Products like Facebook, Whatsapp, and Slack showed exponential growth without spending any money on traditional marketing.
Why? Because they had a Product-Market Fit.
In this article, we will explain what is PMF and how you can track it for your business.
What is Product-Market Fit (PMF)?
Joshua Porter complies with the idea of PMF as an indicator of customer satisfaction:
“Product Market Fit is when people sell it for you”.
It can also be defined as a journey from “I’ve never heard of you” all the way to “Oh man, I love your product so much I’m telling everyone I know.”
Marc Andersen describes that;
“You can always feel a 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.”
Why is it important to quantify PMF?
If you can’t quantify it, you can’t measure it, if you can’t measure it, you have no clue how close or far your product is from reaching the PMF.
So if you ever want to get there it is essential for you to quantify and track PMF. You might stumble upon PMF without a conscious effort but for this to happen you have to get extremely lucky.
How can we quantify PMF?
If you wish to grow exponentially, you need two things:
Retain the customers who have experienced the true value of your product.
If you’re unable to retain your customers it means that you didn’t give them enough reason to stick around.
Unless you fix the problems that are making your customers leave, you can’t grow as you’ll keep adding customers from the top and they will keep leaking from the bottom.
Drive positive word of mouth from your retained customers and make them the biggest marketing channel for your product.
If you are able to retain your customers, the next step is to delight them so they can help you create a network effect.
If you’re unable to do this, you will always need to spend money to acquire more customers and in order to achieve exponential growth, you’ll need to pour in money exponentially.
Bottom-Up Approach to Growth
The goal of every startup founder is to reach the product-market fit. We have developed a simple process to help you with this journey.
Identify Top Customers
The most logical way to reach Product Market Fit is by focusing all your energy on the early adopters or power users, people who need the product the most.
The first step is to define these customers. This is who you’re going after, why you’re going after them, and what specific problems they have.
Your company's mission should be to give this segment the perfect experience. The product should be completely optimized for them and their acquisition and retention should be the primary focus in the early days. These early adopters might be more forgiving of a company while it works out the kinks. [source]
These examples will help you understand it better:
Uber targeted people going to bars, parties, and airports initially. These people needed something like Uber the most. When users realized how easy it was, it was only a matter of time before they started using it to go to work, then shopping for groceries, and so on.
Paypal targeted eBay users as this was the only segment that was already making online payments (the only segment that was ready for PayPal). They almost burned all their funding on secondary segments before going with this approach.
Airbnb followed a similar strategy with its rollout, launching in Denver in 2008 to coincide with the lack of hotel space during the Democratic National Convention and adding new cities at times when they had major conventions or other events. Early hosts were already early adopters – people who might have had a place on another rental listing site like Craigslist. [source]
How to calculate Retention/PMF?
Pick Growth Metric
We need to focus on one metric that defines growth for your product. Some examples of the primary growth metric (also referred to as the North Star metric) are as follows:
Ride-Hailing Apps like Uber, Careem & Lyft = Number of Rides
Airbnb = Number of Bookings
Instacart = Number of Orders
Paypal = Total Payment Volume
Whatsapp = Number of Sends
SaaS = Number of Paid Subscriptions
How are people using your product? We can perform an analysis of the activity of your top users to find the cycle of your product.
Daily Frequency: Facebook, Whatsapp, Chrome, Outlook, Slack (weekdays), etc.
Weekly Frequency: Uber, Careem, etc.
Monthly Frequency: Amazon, Instacart, Netflix, etc.
Quarterly/Annual Frequency: Daraz, Olx, Airbnb, Booking.com, etc.
We need to perform cohort analysis on your growth metric against the product cycle to measure retention.
x-axis = time period/product cycle
y-axis = retention in percentage
If the curve intersects the x-axis at some point then retention is bad. You are unable to retain customers who have experienced the true value of your product. If this is the case, you have to go back and ask who is the customer and what problems are solved by your product.
If the curve becomes parallel to the x-axis at some point then your long term retention is good.
The percentage of users that are successfully activated into retained customers is your activation rate. This is the point at which your curve becomes parallel to the x-axis.
Our goal is to reduce the friction that new users face in reaching the aha moment i.e. experiencing the real value of the product. We can do this by improving the user experience and onboarding of your users.
Focus the acquisition efforts on the segment that has the highest probability of becoming your power user, the segment of the market that is almost ready for your product.
Segment & Repeat
After reaching the product-market fit for this segment, we should move to other segments and start optimizing for them.
In the early days, it is critical to design a process that allows you to launch different product experiences and test your assumptions while staying within constrained resources.
It is about targeting the right customers and prioritizing the part of the customer journey that has the maximum potential to unlock growth.
At altanalytica, we work with startups on rapid iterative experiments designed to improve your product or business so you can reach product-market fit and grow faster.