What is Product-Market Fit?

Product-Market Fit (PMF) is a fundamental concept in the startup and growth marketing worlds. Achieving PMF is the  most important objective for new companies. It’s required to gain traction and enter a phase of rapid growth.

In this article I will try to explain what PMF is, going from the simplest to more complex definitions.  I will also draw the connections between the definitions and frameworks presented by other authors, from Andy Rachleff and Marc Andreessen to Alexander Osterwalder.

This is the first in a series of articles about Product-Market Fit.

TL;DR

In the simplest terms, Product-Market Fit (PMF) means having a group of customers who truly value your product. Customers express their appreaciation in actions, not only declarations – by purchasing or pre-ordering your product, using it frequently, spreading word-of-mouth and so on. PMF is the single most important thing you need to prove as an entrepreneur. If you don’t it in time, your business runs out of money and fails.

Forget building a product for everyone and going for a big market. First, you should rather find a small group of customers with a common, strong need (Minimum Viable Segment) and make them happy by addressing this need. Look for desperation, avoid indifference.

It doesn’t matter how much you love your product – the customer is your only judge. So get out of the building, listen carefully and deliver your MVP to customers as soon as possible. Be careful of focusing too much on product development instead of customer development.

Product is more than features and technicalities. It’s useful to think of it as a value proposition – which describes not only what your product does, but also how it helps your customers and how you communicate it. If you speak customers’ language and help them achieve what they consider important, you are more likely to achieve a PMF.

Achieving PMF results in getting traction. It’s often experienced as a smooth flow of value between you and your customers. Your key business metrics will go up and to the right. Yo will also notice some indirect signs of extraodrinary customer satisfaction like word-of-mouth or organic growth. If you don’t have PMF you will see a lot of friction and lack of interest among your target group, regardless of how much you spend on marketing.

Finally, there are two more things: channels and relationships, playing an important role in achieving PMF. Make sure that you connect with your target group with the proper channels and find ways to acquire and retain them.

Matching these 5 elements (Value Proposition, Customer Segment, Channels and Relationship) – you prove a so-called Value Hypothesis or Desirability Hypothesis, which is equal to PMF.

Popular definitions of Product-Market Fit

Let’s review the most popular definitions of Product-Market Fit circulating in the startup community. You can find dozens of attempts to explain this term, each looking from a slightly different angle.  I’ve tried to pick the most representative ones to visualise the breadth of opinions. See them below:

“Product/market fit means being in a good market with a product that can satisfy that market.”

Marc Andreessen
Co-Founder and General Partner at Andreessen Horowitz

“When people who know they want your product are happy with what you’re offering.”

Andrew Chen
General Partner at Andreessen Horowitz, ex-Uber

“The moment when a startup finally finds a widespread set of customers that resonate with its product.”

Eric Ries
Author of Lean Startup

“When you first start out the only thing that matters is finding a cohort of customers who truly value what you offer.”

Andy Rachleff
Co-Founder and Executive Chairman at Wealthfront

“Product-market fit takes place when you have evidence that your products and services, pain relievers, and gain creators, are actually creating customer value and getting traction in the market.”

Alexander Osterwalder
Author of Business Model Canvas

“Make something people want.” “You can either build something a large number of people want a small amount, or something a small number of people want a large amount. Choose the latter.”

Paul Graham
Co-Founder at YCombinator

Going through these and other attempts to explain what PMF is, one can notice many similarities but also some significant differences and unique perspectives. Let’s try to point them out.

What is similar:

  • creating product that customers “truly value”, “are happy with”, “resonate with”, “are satisfied with”
  • customers being a group with similar characteristics – “people who know they want your product”, “cohort”
  • there is a consensus that reaching PMF is the single most important goal for new companies
  • reaching PMF results in “getting traction”, “exponential growth with no marketing”, word of mouth etc.

What is different / unique:

  • sometimes the customer group is “widespread” (Eric Ries), sometimes small (Paul Graham)
  • some authors refer to markets (Marc Andreessen), while others to customers/people (Andrew Chen)
  • some authors add business model (Andy Rachleff) or distribution (Clement Vouillon) to the PMF definition
  • most of them talk about product, but Andy Rachleff refers to “what you offer” and Alex Osterwalder to value proposition (“products and services, pain relievers, and gain creators”)
  • Brad Feld argues that only above certain revenue you can talk about PMF, otherwise it’s illusory
  • Christoph Janz makes a distinction between a “default” and VC’s definition of PMF

Simplified Definition

If you want a simple, yet very accurate explanation, you should stick to Andy Rachleff’s definition:

Simplified Definition

Product-Market Fit means having a group of customers who truly value your product.

Sounds good, but the big question is: how do you know if they TRULY value your product?  Well, they will express it in their actions.

Actions, not declarations. They value your product if they get so excited that they purchase straight away, preorder in large amounts, use it frequently and refer to friends. If they are indiferrent about your product, you are not there yet.

Notice that according to this definition your product’s value is subjective. The final judge is your customer, not founder or engineer. Adding new features and technical sophistications may make your Product Team more happy, but not necessarily feel the same to your customers. (see feature creep).

Insight

Customer is the final judge of the product's quality, not founders or engineers.

Another important thing is that you don’t build a product for everyone. You build it for a group of people with similar characteristics – jobs to be done, gains and pains (not necessarily age, occupation, gender and what’s typically called a marketing persona). Paul Graham suggests to start with a small number of people with a strong need and serve them well. Michal Skok calls it a Minimum Viable Segment (MVS).

