Product Market Fit
- HJ Kim
- Dec 19, 2020
- 3 min read
Updated: Aug 19, 2022
One of the key investment criteria that VC's seek in potential investment opportunities is "product market fit". The term has been abused in the startup space to the extent that it has become a more nebulous vocabulary to describe any unicorn companies emerge - "this company has achieved the perfect product market fit and reached x number of users and generating y million dollars of ARR!"
Well..so what exactly is "product market fit" and how can companies achieve it? I have listened in on the talk by the founder of Weebly (a web hosting services company), David Rusenko, for a conference held by Y Combinator to expand upon the concept based on his own baby's journey. To better understand from a broader definition perspective, I have leveraged the essay written by a former Hubspot VP, Brain Balfour.
The key in identifying the product market fit is that you first need to assess the "market" before going into detail on the "product". Defining your market involves four criteria: What is the category of your product, who do you serve, what are the problems and motivations of your audience (with more emphasis on the latter two)? Once you have a better grasp of the market, you go onto dissecting your product's core value proposition, hook to achieve the prop, time to value, and stickiness. Just like you need to try out multiple rounds of entering and exiting your fitting room for your outfit shopping, the product market fit also requires a multiple round of iterations. Brian underscores that product market fit is not a binary or static state - it needs to be understood as a spectrum (weak to strong) and something that is constantly evolving as the market changes.
David notes that product market fit may be achieved to its fullest potential when you create a market from ground up, instead of relying on the existing markets. The examples to think about are Uber, Airbnb, even Weebly, where people have not fathomed the idea of sharing a cab and house of others, or creating a website on your own without knowing how to code.
Once you feel like you have a solution to their problems, the speed to creating a prototype to test the water with real customers is critical - and the loop as mentioned by Brain above begins. Once >20 loops have been reached, launch your product when you think you have a minimum "remarkable" product. How do you know when to launch? "Launch when your product is better than what's out there" - Paul Buchheit
Once your product is in the market, how do you know when the fit is reached? You can track 1) returning usage (day 1, 3, 7, 30), 2) NPS (>50), 3) Paying customer renewal rates. Count how many customers are coming back after 1 day, 3 day, 7 day, and 30 days. If they're repeatedly coming back even after 30 days, that means your product is fit to the market. Ask your customers how likely they're to promote / recommend your products to others around them (NPS % will show the % of people who awarded a score of 9 or 10 out of 10). And finally, is your paying customer's wallet still open after one contract cycle? If yes, you have found the sweet spot.
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