Why it's good to know about product-market fit | WARC | The Feed

Why it's good to know about product-market fit

Product-market fit is a mainstay of startup thinking – the process of working out if there’s a market for your idea or value proposition – but how does that process change as a company grows and adds new features?

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Sometimes startups are simply digitalising a pre-existing need – for example, selling glasses on the internet. Other times they create totally new products, to address a problem that nobody else can, or to scratch an itch no one else can reach. 

But marketing can sometimes end up focusing more on the “speaking to the market” side of the equation rather than “understanding and addressing” the market side.

The requirement is to recognise whether there’s desire for a solution to a problem or if there’s a desire for a product that solves that problem (or scratches that itch). If it's the latter, you’ll be seeing regular, organic usage and, ideally, sales. That means you’ve found product-market fit (PMF).

Familiar ideas in a new way

The tech side of things is better covered by this comprehensive piece from the FT-affiliated tech publication Sifted, but there are areas for all marketers to consider: 

• Customer retention: If 40% of customers say they would be disappointed if the product disappeared, then you have product-market fit. The retention curve here is just a little above flat or “smiling”.
• Referral: An area in which your product category matters – it’s less applicable to a mass-market toothpaste manufacturer, for instance. But in a commercial environment in which brands are seeking to turn one-time purchases into recurring revenue, or product brands are building service layers, new rules apply.
• Giving up: For startups, this is a common and difficult problem. But for larger companies using these ideas for new products or services, it’s useful to remember that some ideas or features don’t work, that they don’t have a market, and that the market is a useful guide.

Origins: 1990s 

Venture capitalist Andy Rachleff, who is credited with coining the term product-market fit in the 1990s, explained his thinking in a podcast:

“I’m looking to invest in companies that can screw everything up and still succeed because the customer pulls the product out of their hands.”

Rachleff’s slightly formalised method looked at certain aspects of a company to see if it had product-market fit.

In consumer businesses:

• Exponential organic growth (through word of mouth).
• High-net promoter score (a flawed proxy for word of mouth).

In enterprise businesses:

• “Sales yield”: the contribution margin of a sales team divided by the cost of the sales team. Once the yield is greater than one, there’s product-market fit.
• Trial period cancellations. If at the end of a 30-day trial, you pull the service and “the customer doesn’t scream, you don’t have product-market fit”.

Popularity: 2000s 

A 2007 blog post by Marc Andreessen, of Andreessen Horowitz, expanded on Rachleff’s thinking and argued that of the three qualities which mark a successful startup – team, product or market – it is the market that is the most important.

“The market needs to be fulfilled and the market will be fulfilled, by the first viable product that comes along.”

This gave rise to a more common phrase, at least in marketing: a minimum viable product.“The product doesn’t need to be great; it just has to basically work. It follows that the market doesn’t care how good the team is, as long as the team can produce that viable product.”

Andreessen notes that his ideas raise more questions than provide answers, but the focus remains clear.

As an aside, it’s fascinating to see what Andreessen identifies as terrible markets served by great software –“videoconferencing, and workflow software, and micropayments” – where the market had not yet formed.