Finding Product-Market Fit
Introduction
If you do not have Product-Market Fit (PMF), you don’t really have a business. You might have a product that there is no market demand for. Or, in rare cases, you might find yourself in a situation where you have identified a market, but for which you are unable to build a product for. Even though that latter case could also be a real problem, I will be focusing on the much more frequent case where the market demand is still untapped.
I will make the assumption that given enough resources, I am willing and able to build almost anything. Essentially, the hard part is identifying a market, more specifically an underserved market before actually building. Note that in the previous post I argue for why getting into a more competitive market is generally a bad idea.
Most of the ideas in this post is taken from YCombinator and MicroConf talks, lectures and other content on the web. As of yet I have not had PMF with any of what I have started, so this post is more what I have understood so far to be true rather than a definite guide by an industry expert. However, all of my thoughts here are still copied from people who are experts, I have just put them together.
I will not be talking here much about VC route where the angel investor money simply opens up more paths and time to reach PMF, ideally before series A funding round.
By default, I also take the position of selling a software product B2B, mostly software as a service, as it would be the most likely case for me. I am, however, open-minded about all types of businesses and this is simply a starting point for me.
I am also focusing heavily on whatever’s actually reproducible and the thought processes that hold true if you want to go about things in a more structured way. I still believe most successful companies more accidentally stumble upon product-market fit by being in the right place at the right time, doing the things that they’re good at, after which they recognize the opportunity and seize it, usually with multiple pivots. I personally don’t like thinking too much about that much more frequent scenario as there does not appear to be much for me to learn from this.
Lastly, there is a difference between finding ideas for products, exploring a market space for a product to build, and having an already existing product with customers. This post focuses on the former, the idea generation stage.
Definition
It’s important not just give my opinion what PMF is, but rather actually use the correct definition first before diving deeper into how to reason about it.
From Wikipedia
“Product/market fit, also known as product-market fit, is the degree to which a product satisfies a strong market demand.”
The noteworthy part of this definition is that specifies that the type of satisfaction of the market with your product is strong. That means, in essence, that even though you might be serving the market to some extent, it does not imply you have PMF. Also, the customer’s desire for a solution is not the same as the desire for your product that solves the problem.
This goes a bit counter to the common perception about PMF where even a smaller demand towards the product is identified as PMF, where it really is not. You can have a working lifestyle business without having reached PMF.
The reason why this specificity matters is that we should not take all signals of some fit into account when considering whether the product is at a right place with respect to the market, as the true PMF yields in wildly different effects on the business where growing the business to satisfy the ever-increasing demand seems to be the smoothest path to take with least friction.
Characteristics of PMF
The characteristics of achieving PMF are plenty and colorful across the web.
From YC’s videos, Michael Seibel with Dalton Caldwell say that PMF means that you’re basically almost limited by your ability to deliver to customers because the demand is so high. Also that when you’ve just found PMF, the software systems will break under the load, and it will be hard to deal with that. They also mention that managing people properly needs to be set at the very early stages of the company, with deliberate structures such as one-on-ones, because once finding PMF people dynamics and problems will amplify.
Marc Andreessen says “In a great market — a market with lots of real potential customers — the market pulls product out of the startup.”
Image generated with DALL·E 2 OpenAI’s DALL·E 2
Existing Products in Underserved Markets
No matter the market that I’ve analyzed, I have always found a product that solves the problem. The question, however, is to what extent is the problem actually solved.
What it means for a problem to be solved varies a lot, and consequently the willingness of someone to pay for it. As an example, you will usually find a big enough band-aid for your wound, but having a doctor with expertise take a look at the wound and do the necessary work on it is a completely different deal. Also, a band-aid might cost you a few cents a piece even for the larger ones, but paying a doctor’s salary is multiple orders of magnitude more costly. The question is - do the people have a need for more than a band-aid in your specific chosen market and is it valuable enough for them.
In-House Products
Often companies try to solve their own problems in-house and build the necessary products to take care of them. There are two main boons to this: it solves exactly the problem you are having tailor-made, nothing more and nothing less, making it lightweight. And secondly, it is deceptively cheap as you have already paid for your employees that do the work. The reality is however that almost always the labor cost of a software engineer is more expensive than paying for a service that solves that business problem (that is if it does). If it turns out that the service costs too much, it is also unlikely to be any cheaper doing it through in-house engineers if you need the full set of features, because of economies of scale. Naturally, there is also the hidden question of whether the full-blown ‘solution’ actually strongly solves your problem or adds a lot of complexity to the organization with only barely solving the problem.
The downside to building products in-house is the extra value you are missing compared to the domain experts that have build the retail product and have foreseen needs that you do not yet know of. Of course, there also lies the danger of trying to shove a solution to a place that does not need it, but the retail product is often built with functionality that businesses adjacent to yours also need.
