How To Find Product Market Fit
The term “Product-Market Fit” can be baffling for a lot of new Product Managers.
The phrase sounds great in theory, but in reality, finding product-market fit raises more questions than it answers:
- What is Product-Market fit?
- How do I know when I have Product-Market fit?
- How do I know when I don’t have Product-Market fit?
- More importantly, how do I find product-market fit for my product?
Hopefully, this post will be able to answer some of the questions for you.
What is Product-Market Fit?
According to Marc Andressen: “Product/market fit means being in a good market with a product that can satisfy that market.”
It’s a temporary state where your product is solving a big enough problem with the right solution for your customers.
When you find Product-Market Fit, you’ll see exponential organic growth driven by word of mouth.
The sales chart resembles a hockey stick, and customers are raving about your product.
Signs of Product-Market Fit
Here are four indicators I look at when assessing Product-Market fit:
- Exponential organic growth — if your product shows high levels of sales, conversion and user engagement, that’s a strong sign of Product-Market fit.
2. Very High User Retention — if your product is retaining at least 40% of the customers over a long period, you have a strong sign of Product-Market fit.
3. A three to one return on customer acquisition cost — if the cost to acquire the customer is 3 times less than the lifetime value then you have signs of Product-Market fit. (e.g. spending $1 to acquire a customer with a lifetime value of $3)
4. 40% of your customers will be “very disappointed” if your product is removed from the market. According to Sean Ellis if you survey your customer base and ask them:
“How would you feel if you could no longer use the product?’.
If 40% answers ‘very disappointed’, then you have signs of Product-Market fit.
Here are more areas you can look into but start with the four above.
When You Don’t Have Product-Market Fit
On the contrary, if the product is not showing any signs of traction mentioned above, it means you haven’t found Product-Market fit yet.
In addition, you’ll experience the following for your product:
- There are no clear buyer identity for your product
- You don’t have a clear customer journey
- Free users are not using your product
- Sales cycles are slow, or it’s not happening at all
- Customers are leaving you straight away after a trial
So How Do You Find Product Market Fit?
The secret to finding market-fit is about maximising the number of product iterations, with the limited resources you have. The deeper you know about your customers, the closer you are to finding Product-Market fit.
Here is a six-step process to help you find Product-Market fit for your product.
Step 1: Line up your product goals first
Step 2: Come up with product hypotheses
Step 3: Prioritise the product hypotheses
Step 4: Get feedback from five customers
Step 5: Make small bets with MVP’s
Step 6: Evaluate market traction
Now, put on your product goggles, we are diving deeper into each step.
Step #1 Line up Your Product Goals
To find Product-Market Fit (PMF)— you need to define what the PMF condition looks like. Is it exponential user signups? Or high revenue growth? Or is it having the largest market share?
The PMF goals need to align with your company's financial milestones. The CPO (or whoever the “Manager of Product Managers” is) will need to work with the CEO to agree on a strategy to achieve the financial milestones.
The financial milestones are broken down into Product Team Goals. The Product Team Goals will guide the Product Hypotheses that will be developed by the product team.
If you’re the only PM in your company, take the initiative to align your Product Team goals with your Product Leader. Ask for your team's goals for the current and next quarter. Skipping this step will cause a misalignment in company priorities.
Once the Product Team Goals are clear, it’s time to come up with Product Hypotheses.
Step #2 Coming up with Product Hypotheses
Product hypotheses are sometimes called product initiatives or product ideas. I prefer to call them hypotheses because I can detach my biases from the product idea.
To come up with product hypotheses, look at your internal and external data channels. Speak with customers, look at your product analytics, check out your competitors and speak with internal teams.
Generating product hypotheses is a blog on its own. Here is a blog from Hackernoon with a more in-depth explanation.
Once you have a few Product Hypotheses, centralise them in one place. Having ideas in one place allows for higher-level thinking. You can read more on how to centralise and manage ideas here.
Now that everything is in one place, it’s time to prioritise the most valuable hypotheses to make small bets with.
