How to get to Product Market Fit: what it is, step by step guide and success cases like Notion, Canva and Stripe.

Debunking the myth of PMF

Welcome back again to Product Market Fit! Please if you find valuable what you read don’t forget to share and subscribe 👍

This is a longer post than usual so I would recommend, some music to energize first!

Let’s go.

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So it’s been a couple of interesting and busy weeks, and I’ve just got a little of time to regather my thoughts.

On this newsletter I’m going to talk about:

1. What is Product Market Fit and how to recognize it

2. How to get to Product Market Fit

3. Showcase of successful startups achieving Product Market Fit

Now let’s get into it!

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1st. What is Product Market Fit and how to recognize it

If we go to basics the definition is simple: selling a product that the market wants/needs.

This is simple but still important. Bear with me. Just because the market needs/wants a product it doesn’t mean that having PMF will make your company grow exponentially without you having to do anything else.

So, for example, let’s talk about a commodity like water. Everyone drinks and needs water, so, if you start a water company you get to PMF right away. However, to sell it you’ll still have to find a distribution channel, invest a lot in marketing to try to differentiate yourself and then start getting some customers. Because the market is so mature it will be hard to grow a water company and to make money out of it. You can have product market fit but you then have to sell your product.

So, what is the point of getting to product market fit? Well, if you are a startup you are likely selling a product for which there is no clear need for. You are solving a problem in a way nobody has before, so you have to get to the point where your product is as wanted/needed as water can be. Once you get there, then it’s time to invest in market it. If the product is a market maker then it will have the potential to grow way faster than you can grow a water company.

There is a lot of literature about how to recognize product market fit but I found Tristan Kromer’s definition accurate.

“Product/Market Fit is sufficient demand in a defined marketplace to allow the efficient expenditure of capital (human or financial) to scale company processes such as marketing.

There are three key components to product market fit – value proposition, customer segment and pricing. Once product market fit has been established none of these three areas requires any further iteration. They will need to be reviewed from time to time but are set for at least the first phase of the company's growth.”

2. How to get to Product Market Fit

1st. Find a niche

Identify a problem that a set of homogeneous companies share. Identify that set of companies and define your ideal company profile, by industry, geography, revenues, employee count, key challenges and tech stack. You can then move on to set your Buyer Persona and your user persona.

2nd. Make the sure the problem is so big that they are desperate to solve it

3rd. Build a solution that does a good job solving that problem - start customer experience first and think about the huge benefits you are bringing to your customers

4th. Set a pricing and validate it

You can read all about pricing on this classic Hubspot Blog.

5th. Iterate product

If you don’t know about agile read this.

6th. Measure

Follow the Pirate Metric Framework coined by Dave Mclure

1. Acquisition – how well are you getting customers to your site or app?

• Segment your audience - make sure you are targeting the people who get value from your product.

• Figure out what’s unique about the users that stick around and those that churn

• Find the critical actions they take and milestones they reach that unlock the value of the product.

• Bake those actions into the experience and push as many users as possible to take those actions or hit those milestones – this will drive up activation, conversion and retention.

2. Activation – are your customers having a great ‘first run’ experience?

3. Retention – how often are your customers coming back?

• Survey users to understand how they feel about your product

• Use Sean Ellis’ test for product-market fit – if 40% or more of your users say they would be very disappointed if your product was taken away that is a good indicator of product-market fit.

• Measure retention rates and look for a stabilizing retention rate over time. What’s a good retention rate? Depends on model and vertical.

4. Referral – are they telling others about your product?

• Measure Net Promoter Score (NPS) – if it’s a 9 or a 10 you’re in good shape

5. Revenue – are they paying for your service? Are you able to monetize your customers?

8th. Iterate & do it all again

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3. Business case of successful startups achieving Product Market Fit

Now, let’s look at the data. How fast do companies really get to PMF and how do they keep growing?

Well, best in class startups reach $1M ARR in just 1 year and $10M ARR in just 3 years. However, as you can imagine there are many aspects that affect this.

As it shows on Lenny’s Newsletter, it took longer than most would expect for these well known startups to find product market fit, or did it?

Let’s look about some of the following startups:

1. Stripe