Of course, VCs will be asking about the market size and growth opportunity, but this is not what really matters at this stage. Make something people want and help them achieving their goals with your product.

Insight

Don't build a product for everyone, find your MVS (Minimum Viable Segment).

Value Proposition > Product

Andy’s definition is very useful, however it has one thing which can be misleading – the word “product”. If understood in narrow sense, it may suggest that it’s an objective set of features or characteristics (like processor speed or horsepower) which makes you achieve the Product-Market Fit.

In reality, customers rarely care about features – they care about benefits they get from your product. And they care only if these are aligned with what they want to achieve (gains) or mitigate (pains). Your product is only a mean to attain their goals. So a big part of success is not only what your product does (features), but also how you communicate its benefits.

That’s why it is useful to introduce a new term – value proposition.

Definition

Value proposition is what your product does (features), how it helps your customers (benefits) and how you communicate it (messaging, positioning).

Many new founders believe that if they build a product, customers will come. It doesn’t work like that. It requires communication and empathy. You need to know your customers really well, speak their language and focus on what they care about. You need to position your product in a way that’s meaningful to them (Spotify for X may sound exciting for your fellow startupers, but not for your mom). In your messaging use language which is familiar.

Insight

Replace product with value proposition. It's more than features and technicalities.

Matching Customer Segment with Value Proposition

As of now we know that there are two critical components of the Product-Market Fit:

  1. Customer segment (who?)
  2. Value proposition (what?)

Below you can see a Value Proposition Canvas, a tool to design and visualise these two key aspects. Customer segment is divided into: jobs to be done, gains and pains, while value proposition consists of: product and services, gain creators and pain relivers.

When you have a match between these two aspects, you have a Product-Market Fit. So by making this transition from product to value proposition, we’ve reached the Alexander Osterwalder’s definition:

Definition

Product-market fit takes place when you have evidence that your value proposition is actually creating value for customers and getting traction in the market.

Product-Market Fit leads to traction. It’s time to explain what it means and how we can get evidence that the customer value is being created.

Traction

When value proposition fits a customer segment something magical happens. It triggers a circular flow of value between your company and their customers. This flow is called traction and it makes your key business metrics (e.g. sales, product usage, conversion to paid) go up. There are also some indirect signs of traction like word of mouth, referrals, high NPS, organic growth etc.

The mechanism of triggering such a value flow looks more or less like that:

  1. You reach out to your potential customers with a tailored messaging or they find you while searching for a solution to their problem.
  2. They give you their attention because you speak their language and promise to help them with important and/or urgent problem.
  3. You provide them with initial value (e.g. through trial or demo) or your offering is so strong that they cannot resist and want to buy it straight away.
  4. They purchase your product, upgrade to paid or subscribe to your service.
  5. You provide more value
  6. They keep paying or decide to upgrade

If there is no Product-Market Fit, step 2 won’t happen, because people will ignore your mesage.

In fact, half of the step 1 won’t happen as well, because no one in the customer segment will search for what you offer.

If you are lucky you push some prospect to step 3 – making them create a trial account or join a demo call, but they won’t be motivated enough to go any further.

This is how Product-Market Fit works – it enables smooth exchange of value between you and your customers.

If the product-market fit is not there – you target wrong customer segment, communicate poorly or don’t deliver value with your product – you will experience a lot of friction. Such friction will kill your efforts, regardless of how much you spend on marketing.

Insight

Product-Market Fit enables smooth exchange of value between your company and their customers. It's called traction and you will see its reflection in your key business metrics. If PMF is not there, you will experience a lot of friction, no matter how much you spend on marketing.

Getting to the Full Picture: Channels and Relationships

Just as “product” in the Product-Market Fit should be understood wider than just a set of features, market is more than just customers. According to Britannica, market is a place where goods are bought and sold. We already covered buyers (customers) and sellers (ourselves with our product), but what else is missing?

We already know what to build (product) and who to target (customer segments). The missing question is “how?”. How to reach the customer segment and facilitate the exchange of value. The answer can be broken down into the following parts:

  1. Channels (placement) – a place where the communication happens and value is delivered (e.g. stores, websites, media)
  2. Relationships – methods of acquiring and retaining users (e.g. personal relations, DIY model, sales, marketing automation)

Each of these aspects plays an important role in achieving Product-Market Fit. Potential customers won’t learn about your value proposition if you pick wrong channels or timing (e.g. they may be unable to take action, may use wrong device, or be focused on something not related). Without a relationship strategy you may fail at converting users to paid (e.g. due to lack of onboarding or personal assistance) or retain them.

All these 4 aspects – Value Proposition, Customer Segment, Channels and Relationships – correspond with the right side of the Business Model Canvas by Alexander Osterwalder. This area of the canvas represents the Desirability of your business model. Making them all match is what I consider the most robust explanation of what Product-Market Fit is about.

Definition

Product-Market Fit means proving your Value Hypothesis / Desirability Hypothesis. It happens when your value proposition, customer segments, channels and relationships fit together like puzzle pieces.

Wojtek Skalski

CEO/Chief Growth Marketer at Skalski Growth. I specialize in growth marketing for startups, small and medium companies. Partnering with founders and senior management we help them find their product-market fit and eventually boost profits and revenue with digital marketing, data analytics, and automation.