And of course, we will wonder: What is Product - Market Fit? How to achieve Product - Market Fit? How do I know if I have achieved Product - Market Fit? In this article, ThinkZone will go through the following contents in turn:
➤ What is Product - Market Fit?
➤ How to achieve Product - Market Fit?
➤ What to do after achieving Product - Market Fit?
---
Subscribe Newsletter And agree to receive notifications on ThinkZone's website so you don't miss out on useful articles every week!
---
WHAT IS PRODUCT - MARKET FIT (PMF)
PMF is an ambiguous condition, without a clear definition, with a very general description that “You achieve PMF when your product really has demand from the market, and users are feeling satisfied using that product”.
So, what needs does the market need? How big? How many users do you need?... to be called PMF? The answer is "There is no specific number, it depends on each business model".
To determine whether they are achieving PMF or not, startups often rely on business signs, called traction. Traction is a general concept used to refer to the achievements that a startup achieves in its business process, it can be revenue, number of users, retention rate,... or partnerships with partners, user feedback on the product,... For startups in the early stage, when revenue is still low and profits are a distant thing, traction is something that investors will ask a lot during the startup fundraising process.
To determine PMF, startups will look at traction that shows users are looking to use the product (organic acquisition), they are satisfied when using the product (engagement), and continue using that product (retention). This also means: we do not evaluate PMF in terms of revenue or profit, but in terms of products and markets.
When will I know I have achieved PMF?
We would like to send readers the answer of Marc Andreessen, co-founder of Netscape and General Partner of the fund Andreessen Horowitz, a famous VC who has invested in Facebook, Asana, Airbnb,...
"Even though there is no clear definition, you can always feel if you have not reached PMF. That is when customers do not feel they receive value from the product, they do not introduce the product to each other, the number of users/time using the product does not increase quickly, the sales cycle is too long, and many contracts are difficult to close.
On the contrary, you will know immediately when you have reached PMF. That's when customers buy products so fast that you can sell as much as you can, when the number of users increases so quickly that you have to worry about server overload, revenue suddenly increases dramatically, and you immediately encounter operational pressure to ensure the needs of a large number of users are met.
Andrew Chen, a Partner of the Andreessen Horowitz fund, also set out some criteria to evaluate the PMF of a SaaS company for startups to use as a benchmark:
➤ 5% conversion rate from free user to paid user.
➤ CLTV/ CAC (Customer Lifetime Value/ Customer Acquisition Cost) ratio reaches 3X or more.
➤ Monthly Churn rate < 2%.
➤ Actual Traction clearly shows the roadmap to reach $100,000 MRR in the near future.
HOW TO ACHIEVE PMF?
Most new startups will not be able to reach PMF yet. And most startups fail because the core reason is not achieving PMF, because failure to achieve PMF will lead to many consequences such as: no revenue, uninterested investors, discouraged team, conflicts between co-founders,...
Therefore, every startup should set PMF as a key goal in its initial development process. Here are some tips.
Choose your niche market wisely - Being first doesn't necessarily mean you win, but being late doesn't necessarily mean you lose
An existing market often has a lot of competition, but previous competitors have done a very important job for you, which is educating the market. Facebook following MySpace and Friendster will not need to burn money on marketing to introduce the concept of "social network" to users. In an existing market, customers are already aware of their needs, and actively seek solutions for that need, meaning the "Market" part has been proven, and you only need to worry about the "Product" part.
People also often talk about the concept of "blue oceans", which refers to new markets that have not yet been explored by any competitors. However, jumping into this market also means facing the risk of having to burn money to educate the market from the beginning, or even burn money to build technology infrastructure for that market.
When MoMo first started deploying, the quality of the internet network was still poor, smartphones were not yet developed, transferring money via phone was still a distant concept, even the angel investors investing in MoMo at that time could not clearly imagine what "electronic money" was. 7 years to educate the market and achieve PMF, MoMo is currently leading the market and becoming an inspirational story, but how many startups have such perseverance and resources?
→ The advice here is that startups should choose somewhere in the middle, including both availability and innovation, specifically a niche in a larger market with proven demand, and then gradually develop and expand into the larger market.
Facebook started out as a website used by Harvard students to post personal profiles and vote to see who was the hottest. LinkedIn started out as a website for users to download and store CVs.
