500 Startups Growth Handbook

Product Market Fit

What is Product Market Fit?

When you’ve got a product that your customers love and use repeatedly, over a period of time, you’ve got Product Market Fit. (And these customers cannot be just your dear mother, best friend, and the one neighbor you threatened with dire consequences.) Obviously, for strangers to use your product repeatedly, your product should provide enough VALUE i.e solve their problem in a satisfactory manner. And hopefully, the market (all your potential customers) is big enough to make it worth your effort.

The consequences of not knowing if you have product market fit or not is that you might scale too early. If you scale too early, you’ll be wasting your money because you’re still going to be dealing with a leaky bucket. On the other end, if you have product market fit but don’t know, you may miss your opportunity to capitalize on your market.

How to Evaluate P/M Fit:

Qualitative Test: Sean Ellis 40% P/M Fit Test - At early stages, you might not have enough users for meaningful quantitative metrics, so this is a good place to start. Ask 50 customers (people who pay for or use your product consistently) how disappointed would they be if they could no longer use your product or feature. If at least 40% respond with “very disappointed” you may have product market fit.

Although the test above works for B2B as well, Sean Jacobsohn has created a set of questions and scoring system to evaluate the stage of your startup. And VC Christoph Janz shares his criteria for evaluating PMF for B2B startups, across several different parameters, depending on your target customer.

Quantitative Test: Brian Balfour’s The Never Ending Road To Product Market Fit talks about tracking retention. As your volume of users increases, quantitative testing becomes meaningful, and a more accurate way to check P/M Fit. When you analyse the retention rate of a cohort over a period of time, if a significant portion of your early users are still engaged and using your product after a period of time, then you have a more quantifiable, and more reliable method, for measuring PMF.

Note:

For the sake of this handbook, which is targeted towards early stage founders, we’re simplifying moving from pre to post PMF as a binary/discrete event, but in reality PMF is something you keep a close eye on as you move beyond early adopters or add features to your product.

In this handbook, the Stages of Growth are

Pre-Launch - you do customer development and learn about what you should build

Beta/ Pre-PMF - MVP stage where you iterate on product, target customers, & message until you have retained customers i.e your customers stick around and exhibit repeat usage.

Growth/Post-PMF - All those things that you did in the previous steps that didn’t scale? You operationalize them, build out new acquisition channels, continue to fine tune product.

Scaling (Not covered enough in this book) - here you optimize optimize optimize, and then grow some more by expansion

In this handbook, we focus mainly on the beta and growth stages with more emphasis on non-product aspects. Startups in the Seed and Series A (as of 2017) stages will find this Growth Diagnostics Flowchart and handbook most useful.

Common Mistakes Founders Make

Having a great message that resonates with a group of target customers, but if the product doesn’t actually SOLVE the problem, these customers will buy into the promise the first time, but won’t buy into it again (no retention). If you’re inherently a Hustler, look out for this.
On the other hand, let’s say you have a great solution and have also identified the right customer. Awesome. However, if your messaging is off, your customers might not even know you exist! If you’re an Engineer, look out for this.
Finally, if you have a great message and solution, but no target customer segment, you’re simply a solution looking for a real problem to solve - yikes! This is why the key is Product/Market Fit, not simply Problem/Solution Fit. If you’re a Product Visionary, look out for this.

**Problem/Solution Fit = Good Engineering but Product/Market Fit = Good Business

The takeaway: Iterate on PRODUCT, target CUSTOMERS, and MESSAGING to get to P/M Fit.

Related Keywords

Retention, Cohort Analysis, Product Market Fit, Vanity Metrics, Leaky Bucket Theory,