Other Existing Products
The question is - is a business problem serious enough if an existing product (which undoubtedly exists) is not being used in the company already? Is there a point of trying to serve a market that you have a hunch where there is a business need, but nobody is using any of the alternatives?
My hairdresser complained about not having a good solution to keep track of her customers with a decent calendar, including invites, etc. But since there are some solutions out there that she is not already using and using paper and pen has done most of the job already, is it actually a large enough problem? I am still not completely sure of whether to throw out this market area (where no alternatives are being used) from consideration, but in order to narrow down decision space, it might be a good start. It could of course just be that in some cases no product has yet exceeded the threshold of being better than doing things by hand, but I think that also implies something about the difficulty of building a good enough product in that space.
If an alternative is already being used in the company of the market we’re targeting, I think we’re on better track. Namely, in the best case, it’s an alternative that underserves its customers. Seeing that an alternative is already being used confirms the market demand for that kind of a product. But there also could be various ways it is underserving customers, i.e. by any economic forms of value, be it efficacy, speed, reliability, ease of use, flexibility, status, aesthetic appeal, emotion and personality, or cost.
Efficacy
Efficacy, or the degree to which the product actually solves the true problem, likely has most potential to be the factor that is different enough such that you can build a product based on that difference and then sell it. Understanding whether a product has efficacy in the target market generally needs thorough understanding of the business, or at the very least the particular business problem. I think, however, that this is also the factor that all already-used alternatives have to some extent, so this factor is also harder to beat as a newcomer to the market. Perhaps this is something that should at the very least be copied from the best one in the market as a baseline before introducing all the other economic forms of value to a significant degree.
I also believe the efficacy serving part of the product might only be a tiny fraction of the full product, especially in cases where the existing alternative tries to do too much and solve problems that the product was not purchased for.
Speed and reliability
I think speed and reliability is somewhat part of efficacy of the product itself, the difference being that these only need to be over a certain threshold with diminishing returns exceeding that. Pushing a button in an interface should produce reliable results in a speedy manner, but doing that so reliably that a Mars rover could use it in microsecond level response times is probably effort spent unwisely.
There are opportunities to win over customers through appeal to emotion by being extremely fast compared to the competition, especially if the space tends to have solutions that are too slow to work with generally. But I would categorize that more under aesthetics rather than strict speed and reliability.
Aesthetic appeal, emotion and personality
Something that can be taken as a fluff, but really isn’t, is aesthetic appeal and emotion. Businesses are comprised of people and people want good working environments. They want to do business with people they like, work with products they love, and in environments that are not hostile to them. I am very interested in this area of value, but I am unsure whether it could be an actual selling point rather than just strong marketing boost for the product, something that wins over competition. I presume everything else in terms of product value needs to be in order first, but this is an area that I would love to explore more and promote it as much as possible.
Image from Makhonin Yaraslau on ArtStation
Status
Businesses are comprised of people, and people are extremely social creatures, so status is a big part of life. For most people, status games are at a subconscious level, but still play a big role in a lot of people’s decision making processes. There are probably some examples in software too, but a much easier example to understand here would be luxury brands and how they make you perceive your own societal value and others’ perception of your value. The Hermès women’s Birkin Bag is one that is highly sought after and creates feelings of glamour around the wearer.
A man holding a Hermès Birkin Bag during Paris Fashion Week
Price
If it is cost to the customer that is too high, then that would probably mean that the existing solutions are from big companies that do too much with their products, probably having an order of magnitude too high of a price as well. It would be a rare case where you could accept a price for your product with an order of a magnitude lower price than the incumbent. As a startup, this should never be done if the expected feature set is similar to the big company’s product, meanwhile attempting to undercut the price. From YC’s Startup Business Models and Pricing
Most of the cases where there are opportunities to win business here are whenever a product does too much of what the customer does not actually need. What the customer needs is in truth usually very simple - it either directly affects their core business offering, or is synergistic with it in some way. Sometimes customer also wants things they do not need, but I think building a business on that want without a need is too risky.
Nevertheless, the overall idea of price undercutting is harmful for startups as pricing is the biggest factor in business profit margins. Trying to decrease business costs, increase purchase volume has smaller effects.
Actionably finding the right product to build
You have to solve a problem for businesses. You can luck into doing the right product, but that would not be a repeatable process, so this is something you need to avoid. It has to be a problem real businesses have.
Technically the correct way to find the right problem is to sell for it first, so no resources go to building it before it’s something that customers actually need.
