The phrase product-market fit is often used to define the moment that a startup reaches market relevance. Most of the time, this means that the product itself satisfies the problem that it’s target customers are experiencing.
Unfortunately, I think it’s a bit more complicated than that.
Marc Andreessen defines product-market fit as “being in a good market with a product that can satisfy that market,” and I think that it is already a much better definition.
Mark removes focus from the product alone and addresses its position in the overall market.
But that still isn’t far enough.
To his definition, I would simply add the word ‘reach.’ My definition:
Product-market fit is when a product both can satisfy and reach an addressable market.
Product-market fit is often the benchmark required for signifying the moment that a startup is ready to scale, and you can’t scale without a framework for reaching and selling to that market.
The Best Product Almost Never Wins
One of the best pieces of advice that I ever received came from a college art professor who told me that the most well-known art didn’t always come from the best artists. Rather, it came from the artists who were best as making themselves known.
The lesson here is that the best product doesn’t always win. In fact, I would argue that it rarely does. This shouldn’t prevent you from building a great product. You should. But don’t assume that it will be enough.
Without a way to reach your audience and scale the market, you don’t have the entire formula yet. And, I would argue, you don’t have product-market fit.
A Simple Framework For Understanding Product-Market Fit
When I describe product-market fit to my team, I often use the analogy of a key fitting into a lock.
As keys are inserted into a lock, each tooth on the key moves a corresponding pin. Once the pins line up, in what is called a “shear line,” the key is able to turn and lock is opened. Watch this video to see how it works.
Product-market fit happens when all of the pins line up. When you can turn the key, you are ready to scale.
Now, we just need to make sure we identify all of the pins. Here’s how I think about it.
My Framework for Defining Product-Market Fit
First, let’s bread the typical SaaS funnel down into its major stages.
- Top of Funnel: Acquire new prospects and convert them into trials or leads.
- Middle of Funnel: Convert interested prospects into customers.
- Bottom of Funnel: Help new customers succeed and earn expansion revenue.
From there, each stage of the funnel has two pins each that must be aligned in order for the key turn.
Top of Funnel
- Traffic: You need to know how you will consistently acquire new leads. For inbound traffic, which you will ultimately need plenty of, the best metric is simply unique website visits. If you can’t generate predictable traffic from your target customers you will never win. Many startups die here because they never learn how to generate traffic. It’s a bit hard to benchmark the level of traffic you will need as it will vary depending on your market and price point.
- Trials: Whether you sell your product using self-serve trials or a sales team, you will need to measure how effective you are at converting your traffic into interested prospects. For a self-serve model, this will be trials. If you have a sales team this is probably sales qualified leads. In order to find product-market fit, you will need predictable trials/leads each month.
Middle of Funnel
- Aha Moment: There is plenty to cover on how to define and reliably bring your customer through your product’s aha moment that I won’t cover today, but this will likely become one of your most powerful indicators of future success. If you are using a self-serve model, the metric you care about here is probably something like onboarding completed percentage. For a sales-driven process, it is likely demo completed. Between 50 and 80% of your prospects should be experiencing your aha moment.
- Paid Conversations: Your trial to paid metric is an obvious signal of product-market fit. In a sales-driven process, this is measured by the % of sales closed, often called the closed-won rate. You need to be achieving at least 10% in either of these metrics to have product-market fit.
Bottom of Funnel
- Success: Once a new prospect has converted into a paying customer, you will need to make sure they are successful with your product. It is so easy to miss this metric, and it can be one of the more difficult metrics to measure. A good option here is 90-day retention (percentage of customers will with you after 90 days) or 1-year renewals for sales-driven teams. Obviously the closer you are to 100% the better. Any of these numbers below 90% is a concerning signal.
- Retention: In reality, the best measurement of long term retention is Net Negative Churn. Net negative churn occurs when your expansion revenue from existing customers totals more than your lost revenue from existing customers. Products with good product-market fit will not only convert and retain customers, but those customers will also expand their spending over time. Anything below 0% net negative churn is amazing. Below 1% is solid.
Why This Model Matters
Most of the conversations around product-market fit treat it like a one-time event that happens during the early stages of a startup, but this is a fallacy. The truth is that product-market fit is constantly changing and will be something that you will need to keep an eye on for the life of your business.
To start, markets change. New products will enter your market and disrupt your flow. It’s basically impossible to prevent this from happening, so be ready. Events like this will change how the pins on the lock work. You’ll know it’s happening when things that have always worked suddenly stop working.
Customer attitudes will also change. Things that were important to them early on will become less import over time, and new things will become crucial. It’s inevitable. This is particularly true when you begin to move upmarket – a transition that will virtually flip everything you do upsidedown.
These disruptions are guaranteed and they will not only demand changes to your product, but they will also demand changes to every part of your funnel.
If you are caught thinking of product-market fit as a singular event, you are at risk of learning those lessons too late, and there’s no one that wants to see that happen.