How to Define Product Market Fit For Your Startup
How to Define Product Market Fit For Your Startup
…and why it may not be a flat retention curve or 40% of your customers saying they’d be “very disappointed” if you went away
Product-market fit (PMF) is the mythical goal of early-stage startups — and rightfully so. Once you have PMF you are at that point where you can shift your daily focus from building something people want to getting what you’ve built out into the world and making money.
Despite PMF being the central goal of an early-stage startup, it is not well defined. In fact, almost every definition of PMF I’ve seen from investors and entrepreneurs is different — and often conflicting. For example, some people will say a flat retention curve, others say when 40% of your customers say they would be “very disappointed” without your product, while others say it is when your customers spontaneously tell other people about your product.
However, when you put these definitions up against the wall, you can start to see a spectrum. We’ll use Christoph Janz’s “Five ways to build a $100 million business” blog post as a frame of reference. In his blog post, which is summarized in the diagram below, he discusses how the size of your account value, measured by Average Revenue Per Account (ARPA), dictates your go-to-market strategy. The main idea of this article is that: ARPA should not only dictate your go-to-market strategy — but also how your business should measure PMF.
How to measure PMF based on customer size
Elephant hunters (~$100k/yr)
With high customer values, they can rely on a low bar like retention to measure success. With large deals as the prize, they can invest heavily in sales teams to find and win deals. As long as they close the deal and the customer doesn’t leave, it’s a win.
For Elephant sized customers, focusing on cohort retention leveling off is a good measure of adequate PMF. For example:
“Long term cohort retention is the best metric for determining if there is product market fit. Once you have a few cohorts that level off at a vertical-specific number, then you’ve achieved product market fit!” — Jeff Chang
Deer hunters ($10k/yr)
With a much lower, but still respectable, ARPA they are still solidly in the hunting game but at a much smaller deal size. So to make up for that, they can’t get away with a product that customers will tolerate — but instead, they need to build something they really like. Retention is a good starting point, but positive customer feedback is helpful to know the product is doing its share of the work to make the business successful.
For Deer sized customers, positive verbal feedback is a good measure of PMF. For example:
“The real metric for both consumer apps and enterprise is — do someone’s pupils dilate when they use your stuff? Whether you’re handing them a demo or if you drew something on the whiteboard. Do they say, ‘You’re not leaving’ or ‘Where have you been all of my life?’” — Steve Blank
Rabbit hunters/trappers ($1k/yr)
At $1,000/year or under $100/month, they’re in between hunting and trapping. At this point, they have resources for marketing, but probably little-to-no resources for sales. The product really has to do the bulk of the lifting for the business to succeed. It should come as no surprise then that Rahul is obsessed with PMF because Superhuman is in this range — however, I don't think his approach applies to all (or most) startups.
For Rabbit sized customers, formal surveys and incentivized referrals are good indicators of PMF. For example:
“Survey your users and ask them ‘How would you feel if you could no longer use the product?’ and measure the percent who answer ‘very disappointed.’ If that percentage is over 40%, you have PMF.” — Rahul
For Mice & Fly trappers (<$100/yr)
At this end of the spectrum, the prize is so small that they cannot justify any sales and maybe not even any marketing. To be successful, the product has to do nearly 100% of the work to make the business successful. People have to love the product and it’s even better if the product is inherently social or collaborative so it naturally spreads through use.
For Mice and Fly sized customers, un incentivized referrals or word of mouth are good indicators of adequate PMF. For example:
“I think the right initial metric is ‘do any users love our product so much they spontaneously tell other people to use it?” — Sam Altman
Sam’s definition is the holy grail for startups, and if you can get here fantastic — however, most startups do not need to get here. Unless you’re hunting flies or mice, I don’t think you absolutely have to make your product this good. For product-oriented founders, this may seem like a cop-out, but it is a matter of resource management for most companies. If you can achieve strong PMF and have a high ARPA though, you’ll achieve something really special.
Putting it all together
When you put it all together with customer value on the y-axis and strength of PMF on the x-axis, you see a nice band of most products going from the upper left to the lower right of a chart. Below the band, is the dead zone with companies that didn’t achieve PMF strong enough relative to their customer size. However, in the upper right-hand corner is the magic zone, this is where the Stripes and Airbnbs of the world live. They make a significant amount of money from their customers and also have very strong PMF.
Takeaways
Develop a nuanced understanding of product-market fit that is specific to your product and customer value (ARPA).
Your initial goal should be to reach the minimum PMF required for your business and avoid the ‘Dead Zone’.
However, you should always be striving to increase your customer value and strengthen your PMF to reach the ‘Magic Zone’.
Additional Reading
Lenny’s Newsletter on PMF — A great resource and where I found many of the quotes.