Product-market fit is when a product shows strong demand from passionate users representing a sizable market.
Marc Andreessen coined product-market fit as “being in a good market with a product that can satisfy that market.” Steve Blank writes that, “Customer validation proves that you have found a set of customers and a market who react positively to the product: by relieving those customers of some of
their money.”
Product-market fit requires three criteria be satisfied:
- The customer pays for the product. (In a networks-effects business, the user uses the product on a regular basis, and the customer pays for access to those customers.)
- The cost of acquiring the customer at scale is less than what the customer pays for the product. (You’re not simply buying customers.)
- Evidence proves the market is large enough to support the business. (Enough said.)
All businesses need to reach revenue at some point, so all businesses must have a product-market fit milestone. If you cannot prove you can acquire customers for less than what you earn from selling them your product, you have a fundamental business problem. While the product-market fit definition may seem rather obvious, and getting to revenue is a clear milestone, measuring product-market fit from a market acceptance perspective is a bit more difficult.
Sean Ellis offers this view: “Achieving product-market fit requires at least 40 percent of users saying they would be ‘very disappointed’ without your product. Admittedly this threshold is a bit arbitrary, but I defined it after comparing results across nearly one hundred startups. Those that struggle for traction are always under 40 percent, while most that gain strong traction exceed 40 percent.”
Of course, it is possible to build a successful business with less than half of your customers being very disappointed without it. I’m sure you can think of many products you buy that you could easily live without. Conversely, not all businesses with greater than 40 percent will succeed. But here’s why 40 to 50 percent is a reasonable number:
- If you buy into Moore’s technology lifecycle adoption curve, your target customer at the beginning is the early adopter. Your early adopter will care significantly more about your product than the early majority or late majority adopters will.
- If you have waited to try and scale your business until achieving that mark (as Ellis recommends), you want to be sure you have nailed it before you spend money on demand creation efforts (scaling up).
While the 40 percent number is a good indication you have achieved product-market fit, it doesn’t say anything about the size of the market. Does that matter? The answer depends on your values and funding desires. Regardless, a bottoms-up approach to market sizing at this point should be quite straightforward, since you know a lot about your market segment and likely, the adjacent. As Ellis says, “crazy startups pivot away from strong customer-perceived value in search of a bigger market.” But that doesn’t mean you shouldn’t think through where a particular segment is taking you from a scaling point of view.
Even if you are lucky enough to have such strong evidence, this doesn’t necessarily mean it will last and the size of the market is large enough to sustain the type of business you hope to build. As Ben Horowitz points out in his famous blog post, “The Revenge of the Fat Guy,” often the evidence is not so clear, and even if it is, it may not be where you end up.
Finally, product-market fit is not a hypothesis. It is evidence through customer traction that a fit exists. Growth hacking is taking early evidence of fit and playing with the levers as discussed above, until hopefully, rapid growth is achieved.