You think you’ve got it. The perfect startup idea. The idea that will help you fulfill your dream of building a great company. So you build it, and show it to potential users.
You see their reactions, their behaviors, and much to your dismay, you realize they’re not interested in it. At all.
It’s the tragedy of startups—an ambitious, forward-thinking entrepreneur spends months creating a product that nobody likes, needs, or cares for. Or maybe people do use the product, but they’re not willing to spend any money on it, which is even sadder in its own way.
In order to avoid this issue, you have to understand the power of “product/market fit.”
If you’re not sure what this is, or exactly how you can leverage the concept to ensure you’re launching a scalable, profitable startup—this article is for you.
Here, we’ll clearly lay out what product/market fit is, how to achieve it, and how to know when you’ve got it.
Let’s get started.
Find Product/Market Fit
Product/Market Fit, Defined by a Startup Legend
Marc Andreessen is one of Silicon Valley’s most respected and sought after venture capitalists. Responsible for founding two large and successful tech startups—Netscape and Opsware—in the late 2000s, he became an influential thinker in the space through his blog, pmarca.
In what’s likely the most influential post he wrote, which he appropriately called “The only thing that matters,” Andressen explains the most important thing that any new startup needs to have in place to succeed.
According to Andreessen, there are three possible answers to the question of what leads to success in a new startup:
- The team
- The product
- The market
Most entrepreneurs will say the team is the most important of those three. Without that, they’ll say, you can’t figure out what to offer, how to build it, and how to sell it to others.
Fair enough, but what about the product? Engineers tend to say the right product leads to success in a startup. Nail the product, and you can achieve success fairly easily, or so they say.
Andreessen didn’t agree with either assessment. In his opinion, “the market pulls the product out of the startup.” That is, given the right market—a market with lots of real potential customers—people will fulfill their needs with “the first viable product that comes along.”
Instead of focusing on creating the perfect product for a given audience, Andreessen believes a startup founder needs to focus on developing, in the words of Eric Ries, “a minimum viable product”—or MVP for short.
As Andressen puts it, “The product doesn’t need to be great; it just has to basically work. And, the market doesn’t care how good the team is, as long as the team can produce that viable product.”
As a startup founder, your job isn’t to focus on building a great team or building a great product—those are great goals on and in themselves which you should eventually focus on. But when you’re just getting started, you want to build the thing that makes people, in the words of Andreessen, “knock down your door to get the product.”
He summarized this point in what he called Rachleff’s Law of Startup Success: the #1 company killer is lack of market.
As a corollary to Rachleff’s law, and the ultimate point of his article, Andreessen defined the only thing that matters for any startup founder is to get to product/market fit.
Your job is to find the market that wants the product you are building—not the one you’ve already built. As you build the product, you need to find the people who will use it, take their feedback, and make it better until the market can’t live without your product.
In the simplest terms, “product/market fit means being in a good market with a product that can satisfy that market.”
When you fail to achieve product/market fit, the market’s answer will be clear:
The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of “blah”, the sales cycle takes too long, and lots of deals never close.
On the contrary, when you’ve found product/market fit, Andreessen explains:
The customers are buying the product just as fast as you can make it—or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can. Reporters are calling because they’ve heard about your hot new thing and they want to talk to you about it. You start getting entrepreneur of the year awards from Harvard Business School. Investment bankers are staking out your house.
This is all easier said than done, as product/market fit isn’t some clear metric you can total up, like revenue or user acquisition. This is where many startup founders get confused, and that’s why we need to go over some ways you can achieve product/market fit and then how to measure how strong it is.
How to Find Product/Market Fit
Find Your Value Hypothesis
The core of product/market fit is value. If customers aren’t finding any value from the offer of a startup, then the startup won’t be able to sustain itself for long. Crystalizing the value the customer gets from a startup is understandably hard for entrepreneurs; value, after all, is an ambiguous concept that varies from person to person.
But Steve Blank, one of the godfathers of the startup movement, famous for his book The Four Steps to the Epiphany, and Eric Ries, another highly influential figure responsible for writing The Lean Startup, have developed a key concept that simplifies the process of finding a startup’s value offer.
Ries says the two most important assumptions entrepreneurs make are the value hypothesis and the growth hypothesis. The former “tests whether a product or service really delivers value to customers once they are using it,” whereas the latter “tests how new customers will discover a product or service.”
On this note, Wealthfront CEO Andy Rachleff said: “Identifying a compelling value hypothesis is what I call finding product/market fit. A value hypothesis addresses both the features and business model required to entice a customer to buy your product.”
In other words, find the value hypothesis, test it, and if it proves right, then you’ve found your product/market fit.
To test a value hypothesis, you first need to define it—a testable statement that can be validated or refuted when facing your users.
If Foundr was to develop a value hypothesis, we could say, “Foundr believes entrepreneurs need content that helps them launch and grow their online businesses.”
