What is Product-Market Fit?

'Product-market fit' is one of the most often used terms in the startup world. We'll look at why over 80% of startups fail to find it and what to do about it!

What is Product-Market Fit?

‘Product-market fit’ describes a state you should aim to reach while creating your product (or service), ie. how well does your product satisfy the need of the market.

It is not a hypothetical state. It can be closely measured, and improved upon. Indeed, before you know you have product market fit, it should be the only metric you measure. The only metric you care about.

Here’s the hard truth: not finding product-market fit is the #1 reason why startups fail. According to CB Insights, 42% of CEOs report this as the reason of their failed startups. In reality, virtually all of the other reasons — running out of funding or getting outcompeted — might also point back to lack of this fit. They only become critical problems when your product is not meeting the need of your customers.

To dive deeper into the concept and understand it in the way we use, we’ll break it down into three parts — the market, product and fit.

The Market

The truth of the market is as counterintuitive, as it is relentlessly true. The market is why most entrepreneurs never achieve the fit. The law of the market is this:

With great market, even an average product will result in a fit. With average market, try as you might and you may never achieve it.

And so, your most important work is around the market. Defining it, framing it, knowing it. The market, unlike your product, is an abstract thing. It doesn’t exist until you declare it (‘This is my market’), and tell that market about your product (‘This is a thing I made, you need it’).

The market for cars didn’t exist before the first car was made. Just as the market for smartphones didn’t exist before the first smartphone was made.

There are two main ways you can go about the market: either take it from your competition or define your own.

Take market from your competition

When you take market from your competition, you usually release a product that your early competition recognised a need for. This could be for many reasons. Maybe your competition didn’t do that good of a job, like the market of crappy smartphones Apple’s iPhone entered. Or you’ve had some insights none of your competitors had. In any case, you typically have an insight or an advantage over your competition that you know about.

Define your own market

The more exciting, and also more difficult of the two is to define your own market. You do this when nothing like what you’re making exists.

A market for renting your apartment while you’re away didn’t exist until Airbnb declared it. The need, of course, existed long before. A need becomes a market upon declaration. Which brings us to the main point of thinking about Market:

You can only define your market as well as you understand your customer and their needs.

In a great market—a market with lots of real potential customers—the market pulls product out of the startup.
Marc Andreessen, SV investor

The Product

The product is, broadly, your ability to satisfy the market need. It will only ever be as powerful as the actual market need you’ve created or borrowed.

The product is also the solution to a problem you think exists in the world. Your efforts around product should as much as possible focus on validating the market & problem assumptions you’ve made. If you care to build a business, you should be wholly focused on answering these questions:

  • How many people actually have this problem and care about solving it?
  • How well am I solving this problem?

Of those two, which do you think is more important? Lots of entrepreneurs (ie. those who fail), focus on solving the problem well before validating the actual need for the solution. They build a solution and then look for a need for it within the market.

But understanding the problem (and therefore the market) well is much, much more important than the solution. The most skilful founders focus on defining and understanding the problem fully, learning to deeply empathise with their customer and just then building a relevant solution. Be wary of this at every stage. It takes courage to confront the market and only the most successful entrepreneurs repeatedly show that courage.

If you don’t have a great product there’s no point in executing well on growing it because it won’t grow.
Alex Schultz, VP at Meta

The Fit

What you need to know about the fit is actually quite simple. Product-market fit is achieved and can be measured. You can go from no-fit to fit simply by asking questions and finding answers to them. It is not something you stumble upon through luck. It is also not constant, it changes along with our world and our customers. Finally, you can improve on your fit even once you have it.

The most direct way of measuring fit we found and personally love for its simplicity is authored by Sean Ellis, dubbed the Sean Ellis Test.

In the test you ask your customers:

How would you feel if you could no longer use our product? 
— Very disappointed ?
— Somewhat disappointed ?
— Not disappointed (it really isn’t that useful)?

You have sufficient fit only if over 40% of customers reply ‘Very disappointed’.

Before that is the case, your #1 goal is to reach that magical 40%. Why? Because only after you have the fit, you have potential to build a real business that has real impact on the world. Only then you can start answering questions of marketing, sustainability, growth and scale. Before that, marketing and business should only work towards supporting you achieving the fit.

Less than 20% of startups ever reach real unquestionable product-market fit. Of those, few fail. Achieving it is the single biggest factor contributing to startup success.

The journey towards product-market fit is unique to each startup and requires entrepreneurs to move fluently across three distinct domains and mindsets:

  • The curious questioning mind of a scientist — to understand and codify who their customers are and what they need
  • The creative persistent mind of a designer — to create a solution both effective and beautiful, not through luck but sheer effort
  • The courageous visionary mind of a leader — to lead those customers and their team to the solution, simply and authentically

Well balanced, those three mindsets keep each other in check, allowing for progress and, eventually, breakthrough success. How effective you are at achieving product-market fit is dictated by how masterfully can you and your team move within and between those three mindsets.

And here's another quote from Marc Andreessen to keep you motivated:

You can always feel product/market fit when it’s happening. 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.
Milosz Falinski
About the author

Milosz Falinski

Founder of Lumi Design, design Strategy expert and startup veteran. Businesses Milosz has worked on tend to be acquired.

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