Defining the Elusive Product-Market Fit


You can’t define Product-Market fit, but you know when you see it. There are no specific KPIs, but you feel it.Richard Aberman, WePay Co-Founder

There is no clear definition for what Product-Market fit really is. The reason for that is not because it is mystical, esoteric or elusive, but because it varies based on the type of business and revenue model of your startup.

Depending on your business type, P-M fit will be a mix of:

  • Revenue;
  • Engagement;
  • Growth.

Let’s have a look at what each of these aspects entail.

Revenue

In B2B, revenue is how you typically validate your solution.

Maybe you have five, ten or 20 clients signed up willing to pay you good money to use your pilot in a few months. You’re going to ship the solution — if it’s not already done — and they’re going to use it.

But, what happens if they only use it once? Or worst, if they never use it at all? Do you have P-M fit? Do you think they will pay again once the pilot is over?

Engagement

Entrepreneur and angel investor Dave McClure created the AARRR model (Startup Metrics for Pirates) to help startups understand the customer lifecycle.

In his model, a customer is first Acquired, then Activated, Retained, used for Referrals and converted into Revenue.

Simple, but a big part of P-M fit is covered by the activation and retention — also known as engagement — of users. If revenue is the first form of validation, retention is the ultimate form.

A pilot project with user engagement demonstrates value in itself. It proves that the product — beyond the pain it’s solving — is useful. Engagement (not revenue) is the greatest predictor of growth, the third P-M fit engine.

Growth

If you think of a store, pre-product market fit, you’re putting products on the shelves and you’re trying to get on the top shelf and not on the bottom shelf and you’re changing your packaging to catch people’s eyes. Post P-M fit is when you can’t keep the product on the shelves, people are buying it so quickly.Brant Cooper, The Lean Entrepreneur Author

A last and crucial aspect of P-M fit is customer growth or demand.

Unfortunately, it is possible to have found P-M fit in a market of twenty odd companies that can’t possibly scale beyond the first few early adopters. Your market has to be large enough and the demand has to be sustainable if your solution is to have an impact.

P-M fit is also when people are buying the product and buying it more than once. The market says that you have the right product, not you. Your product doesn’t have to be flying off the shelves, but there has to be a pull from the market.

Entrepreneur and marketer Sean Ellis devised what is now know as the Sean Ellis Test to validate that a company has P-M fit. In his model, a product that would leave more than 40% of its users disappointed if it disappeared has P-M fit.

Although this metric is not the ultimate rule, the survey helps gauge the value that the product has in the eyes of customers.

So, do you have product-market fit?


⚡⚡ Enjoyed this content? I go into way more detail on this subject in Lean B2B. The book covers the ins and outs of finding traction in the market for B2B products. Check it out »


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