How to Measure Product-Market Fit

Can product-market fit be measured? And if so, how? What are the most important things to keep an eye on during your journey towards the holy grail of startups? Here are the answers that I gave Mixpanel to their questions about this super-important topic.

Last month Mixpanel published an article called “ Can product-market fit be measured? “, featuring 14 product and business experts from around the world. I was proud and honored to be included in this list alongside world-famous leaders like Sean Ellis, Dan Olsen, and others.

When Mixpanel first approached me for the article, they asked me five questions to which I gave elaborate answers. Naturally, what eventually made it into the interview was only a portion of what I had to say about one of my favorite topics. Hence, I decided to give you the full, uncensored interview and give you a deeper dive into my thoughts and advice on product-market fit.

What’s the Best Definition of Product-Market Fit?

I always like going back to where the term product-market fit came from. The person who coined this term is Marc Andreessen in an article called “ the only thing that matters “. In this article, Andreessen defines product-market fit as “being in a good market with a product that can satisfy that market”. He also goes beyond to define what a good market means: “a market with lots of real potential customers”.

When I teach about product-market fit, I break this definition of a good market into three distinct qualifications for a good market:

First, referring to the word ‘real’ — there has to be a real, substantial, unmet need that you can satisfy with your product.

Second, referring to the word ‘customers’ as opposed to users — it needs to make sense for them to pay for your product (or for someone else to be willing to pay you if you are giving your product for free).

Third, referring to the word ‘lots’ — there has to be many of them, with the same need and the same willingness to pay. The market size is important not only for your ability to bring a lot of revenue and raise money. It is also important for your ability to experiment and make mistakes along the way. The trial and error process that is part of any journey to product-market fit is hard to nearly impossible if your market is too small since you can only make a first impression once, and you need to have many first impression opportunities in order to improve and eventually succeed.

What is a Good Quantitative Indicator of Product-Market Fit?

The #1 reason that startups fail is that they make something nobody wants. So in order to succeed, a startup must make something people want before they run out of money. If “make something people want” sounds familiar, it’s because it’s Y Combinator’s slogan, and within the context of product-market fit it is easy to understand why they chose it.

So when we are in the search for product-market fit we want to keep an eye on the metrics that will tell us that people want what we have. Out of the various stages of the customer journey with the product (acquisition, activation, retention, and monetization) only the last two are actually indicating that people want what you make (the actual product). The acquisition phase is an indication that they have the problem or need, and activation is an indication that they think your product might help them (they like the idea of your product, not the product itself). Retention is where they come back because they see the real value (they want your product), and monetization is where they demonstrate their willingness to pay and put their money where their mouth is.

While in order to reach product-market fit per the definition above you must nail both retention and monetization, retention is the more important metric here. First, because it is a precondition for monetization — if they don’t see the value in your product they won’t pay for it (this is true even if you are selling without product trial and make your customers pay before they start using the product, as you might be able to get the first deal but as they need to renew they would never do so if they don’t use it regularly). The other reason that retention is more important is that it is an earlier indicator and a much more actionable one in the sense that the feedback cycle is much shorter.

Think about the following analogy: imagine you subscribed to a gym and never showed up. If they only track monetization, they will know about it when the year is over. Asking you to renew your subscription after you haven’t used it at all in the past year is bound to fail. But if they tracked retention and saw that you didn’t show up, at all or as frequently as they would like you to, there are many things that they can do to change it: they can call you and send reminders, they can offer a personal trainer, they can point you in certain classes that they think you might like, etc. It is also much easier for them to see if their actions led to the results they were hoping for: wait a week and see if you did show up. So they have many opportunities to improve before you need to make the big decision of whether or not to renew, which increases the chance that they will succeed and make you a happy user with good retention. And when they are able to nail down retention it will be much easier to nail down monetization as a result.

How to Measure Progress Against These Indicators?

The first thing to do when you want to start measuring your progress is to understand what each stage means in your case. The definition of acquisition, activation, retention, and monetization changes with every product. Not just categorically (e.g. B2B vs. B2C), but also truly between products of the same category and even the same company. Some products are meant to be used daily (like slack for example) so it makes sense to measure daily active users. But other products (like cybersecurity products for example) are not meant to be used daily, and so they might look at monthly active users instead. It is not only the frequency that matters but also the definition of what active means: if I’m a slack user and only read messages but never send any, am I considered active? what if I only send one each day?

All these examples are talking only about retention, but startups should discuss each and every category in depth. These discussions are priceless even if you never get to actually measure anything on the product (not recommended, but still happens — especially with B2B startups that generally have less traffic than B2C) since you will have a much deeper understanding of what success means in your case and can act accordingly.

Any Success Stories When Product Metrics Showed Real Product-Market Fit?

The process of finding product-market fit is like finding the path of least resistance to success (like water or electricity do). When it comes to product-market fit, it means finding the very specific market segment where your product is most needed and sells most easily. Whenever I work with startups, the first thing we do is understand out of all the customers that they have who is this ideal segment, to a very specific and detailed level.

For example, we are moving from the broad “enterprise companies” definition that many startups use to something much more specific, like “traditional enterprises, where the tech department is less than 500 people and on the other hand their business strategy requires constant innovation”. As soon as we define it as clearly (it is a process that takes a few iterations to do right), and after validating that the market is large enough (that’s part of finding the ideal customer as per the definition of product-market fit I gave above), we always start seeing the metrics checked one after the other.

When the problem is defined well, marketing can do their job and acquisition gets easier, then if we are able to explain the solution in a way that resonates with the customers, activation rates are much higher. Retention usually requires a number of iterations to do right, because that’s where most learning happens that couldn’t have happened before they start using it, and when all of these are done right monetization comes as a straight-forward step. I work with a model I created called “ The Product Circuit “ that outlines this strategic product thinking and a step-by-step approach for the process.

Bonus: What Are Other Non-Quantitative Indicators for Product-Market Fit?

With acquisition and activation, especially in B2B startups with top-down selling strategy which means talking to each customer as part of the sales cycle, I always encourage my customers to run the following “A/B test”: as soon as we clarify the exact problem we are solving and the exact customer segment, this reflects on the product pitch. Changing the product pitch is the easier experiment you can run, it consists only of a slide deck, or if you pivoted you should add some screen mockups. I ask my customers to use this new pitch when they reach out to customers and in any sales meeting, and “measure” the reaction on the other side.

Of course, it is not a real measurement with numbers, but it is the difference between having someone nodding randomly when you are talking, and having them say “right, I had this problem only yesterday! I wish we had talked last week!”. You can literally see their eyes open wider as they like what you are talking about. This is a great indication that they have the problem, which is the first and necessary step not only in every sale but also in identifying a good market to be in. Once you identified a real customer need as per the definition in the first question above, building the right product to satisfy it is a much easier (even if much longer) process.

To me, product-market fit represents the essence of product management at the strategic level. As you can see, it is not a line in the sand, and hence relevant for most lifecycle stages of any company (yes, even growth stage startups need to apply the same way of thinking before they enter specific growth tactics). That’s why it’s one of the first topics and one that is discussed in most depth in the CPO Bootcamp. It serves as the foundation for building your product strategy, regardless of the stage of your product.

📖 My free e-book “ Speed-Up the Journey to Product-Market Fit” — an executive’s guide to strategic product management is waiting for you at www.ganotnoa.com/ebook

Originally published at https://ganotnoa.com on March 3, 2021.