MVP and the Build - Measure - Learn loop are powerful tools
The product development process needs to closely follow user needs. Through user interviews, testing, and feedback, you need to determine which features bring value that they need the most, focus on it, and eliminate unnecessary features.
Using MVP and the Build - Measure - Learn loop will help you continuously test hypotheses, gradually improving product market fit. This process is not a straight path to the destination, but more like the process of finding an aimless path. On that journey, you constantly come up with ideas, add new features, test each one, keep the good ones, get rid of the bad ones, and gradually one day you have a product good enough to reach PMF.
The market has certain standards for products, don't reinvent the wheel, but innovate just enough
Technology brings many possibilities in the product development process, allowing us to create products with a variety of features. However, it also makes us easily distracted, creating products that are too "strange" and complicated that they don't really need. There are 2 notes for this section:
➤ Don't let Minimum Viable Product (MVP) be too "Minimum": Entering an existing market means customers already have minimum standards for the product. An MVP that doesn't meet that minimum standard will have no users, and won't test the assumptions you want to test.
➤ Copying 100% will not make you stand out, but innovating 100% is also suicide. Imagine a new email sending tool is born with a completely new email management interface compared to Outlook or Gmail. Users will have to learn how to use the tool from scratch, which is too inconvenient for them. The advice is to copy 80% (standard elements that users expect from the product) and 20% improvement (to create competitive advantage with new improvements that bring efficiency or good UX to users). That's why new phone versions often don't differ too much.
WHAT TO DO AFTER ACQUIRING PRODUCT - MARKET FIT?
Before PMF, your main problem was building a good product. After PMF, you will come to growth and optimization problems, with the goal of increasing users, revenue,... (depending on the business model).
Here are some ways to scale.
Run ads
If you have not reached PMF, spending money on advertising will not bring many results when the number of users coming from advertising is not enough to compensate for the number of users leaving because the product is not good.
But after PMF, when the product is good enough to partly solve the user retention problem, and there is a high possibility that at this stage you have also been invested by VC, advertising is a good channel to attract more customers, besides organic and word of mouth channels.
This is the stage where the startup will look closely at the CAC and CLTV indicators. Of course, you'll want CLTV > CAC, and if done well, the CLTV/CAC ratio should be 3X or higher.
➤ Learn about how to calculate CAC in the article: “Calculate Customer Acquisition Cost properly”
Viral loops
From social networking platforms to work tools like Slack, Trello,... or even e-wallets like MoMo, viral loop plays an important role in increasing the number of users. This is a mechanism to encourage current users to invite new users to join, with a simple, fast mechanism, and attractive enough rewards.
For example, MoMo used to have a policy of giving 100,000 VND to each user when successfully inviting a new user to use MoMo with a referral code. Similarly, Trello also gives credits for using Trello's paid features if you invite friends to join a workspace on Trello for the first time.
With viral loops, we are interested viral coefficient (viral coefficient), represents on average how many new users a new user will invite to agree to use the product, and of course we expect the viral coefficient > 1.
* Learn about Viral Loop and how to calculate Viral coefficient through the article: 10 case studies about Viral Loop of major startups in the world and how to calculate Viral Coefficient
SEO (Search Engine Optimization)
For products that include a lot of content such as review platforms, blogs, real estate, etc., SEO is a method that cannot be ignored, because SEO optimization will help you gain a lot of traffic from search engines like Google.
And constantly optimize everything
There is never a perfect product, only products that get better day by day. This process has no end, in which you will optimize from the smallest things such as landing pages, call to action buttons, interface, distribution channels, customer care,... to make the user experience better and better.
***
SUMMARY
In this article, ThinkZone has gone into depth explaining the concept of Product - Market Fit, its importance, and notes for startups in the process before and after achieving PMF. PMF should be a startup's top priority in the early stages, instead of pouring resources into marketing, sales or partnerships, because if the product is not good enough or has not reached PMF, then all the effort you put in will not be effective, like pouring oil on cold coal.
If you feel your startup has reached PMF and is ready to raise capital to scale up, please contact ThinkZone!
Reference
https://andrewchen.com/zero-to-productmarket-fit-presentation/
https://future.a16z.com/about-product-market-fit/
https://platformthinkinglabs.com/materials/virality-viral-growth-network-effects/