Reaching the Startup Holy Grail: Product-Market Fit

by mikekarnj on November 5, 2012

In preparation for my next online Skillshare class, I’ve been doing research into how startups reach product-market fit (disclaimer: I’m not an expert on this topic).  The beauty behind a new concept is that there are a lot of different methodologies including those from Sean Ellis, Ash Maurya, Steve Blank, and Eric Ries. Below, I’ll link to great articles I found throughout my research and share a simple methodology we’ve been using at Skillshare to reach product-market fit.



A startup hits product-market fit (PMF) when they’ve developed a product for a group of passionate users in a big enough market. As Marc Andressen puts it in this
article: “product/market fit is the only thing that matters.”

Product/market fit means being in a good market with a product that can satisfy that market.

You can always feel when product/market fit isn’t happening. The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast, press reviews are kind of “blah”, the sales cycle takes too long, and lots of deals never close.

And you can always feel product/market fit when it’s happening. The customers are buying the product just as fast as you can make it — or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account.

The key is to reach PMF before you run out of money. So, when searching for PMF, it’s critical to conserve cash. It’s important to know when you’ve hit PMF because 1) most startups fail because of pre-mature scaling – they attempt to grow the business when it’s not ready to scale and 2) companies also fail when they don’t step on the gas pedal when they’ve reached PMF, which allows competitors to come in and take over the market opportunity.

Throughout my research, I’ve documented the process and methodology I’ve been using at Skillshare to reach product-market fit. As part of my class, we’ll be using this four-step process below.

Optimize for Learning
Before you even start, keep in mind that getting out of the building and talking to your customers is the most important thing you can do when trying to reach PMF.

During this stage, you want to be learning what the market wants versus proving that you have the most awesome idea in the world. Don’t fall into the “Steve Jobs trap” – thinking that you are such a visionary that no one understands your vision because you’re so innovative.

While talking to real users, remember that “customers validate and that entrepreneurs innovate.”

1. Pick a Market
According to Marc Andressen, “the #1 company-killer is lack of market… In a great market — a market with lots of real potential customers — the market pulls product out of the startup. Conversely, in a terrible market, you can have the best product in the world and an absolutely killer team, and it doesn’t matter — you’re going to fail.”

This is re-iterated by Sean Ellis, “my recommendation has always been to decide not to grow the business if it doesn’t have a lot of people that are real passionate about the solutions.”

That’s why I believe that determining your market is extremely important before you even start thinking about doing anything else. Here’s a great article by Noah Kagan on determining your market size.

As you’re thinking about your market, it’s important to know that you can’t build a product for everyone. I came across this quote from Chris Anderson (TED) which I thought was really relevant:

Build for a Niche While Maintaining Broad Appeal: Winning ideas have to connect across a broad array of areas. They have to engage technology in an intelligent way, but they also have to tap into market psychology, human psychology, and customer psychology.

As you build for a specific niche, it’s important to understand how to cross the chasm into the early majority. Geoffrey Moore (author) suggests that “focusing on a single industry vertical, leveraging all your resources to win early-majority reference customers in that segment (by convincing them you are a safe, legitimate choice), and then dominating that segment before moving on to the next industry vertical.”

During this stage, it’s important to define your market, find your passionate users, and figure out how to reach them and help them spread your product for you.

2. Competitive Advantage / Unique Value Proposition
One area that is often overlooked is your company positioning / UVP and overall competitive advantage.  Your UVP is a single, clear, compelling message that states why you are different and worth buying over your competitors. By clearly positioning your product within the right market, it can be all that’s needed to drive PMF.

A trap early stage startups often fall into is thinking that their competitive advantage/UVP is complex and simply a list of different features. When an adequate market with a substantial enough problem has been picked, though, the key is to find a simple, understandable message that conveys the main problem your solution solves.

“And for me, ultimately it’s that strong signal that this is something that users really love about the product. So understanding who loves that product — who really has that need — that starts to give you guidance on who you’re going to target going forward.

And you may find that they absolutely love the product. Then hone in on why they love the product. And then get the messaging right and the experience right, so that you’re delivering that better.

So, with no real change in the product, but a change in the messaging and a little bit of first-user experience change, you got a huge uptick in the must-haves.” – Sean Ellis

Bill Gurley wrote a great article on competitive advantages, which he defines as “how easy is it for someone else to provide the same product or service that you provide?” But, I think even more important is building your economic moat, “coined and popularized by Warren Buffett, refers to a business’ ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms.”

This is a strategy I continuously develop and evolve over time. I found that it’s much easier to create a strategic blueprint for your startup by putting together a lean canvas (which was created and popularized by Ash Maurya). It’s a great framework for validating your startup idea.

3. Creating a “Must-Have Product”

10 Steps to Product/Market Fit, Ash Maurya

Before your reach PMF, it’s really important to focus on activation (do users have a great first-time experience) and retention (do users come back?). If you have a business model already, you can start tracking revenue as well.

While working on your product, you’ll want to define your Minimum Feature Set (MFS) that will drive users to use your product, come back, and eventually give you money. At Skillshare, we focus a lot of our time on improving existing features (vs adding new ones), usability/flows, and writing clear communications for our product. We find these changes really correct a lot of the confusion around our  product.

4. Measure Product/Market Fit (User Growth, Revenue Growth, Surveys)
As you’re reaching PMF, it’s critical to find your power users and developing a “must-have” product for them. It’s also important to stay away from vanity metrics, which Josh Elman goes over in this article:

One of the things that I felt working on each of these is that we never looked at numbers or metrics in the abstract — total page views, logged in accounts, etc, but we always talked about users. More specifically, what they were doing and why they were doing it.

When measuring PMF, focus on improving the overall experience for your power users. We found that it’s usually too early to set arbitrary BHAG’s when you searching for PMF. Since everything is so unpredictable,  you won’t even know what goals to hit.

If you’re looking for a quantitiave approach to measure PMF, I would recommend reading Sean Ellis’ 40% rule.

If none of the steps 1-3 seem to be working, go back, repeat, and keep repeating until you develop a must-have product for a certain market.

How do you know when you’ve hit P/M fit?
Marc Andressen debunks a couple of myths in this article: reaching product/market fit isn’t a big-bang event, it’s not obvious when you hit it, and you can lose it once you hit it to your competitors.

There won’t be an exact moment where everything clicks that lets you know you hit PMF. There’s no set formula that works for every company but I think there are things you can look at to make a decision whether you’ve hit PMF or not.

  • What evidence do we have that we’ve hit PMF?
  • Are we growing organically?
  • Are the survey responses improving?
  • Are users coming back to the site and using the product?

Before you hit product-market fit, the only thing that matters is getting to product-market fit. After you reach PMF, the only thing that matters is reaching sustainable growth.

When searching for PMF, there will come a time when you have to double-down on things that have been working and transition to growth/scaling. Remember that most startups fail because they 1) start scaling prematurely and 2) they don’t start scaling when they hit PMF.

From my experience at Skillshare, here are some last quick tips while you’re searching for PMF: question everything, be objective, and make constant 1% improvements. We believe that one silver bullet won’t help you reach PMF but instead a lot of small 1% improvements. It won’t be easy but I hope this simple methodology helps you reach product-market fit!

Michael Karnjanaprakorn is the CEO/co-founder of Skillshare, which is a global marketplace for classes. If you’re interested in learning more about reaching product/market fit; feel free to take his free online class on Skillshare.

Resources
Nail It then Scale It: The Entrepreneur’s Guide to Creating and Managing Breakthrough Innovation [Paperback]
 Running Lean: Iterate from Plan A to a Plan That Works

 

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