but you know when you see it. There are no specific KPIs, but you feel it. – Richard Aberman, WePay Co-Founder
There is no clear definition for what
Product-Market fit really is. The reason for that is not because it is mystical, esoteric or elusive, but because it varies based on the type of business and revenue model of your startup.
Depending on your business type,
Product-Market fit will be a mix of:
Revenue; Engagement; Growth.
Letʼs have a look at what each of these
aspects entail.
Revenue
In B2B, revenue is how you typically
validate your solution.
Maybe you have five, ten or 20 clients
signed up willing to pay you good money to use your pilot in a few months. Youʼre going to ship the solution — if itʼs not already done — and theyʼre going to use it.
But, what happens if they only use it
once? Or worst, if they never use it at all? Do you have Product-Market fit? Do you think they will pay again once the pilot is over?
Engagement
Entrepreneur and angel investor Dave
McClure created the AARRR model (Startup Metrics for Pirates) to help startups understand the customer lifecycle.
In his model, a customer is first Acquired,
then Activated, Retained, used for Referrals and converted into Revenue.
Simple, but a big part of Product-Market
fit is covered by the activation and retention — also known as engagement — of users. If revenue is the first form of validation, retention is the ultimate form.
A pilot project with user engagement
demonstrates value in itself. It proves that the product — beyond the pain itʼs solving — is useful. Engagement (not revenue) is the greatest predictor of growth, the third Product-Market fit engine.
Growth
If you think of a store, pre-product
market fit, youʼre putting products on the shelves and youʼre trying to get on the top shelf and not on the bottom shelf and youʼre changing your packaging to catch peopleʼs eyes. Post Product-Market fit is when you canʼt keep the product on the shelves, people are buying it so quickly. – Brant Cooper, The Lean Entrepreneur Author
A last and crucial aspect of Product-
Market fit is customer growth or demand.
Unfortunately, it is possible to have found
Product-Market fit in a market of twenty odd companies that canʼt possibly scale beyond the first few early adopters. Your market has to be large enough and the demand has to be sustainable if your solution is to have an impact.
Product-Market fit is also when people
are buying the product and buying it more than once. The market says that you have the right product, not you. Your product doesnʼt have to be flying off the shelves, but there has to be a pull from the market.
Entrepreneur and marketer Sean Ellis
devised what is now know as the Sean Ellis Test to validate that a company has Product-Market fit. In his model, a product that would leave more than 40% of its users disappointed if it disappeared has Product-Market fit.
Although this metric is not the ultimate
rule, the survey helps gauge the value that the product has in the eyes of customers.
So, do you have product-market fit?
Enjoyed this content? I go into way more
detail on this subject in Lean B2B. It covers the ins and outs of finding traction in the market for B2B products. Check it out »
Download the First 6 Chapters for Free
This sampler covers the differences
between B2B and Business-to-Customer (B2C) product-market validation, shows you how to define your vision for success, find early adopters, select market opportunities and assess a venture's risk. Download The First 6 Chapters Today »