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Defining the Elusive

Product-Market Fit
April 23, 2015

You canʼt define Product-Market fit,


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 »

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