The best way to think about product-market fit
Product-market fit isn't one thing. It's best to think of it as a spectrum that matches the lifecycle of the startup, and guides founders on what to do next. Let's break it down.
The idea of product-market fit can be confusing, and founders often reduce the concept to some ambiguous time when there’s some unknown amount of revenue.
The truth is that product-market fit isn’t one thing. It’s a spectrum that follows the lifecycle of a startup, from idea to IPO. If you think about it as a spectrum broken down into four phases, it can clarity what you should do next.
Let’s break down each of the four phase.
Phase 1: Customer-Problem fit
Customer-problem fit is surprisingly straightforward: is there a sufficient volume of customers who are experiencing a particular pain acutely enough to make it worth building a business to solve it? This is one of the two often-overlooked phases in finding real fit, and yet it’s absolutely central to design thinking.
The typical, though backward approach is to start with a solution and attempt to find an audience for it. The adage “don’t be a solution in search of a problem” is well-known, but it’s often more insidious. It can conceal itself in subtlety. We often think we’re avoiding this if we translate our product idea into a problem and then probing for that problem.
And that’s the right way to be a solution in search of a problem, but it’s still a solution in search of a problem. If we’re trying to find a use for an existing technology, this can be fantastic — think tech transfer in academia or commercialization of an internal technology.
The smarter approach is to find a problem you really want to solve, and then prove it’s a problem that a lot of potential customers really want you to solve, too. And then fall in love with that problem. Desirability is the foundation of any successful product, and there will never be desire for a product if there’s no customer to desire it, and no problem the product solves for them.
Phase 2: Problem-Solution fit
Once you have a customer base that has a problem they desperately want you to solve, the next step in finding fit is testing the solution. Problem-solution fit is having a group of potential customers who passionately want you to solve their problem in a particular way.
The old adage is that there are many ways to skin a cat. While that’s as vivid and disturbing as any nursery rhyme of old, it couldn’t be more true in the product world. For example, is the problem best solved through a white glove service, or a self-service mobile app? Is it a reusable good sold in stores, or a disposable subscription service? Etc.
To achieve problem-solution fit, we have to again get in front of our customers and make them an offer: buy now to achieve this amazing solution to your problem. More often than not, this step occurs prior to any “real” product existing (e.g. through a “Wizard of Oz” prototype, or even just a pre-sales offer), but does involve an exchange of money.
We don’t care if they say they’d buy it if we made it. We care if they will accept our offer to buy it if we present it to them. The sooner you can get an offer in front of real customers, the sooner you can start making bigger bets and building real products. Any sooner, and you’re front-loading all the risk.
“If you build it, they will come,” may work for the disembodied spirits of dead ballplayers, but it’s disastrous for business. The better version: if they come, we will build it.
Phase 3: Product-Market fit
Now that we have compelling evidence that they will come if we build it, we have to get them to come. Product-market fit is when you have compelling evidence that the high-level mechanics of the business model are working. The simplest way to think about those mechanics is via “pirate metrics”, so-called because they form the acronym “AARRR”, which…you know…sounds like a pirate. Roughly speaking, pirate metrics are:
Acquisition: are customers responding to our offer by beginning to engage with our business or product?
Activation: are customers staying long enough such that we create value for them?
Revenue: are customers paying for said value?
Retention: are customers staying with the product as long as we expect, or are they churning?
Referral: are customers referring new customers to our product, creating viral growth?
If we’re hitting these metrics in a way that points in the direction of a big win, we have unlocked this phase of product-market fit. There’s a there there, and we’ve found a way to make play. Now, it’s time to double-down.
Phase 4: Business Model fit
The last phase of the product-market fit process is the second often-overlooked one. Business model fit is when the product is sufficiently repeatable so as to be scalable. This often requires tweaks to internal operations, such as automation, but just as often requires tweaks to the business model. Are we charging the right amounts to the right customers in the right way? Are we delivering value in an efficient way? Does this make money?
We have not achieved business model fit until we have sufficiently compelling evidence that the only thing left to do is to pour tons of gas on the fire and to watch it burn.
It’s easy to think reductively about product-market fit, but putting it in a spectrum with roughly-defined phases provides perspective. It helps us place smarter bets, and proportion our belief to the evidence.
If you have some traction and you’re looking for the fastest path to the end of this spectrum, a design sprint might be a good tool to have in your arsenal. Let's chat.
Published 9 months ago
Josh David Miller
Managing Director // The Right Box
JDM is the founder of The Right Box, where he facilitates the process of innovation with startups and Fortune 100s alike. He and his team help get new ventures to market, innovate on business models, and establish a culture of intrapreneurship. JDM spends his free time as a startup ecosystem builder, connecting founders and funders in the Sacramento area — where is known as that guy wearing unusually colourful shoes.