Step #3 Prioritising the Product Hypotheses
At this point, there will be a few assumptions and unknowns. That’s okay. You’ll validate the assumptions in Step #4 & 5.
Set up a prioritisation meeting with the core members of your product team — Tech Lead, a Designer, a Decision-Maker and a Subject Matter Expert. Keep the prioritisation meeting small. 4 to 5 team members is a good size.
Go through the list of Product Hypotheses and label each item with an expected Impact, Confidence and Effort.
- Impact means how likely you’ll be able to achieve your quarterly product goals
- Confidence means how much you understand the hypotheses and how risky the idea is
- Effort is an estimated effort based on a high-level tech solution
Once you’ve gone through the list of Product Hypotheses, you should see something like this:
Once you’ve decided on a few hypotheses to test, it’s time to speak with 5 customers to see what customers think.
Step #4 Get Feedback from Five Customers
Before you start building, seek feedback from five customers on the product hypotheses. Five customers should give you a good indication on whether if the idea is worth pursuing or not.
Use a mix of customer insights (qualitative data) and customer behaviours (quantitative data), so you can get a full picture of what people say vs what they do. Here is a guide on how to ask the right questions.
This process can take a few days to a few weeks. There are three scenarios you should expect:
- More than four customers are interested in the product hypothesis — this is the best-case scenario. Getting to 80% confidence is enough for you to move to the next step.
- Three out of five are interested — this is a tiebreaker and you might want to find more customers to speak with.
- Two out of five customers are interested in the product hypothesis — ask why and use the new insights to come up with new hypotheses. Add the new hypotheses into the backlog and reprioritise.
Assuming you’re getting good feedback from customers, it’s time to move onto the next step.
Step #5 Make Small Bets with Product Experiments
Product experiments are sometimes called “MVP’s” or “Prototypes”, or “Small Bets”. Regardless of the semantics, the purpose is to validate the hypotheses further by collecting proprietary data.
Proprietary data is the secret sauce to find Product-Market Fit. It generally includes the following insights:
- Your customer’s unique behaviour and the customer journey
- The pricing sensitivity of your target market
- Feature ideas for your next product iteration
- Insider knowledge about your product category
There are usually two types of experiments you can build:
- A Proof of Concept experiment that demonstrates the product but doesn’t fulfil the actual need of the customer. (e.g. smoke and mirror tests)
- A functional experiment that works, but it’s usually created with an unscalable solution or with minimal features. (e.g. “plain-donut” product)
You can also employ A/B tests to launch these experiments. The extend of your product experiment depends on the company risk and the resources you have.
You can read more about different experiments here and don’t forget to create a tracking plan for your product.
Step #6 — Evaluate Market Traction
Once you’ve launched your product experiment, keep a close eye for early signs of customer traction mentioned above. Stay close to the signs of traction below:
- Exponential organic growth in revenue, conversion, and engagement
- High user retention at a minimum of 40% of new customers
- At least a 3 to 1 return on customer acquisition cost over your customer lifecycle
- At least 40% of customers tell you they are “very disappointed” if the product is removed from the market
If the product is not showing any signs of traction, use tools like Fullstory or Amplitude to see why customers dropped off in your product. Use this as an opportunity to create new sets of insights and start the process again.
Finally — PMF is Not About Perfection, But Progress
Remember, chapter 1 starts when you launch. Product-Market fit is a prospecting process that takes multiple iterations.
In reality, nobody gets the product right in the first go. Twitter started an SMS service, LinkedIn was a job board, and GoPro was a film camera.
Once you’ve launched, follow these six-steps process to find Product-Market fit:
- Line up your product goals
- Come up with product hypotheses based on data
- Prioritise the product hypotheses
- Get feedback from five customers
- Make small bets with MVP’s
- Evaluate market traction
You want to maximise the number of iterations and focus on getting to know the customer. The deeper you know about your customers, the closer you are to finding Product-Market fit.
Quick update Mar 2021: I’ve just launched an online course that covers this topic, and every other topic in Product Management. The course is designed for busy Product Managers who don’t have time for class. (and it doesn’t cost you thousands)
Check it out at: https://www.productschool.org/
