new term at this point.
π For context, it's enough to remember Product/Market Fit is used and applied as an overarching term for the four fits applicable to highly scalable businesses everywhere in this guide.
3. Where Do Startups Go Wrong?
The extensive study carried out by CB Insights cites βno market needβ as the top reason for startups' failure. You have to look at how startups incubate to know why they end up with products that have no market need.
Most startups are born to solve problems or exploit opportunities created by the ever-changing market forces.
π Startups go wrong when they try to solve a problem they are interested in instead of solving the one that truly serves a market need.
There is nothing inherently wrong with a bunch of founders set out to change the world as interest in solving a problem is a strong motivator. The problem appears when they find a small market, interpret it as the holy grail without further validation and continue to develop the product and business around it. It's only after years of effort they discover the market was never there or it was never big enough to build a profitable and scalable business.
It begs the question, "How do you move from solving an interesting problem to the one that market wants you to solve?". I will answer this by using an example of a hypothetical video collaboration startup throughout this guide. Letβs call this startup π¬ VideoCo.
π¬ Hypothetical Video Collaboration Startup β VideoCo
Mike is the head of design at a tech startup. He loves collaborating with his team and working together to solve meaningful problems. Even when he is working at his desk, he is constantly connected to the team and responding instantly via Slack.
It's early 2020. Mike has experienced a dramatic increase in remote work and video conferencing due to the lockdown caused by the coronavirus pandemic. Despite connecting with his team via remote video calls, he felt alone, demotivated, and bored while working from home and he wanted to do something about it.
1. Idea β Mike conceives an idea to create a video conferencing app that stays on your screen at all times in a small circular window to create an impression of people sitting next to each other. He shares the idea with his team members, friends and family, and receives positive feedback encouraging him to go ahead.
2. Target Audience β Mike defines the target audience who would likely use this product after thorough desk research.
3. Prototype β Mike puts together a prototype using his design skills. He shows it to a bunch of people from the target audience and gathers plenty of feedback.
4. Value Proposition β Mike brings it all together to craft a sound value proposition incorporating the ideas from end-users like the ability to hide the video or mark yourself as away. He is a lot more confident about what he is building.
5. MVP β Mike uses all the insights and evidence to recruit Mia to his team. She is a friend and a technically superb individual who was laid off recently when her company downsized due to Covid-19. They start building the MVP using the Lean Startup principles to learn quickly about what works by iterating concepts with the end-users.
6. Beta Launch β Mike and Mia launch a bare-bones MVP within just six weeks of coming together and already signed up hundreds of users.
This is a typical Lean Startup process followed by entrepreneurs to bring an idea to life and the one also followed by our startup, VideoCo:
π¬ Is there a problem with VideoCo's Lean Startup approach?
VideoCo followed the Lean Startup process of Build-Measure-Learn to build an MVP diligently. They spoke to their users regularly and built a product that's used by many. What's the wrong with that?
It's a product built in the search of a market.
It's been six months since Mike and Mia launched VideoCo. The startup has grown rapidly within a short period of time. The biggest push came from the launch on Product Hunt and Hacker News. They supplemented the user acquisition by paid ads to make sure product is resonating widely and not just with the tech audiences.
VideoCo still has a waitlist of 250K people. They are releasing invites to hundreds of users daily and growing every month. Their team size has grown to 9 people. They have launched a paid plan for group calls with 4+ people and a couple of hundred users have converted to paid customers.
Mike and Mia are extremely pleased with how things are going. They truly believe they have built something people want based on the data, traction and paid users.
π¬ Does VideoCo have Product/Market Fit?
VideoCo is riding the wave of an expanding and growing video conferencing category. The market conditions and timing are perfect and there are promising signs of potential great business.
VideoCo has Problem/Solution Fit but not the Product/Market Fit.
It's because at this stage, they don't know if they are solving an acute problem, the Lifetime Value (LTV) of their customers or their retention. They haven't figured out the channels through which they can acquire new users and sustain growth. Their business model isn't tested and they haven't built any unfair competitive advantage in a category where new competitors are popping up every day.
Your startup stage governs what you need to do
The actions you need to take in the MVP stage differ from the Problem/Solution Fit stage. The actions you need to take in the Problem/Solution Fit stage differ from the Product/Market Fit stage, and so on. Premature scaling kills a ton of startups every year.
π One of the reasons founders get excited and start scaling prematurely is misconstruing the stage they are in.
Premature scaling happens when your startup tries to expand faster than the company, product, or market is ready for it. Over-hiring, rapid market expansion, spending too much money on customer acquisition, and taking shortcuts for your operational and product development processes are all signs of premature scaling.
π Startups need 2β3 times longer to validate their market than most founders expect. This underestimation creates pressure to scale prematurely. β Startup Genome Study
Note β The process ahead is more applicable to startups who have already achieved the Problem/Solution Fit. If you are just starting out and building an MVP, I recommend following The Lean Product Playbook by Dan Olsen instead.
π
Key Takeaways (Part I)
Product/Market Fit is a spectrum instead of a discrete point in time.
Figure out the market and the right product to build first. Donβt build blindly.
Donβt focus on random KPIs and forget about P/MF when you get some traction.
Problem/Solution Fit is often mistaken as Product/Market Fit. Know the difference.
Product/Market Fit is a misleading and incomplete term. Expand the definition to four fits.