To test this hypothesis, we’d need to create content and see if people find it useful in their journeys to launch their online businesses. The same could be applied to our premium courses. If people read our content, shared it, linked to it, commented on it, and bought our courses, then we’d be able to verify our value hypothesis.
In order to test your value hypothesis, you need to apply Steve Blank’s concept of “getting out of the building.”
In a startup no facts exist inside the building, only opinions. You need to leave guesswork behind and get “outside the building” in order to learn what the high-value customer problems are, what about your product solves these problems, and who specifically are your customer and user (for example, Who has the power to make or influence the buying decision and who will use the product on a daily basis?).
Talk to your customers one on one and discover how they react to your company. Write down what they tell you, record their reactions, and avoid pushing back. Honest customer feedback is the best ingredient for validation, regardless of how painful it may be for its founders to find their original hypothesis is no good.
You can also run experiments, like doing A/B testing and fast iterations of different features. These experiments work great because you can assess the true actions users take. What’s more, you can use cohort analysis, which means you analyze how different batches of users from different markets are behaving.
Ries uses the example of a volunteering software tool to explain this idea:
We could find opportunities for a small number of employees to volunteer and then look at the retention rate of those employees. How many of them sign up to volunteer again? When an employee voluntarily invests their time and attention in this program, that is a strong indicator that they find it valuable.
Your value hypothesis will change over time. As you learn from your customers, you will improve it and refine it. The closer you get to the market’s real needs and pains, the better the chances of getting to product/market fit.
Choose the Right Industry
Going out into the world to test out an innovative software company can be expensive and time consuming. So before you even get to the point of testing your value hypothesis, think about the industry you’ve chosen.
Andrew Chen, the famous VC and entrepreneur, recommends picking an industry that fits the following criteria:
A Pre-Existing Product Category
Even when starting a highly innovative business, you want people to understand what it is right away. That’s why businesses overuse the pitch, “It’s the Uber of .”
The “uberification,” as industry experts have called it, has caused many new companies to start with the premise of disrupting an industry through the gig economy, just as Uber did for the taxi industry. Before Uber, startup founders used to say, “It’s like for ,” which also spawned a lot of new startups to try their luck at disrupting a particular field.
In either case, what entrepreneurs tried to do was take an existing category and use that as an anchor for a new startup. Regardless of the weird startups this approach has spawned, Andrew Chen believes it’s a smart way of starting a new innovative company.
The key, according to Chen, is to start early within an existing category so it’s easier to dominate it before other companies get to it:
Google was not the first search engine, Facebook was not the first social network, and Microsoft was not the first OS. However, those companies came to dominate those markets because they came in early, when the dynamics were still developing. And the markets grew and grew. But it was also clear what they offered, how they developed something killer.
Large Numbers of Interested Customers
Another benefit of starting a business within an existing industry is that you’re guaranteeing there are customers who’re willing to pay for what’s on the market. Having a large number of interested customers means, as Chen said, “folks are actively searching for the product.”
No matter how innovative your company may be, if there are no customers in your industry, you will be forced to pivot or close doors.
So before you decide to target a given industry, Chen recommends using a market analysis tool like Google Trends to see if customers are clicking on links that mention products in that category.
Lots of Successful Competition
Despite what some entrepreneurs may think, it’s a good sign when there are competitors within an industry. As Chen puts it:
The best markets already have competitors. And maybe they are pretty decent. It’s a good sign when folks can make a decent living building products in the space, but you just have to find a wedge to get in. Or maybe you have a clear thesis on why and how the market will get a lot bigger quickly.
If the demand is high enough, you could potentially sell a similar offer as the competition and start to make money. But if innovation is your goal, you can take the competition’s offers as a proxy for demand, and then build something different—something that’s cheaper, more efficient, more effective at solving a problem, and so on.
If you aren’t sure whether a market is saturated with new competition or not, check how the competition is organized. If it’s fragmented—that is, if everyone seems to offer different products and services that don’t quite match with one another—it may be a good sign for you to enter and take the market.
A large, fragmented market suggests the competitors are not that competent, or there’s something inherent in the field, like regulatory issues, that’s keeping existing players from dominating.
Clear Axes of Competition
Regardless of the size of the market and the existence of competition, you need to have a strong understanding of how you’re going to break in—you need a wedge.
Different and Blue Ocean Strategy are books Chen refers to
Before you pick an industry, make sure you have spoken to enough customers, analyze the market trends, and check that you’ve got something that could potentially change it for the better.
Copy What Works
While the goal of this article is to help you find whether your startup has achieved product/market fit, the truth is such process takes time—Chen says it can take not only months, but years.
Yes, this whole process seems time consuming and soul draining, but it’s worth it if you stick to a process of continual iteration until you find the right product for your market.
That being said, if you’re impatient, or if you aren’t sure you will ever achieve product/market fit with something radically innovative, Chen recommends an easy way out.