I presume even the potential solutions found in this space already have existing alternatives. After identifying that the problem to be solved is real, you need to also make sure that the product you aim to build is what the customer wants, including its efficacy, cost, aesthetics etc.
Inbound prospecting
Pre-product landing page
A way to validate your idea is that you can create a website for the product that looks like the real thing, but whenever someone writes down their email to hear more, you tell them that it’s in development and pre-orders are open. It’s like a harmless honeypot website for signups, credit cards, etc, assessing demand. From MicroConf’s video
Then you can also ask what were they doing just before searching for your product to understand where you can get more traffic from, e.g. if they found you from Quora or searching on Google. Also you can ask what would have prevented them from signing up at that point. From MicroConf Starter 2019 talk
The harder part is how you end up getting traffic to that website. You could set a marketing budget for which to buy very specifically targeted ads with and at the very least you can have some signals from that. But good marketing is always a creative process, so I guess it depends a lot on the specific product as well. Selling software to a specific niche probably yields opportunities, windows through which to reach them that is unique to that field. But generally you can market the landing page on social media, podcasts, entrepreneur forums, Quora, StackExchange, depending on the product.
At the very end it is important to understand if people are willing to give money for this thing. If people don’t trust you with their information, they also won’t trust you with money. The focus should be on closing real sales. From MicroConf 2013 talk
You can name your price up front, but don’t charge the customer before they receive ample value (for the first customers). From MicroConf 2014 talk
Outbound prospecting
Pre-selling
Pawel Brzeminski in his talk talks about preselling for market validation. His main points are to find a market that you personally have an affinity for, comprises of at least 2000 to 5000 companies, where the companies are contactable. Then you use that contact list to talk about that problem, the solution and sell in a 30-minute conversation either by email, phone or both. And you can start with “hey, I am making a study on the market, I’m looking for the best challenges, the most painful problems in the business you experience on a day-to-day basis”. Later on if you find a common problem, you can tell them “if I have found 3 to 5 people with that problem I will be building the solution”. Pre-selling dramatically reduces risk.
I feel like this pre-selling could be done in tandem with the product landing pages to account for different ways potential customers might show interest.
Validation of PMF after building
You can ask your customers the magic question “How disappointed would you be if we disappeared” and if at least 40% of the customer base do not answer with “very disappointed”, there is no PMF.
The general consensus tends to also be that if you have to ask whether you have PMF, you don’t.
Motivation
After asking for feedback on this post’s draft from a bunch of smart people that I respect, they drew my attention to a couple of points.
For one, it appears that 9 times out of 10 if a successful business is launched, it is generally from something that they’d already be doing for a while. And you tend to do the things you are motivated to do for a longer time. I think this is because it is much easier to continue doing the things you already are doing, and you understand that area much better. This also makes it more likely that you actually understand the problem space well.
The other issue is that when choosing what business to get into, you must also account for your long-term motivation to continue doing this even in market downturns, when things go bad, to get through the trenches. If you choose something that has a lot of market demand, but that you yourself eventually don’t care about, it will probably fail nonetheless. However, I think you’ll still be more likely motivated long-term by a business that has proper PMF rather than work on a business that will never reach PMF but for which you have more pre-existing motivation for. The ideal, of course, would be to find one in a field you are motivated in, and where you could reach PMF.
Finding PMF through growth
It is known that it is rarely ever the first idea that will bring success in a business. Businesses generally pivot through multiple business models before getting to PMF. Sometimes it takes a year, sometimes five. Michael Seibel said Twitch might have reached PMF in 2 years instead of actual 5 if they’d searched for that deliberately. Understanding that it needs to be found in the first place probably speeds up the process rather than trying to sell your product to a market that does want it.
Still, it is much more likely you’ll find PMF at all, and that you’ll do it fast if you have some sort of user base growth in the business that is there before reaching PMF. This is usually done by leveraging your pre-existing network - people already know your work and might be willing to try things out. This was the case with David Holz, who had previously done Magic Leap and recently found success with MidJourney. This in turn can be boosted by understanding where and how to get traction, usually with experience and a good strategy. Some people turn to ads. Either way, a good growth strategy will help advance quickly towards the right PMF.
Summary
Reaching product-market fit with your business is extremely desirable and essential to do business right. There are lots of business that either ignore the issue or struggle without a proper PMF without giving their all in search of one.
There is not a single playbook on how to achieve PMF, but if anyone has proper experience, it would be the venture capital firms that generally understand at the very least what not to do.
We can also learn some from others’ anecdotal experiences on how we might go about trying to find that fit. But I think the most important thing here is to understand when you have it and when you don’t, in order not to delude yourself and make incorrect assumptions what a business should be. The end goal is to build great businesses.
A port during California Gold Rush by Fabio Goncalves on ArtStation