Pablo Picasso supposedly said, “Good artists borrow, great artists steal.” Or, as Austin Kleon put it:
Similarly, Chen says the easiest way to find product/market fit is by copying what works. This is the easiest short-term path, cloning something that already has product/market fit. If it’s a big and growing market, users will still try out something new.
Keep in mind, by “copying what works,” he doesn’t mean you need to rip off exactly what others do. You don’t want to be like the Samwer brothers who copycat startups all over the world.
The better (and more ethical) approach is to add your own twist. On the spectrum of pre-existing product to brand new product, pick a point in the middle. Build something that consumers fundamentally understand, but with a clear innovation that you can market around.
As Scott Berkun, the influential author and speaker said, “innovation is overrated.”
When was the last time you, as a customer, called the support line for a product you own to complain about its lack of innovation? Or sent a meal back to the kitchen at a restaurant because it wasn’t innovative enough?
It’s perfectly fine that you want to “put a dent in the universe,” as Steve Jobs said, but you don’t need to put the cart before the horse. Innovation should be a secondary effect of what you’re really trying to do, which Berkun said is to “profit by making good things.”
How to Measure Your Product/Market Fit
Now that you have some strategies for getting to product/market fit, how are you supposed to know when your mission is accomplished and it’s time to charge ahead?
The key question isn’t to ask if you’ve reached product/market fit. Ash Maurya, the author of the classic entrepreneurial book, Running Lean, thinks a much more powerful question is to ask, “Have I built something people want?”
While there’s no product/market fit metric, exactly, there are a couple of key stats to look at:
- High Net Promoter Score (NPS)
- Low Churn/High Retention
High Net Promoter Score
The Net Promoter Score is a simple survey that asks customers to rate from 1–10 how likely they are to recommend your product to a friend or colleague of theirs.
If people are very likely to share your product with others—which is often considered to be an NPS above 9—then it means it’s something they truly need.
According to the Net Promoter Network, the results can be segmented into three groups:
- Promoters: These are the people who scored your offer with a 9 or 10; they are loyal enthusiasts who keep buying and refer others, fueling growth.
- Passives: These are the people who scored between a 7 and 8; they are satisfied but unenthusiastic customers who are vulnerable to competitive offerings.
- Detractors: These are the people who scored between 0 to 6; they are unhappy customers who can damage your brand and impede growth through negative word of mouth.
Another similar approach is the one Sean Ellis developed, which asks people whether they’d be distraught if they couldn’t have your offer anymore:
If you find that over 40% of your users are saying that they would be “very disappointed” without your product, there is a great chance you can build sustainable, scalable customer acquisition growth on this “must have” product. Those that were above 40% are generally able to sustainably scale the businesses; those significantly below 40% always seem to struggle.
In either case, your goal is to find how much they value your offer and leverage the information to base your decision, your pricing, and your growth strategy.
Low Churn/High Retention
Earlier in this article, you learned that one of the key aspects of verifying the value hypothesis is to run experiments and cohort analysis. The ultimate goal of both tactics is to find how people react to your offer and whether they stick to it, that is, continue using it over time.
Startup marketers call this “stickiness” or “retention,” and the effect of people leaving the tool as “churn.” Both metrics, which work together, are the key to finding the true value of your startup.
In his talk on How to Start a Startup, Alex Shultz bases his definition of product/market fit on these two metrics:
Look at this curve, “percent monthly active” versus “number of days from acquisition.” If you end up with a retention curve that is asymptotic to a line parallel to the X-axis, you have a viable business and you have product market fit for some subset of market.
Andrew Chen made a more specific definition of this retention curve: “You want to see DAU/MAU at >25%. A world-class leading DAU/MAU would be over 50%.”
In other words, if a quarter of your user base comes back to use your tool daily or monthly (depending on the type of offer you have), then it means there’s product/market fit.
He also gives other examples of metrics that represent product/market fit:
Actions speak louder than words, and actions are what you need to observe in order to find out if you have product/market fit.
Here’s How to Find Product/Market Fit
At the end of the day, Andreessen recommends a “rise-and-grind” attitude. That means you need to do whatever it takes to find product/market fit. Be relentless about it.
It’s so critical, he even separates the life of a startup in two parts, what he calls “before product/market fit” (BPMF) and “after product/market fit” (APMF).
In BPMF, your only focus must be to obsess over getting to product/market fit. Get out of the building, talk to users, and refine your value hypothesis until the chips start to fall where they’re supposed to—in your startup’s growth engine.
One more piece of sage advice from Andreessen to part with:
Do whatever is required to get to product/market fit. Including changing out people, rewriting your product, moving into a different market, telling customers no when you don’t want to, telling customers yes when you don’t want to, raising that fourth round of highly dilutive venture capital—whatever is required.
Are you looking to find product/market fit for your startup? If so, what’s been your experience so far? Let us know in the comments below. And tell us what you’re building, we’d love to see your progress. 🙂