4.1 What is PMF? 🎯
This section includes an Activity 🎯
If every product succeeded, then companies wouldn't need product managers. As you're no doubt aware, many products fail. One of the key reasons for this is the failure to find sufficient product-market fit.
If you understand the people who use your products, you can create solutions that fit their needs and increase the likelihood of success. In this checkpoint, you'll learn about this concept through the lens of product-market fit.
By the end of this checkpoint, you should be able to do the following:
- Explain the concept of product-market fit and its role in product management
- Identify factors that can cause a product to succeed or fail in a market
What is a market?
For the sake of this course, a market is where buyers and sellers exchange related products and services. Rather than referring to a specific location, this modern definition of a market is often categorized based on industry or product segment. For example, the software market refers to all transactions between buyers and sellers of various software products. This could happen in a retail store, online, or over the phone.
Markets can be broad, such as the software market. Or they can be segmented into smaller markets, such as the productivity software market or the educational software market.
Markets and their various attributes vary widely. Additional examples of markets could include the higher education market, the pet food market, the social media market, and hundreds more. Each market has a different combination of attributes and factors that make an impact on how companies compete in it.
Even if you give away your product for free, you still exist in a market of competing products fighting for user attention. Your newly launched mobile game is competing with hundreds of thousands of other mobile apps. There's a huge potential market of app users, and you might get only a handful of them to spend time with your app.
Here are some of the factors you need to think about when considering your market.
Market size
Not all markets are equal. For example, you could sell specialized cases for Fields Medals for winners to show off their awards. But there are only a few dozen people in this market, so this is probably a bad market to be in.
By contrast, if you're working on a B2B product, your market is all the people who could possibly be users of your software. This includes people who have never visited your website or even heard of your product.
Besides the sheer number of people in the market, you should also know the market size in terms of the amount of money spent in that market. You'll learn more about this later in the program. For now, you should be aware that you need to choose your product and market carefully to ensure there's a sufficient number of customers to support your business.
What the market can afford
The proceeds from selling your product must cover the costs of developing the product and running the business. As you consider what product to develop and the pricing for that product, understanding customers' willingness to pay will help you determine the types of products you can offer.
For most consumers, a $50-per-month subscription model for a software service may not be reasonable. But that same price point might be entirely reasonable if you're selling to businesses. Companies—especially sales and marketing teams—often have large budgets to pay for tools for their teams.
Competitor products
Competition is a huge factor in markets. Your brand new product probably has several competitors already in the space, and you're trying to attract their customers to your product. Or if you really are the first one in your space, you should expect competitors to move into your space quickly to compete with your product. You should always keep track of the competition in your market—whether it's new companies competing with you, old ones moving out, or any other changes.
What is product-market fit?
Products with good product-market fit have a large and happy customer base. Product managers care about product-market fit because it tells you whether or not your product is really solving your users' needs. Typically, product-market fit can be specified using quantitative metrics, which you'll learn about momentarily.
Alternatively, you may be dealing with a product that doesn't have any comparable products in the market. In that case, you need to establish why the market hasn't already produced a similar product.
Product-market fit is especially important for startups. Successful startups find their product-market fit by refining their product to meet the needs of their users, finding a business model to support the product, and targeting a market that's large enough to ensure the company has growth opportunities.
Conversely, many startups build products that fail because they miss some of these factors. Maybe the target market is too small, the product can't be sold profitably, or the company doesn't add the right combination of features necessary to make the product useful for customers. In the end, a market is only interesting if you have a feasible solution to real customer problems. If your product is too expensive, too difficult to use, or if the market is too small, you'll quickly find yourself out of business.
There's not an exact definition or fancy formula to let you know that you've found product-market fit. Instead, it's a combination of factors that most likely means you're on the right track.
This video below by Y Combinator provides more insight into product-market fit.
Evidence of product-market fit
There's no perfect method to know if you've hit product-market fit, and it's often more art than science. That said, here are a few ways to measure how well you're doing.
Suprisingly Shopify has a great video explaining the same concept
The Rule of 40
The Rule of 40 is a common shortcut to tell whether or not a startup is healthy. Here's the formula:
Growth Rate + Profit >= 40%
Growth rate is the year-over-year growth (or for subscription services, the % increase in monthly recurring revenue), and profit is any generally accepted accounting method for calculating the percent increase in annual profit.
If your growth rate is high enough, you can have negative profits and still be over 40%. For example, a venture capital-backed startup is losing money with profits of -30%. However, it's growing at a rate of 100% annually. Does it pass the Rule of 40? If you add the two together, you end up with 70%, easily clearing the 40% benchmark.
As another example, a more established company has a high profit of 30%, but its growth is nearly flat at 1%. The combined value of 31% doesn't clear the benchmark, and this company may have trouble in the coming years.
It's not a solid rule; plenty of companies have been wildly successful while not adhering to the rule of 40. However, it's a compelling sign to investors that things are moving the right way.
No substitutes
One clear sign of product-market fit is that your users will not accept any substitutes. For example, imagine you're providing users with a survey of your product, and you include a question like this one:
How would you feel if [product] didn’t exist tomorrow?
- Very disappointed
- Somewhat disappointed
- Not disappointed (it's not useful)
- N/A, I don't use [product]
In this case, users who love your product would probably answer "very disappointed." Similarly, if you have product-market fit, a large percentage (40% or more) of the people you survey will say "very" and "somewhat." A bad product will score mostly on the "not" and "N/A" categories. When your product is beloved by your users and they won't accept any substitutes, you're probably well on your way to success.
Recurring use
Many products are ones that are intended for users to use daily. This kind of repetitive use is a sign that you've found product-market fit. Google CEO Larry Page famously discussed the "toothbrush test" when deciding about acquisitions. The test is simple: would you use the product every day as consistently as using a toothbrush? If so, it's a good product.
Another sign of product-market fit is low customer churn. This means that once customers start using a product, very few of them stop. When you look at recurring use data, make sure you check segments of your users. Your overall retention rate could be really poor, except for one group that has incredibly high retention. Why does your product fit those users and not others?
Net Promoter Score
Net Promoter Score (NPS) is a popular measure that investors love to see as a sign of product-market fit. If your product has a high NPS relative to your competitors, it's an indication that your users really prefer your product over your competition. One important note on NPS is that average NPS can vary quite a bit across industries, so there's no clear benchmark.
Similarly, the trend of NPS scores over time can help you determine whether you're making progress on product-market fit or not. If your NPS keeps increasing, it usually means you're increasing your product-market fit.
What makes a product succeed or fail?
No single indicator will prove you've hit product-market fit. Similarly, you could have several factors that look good but still not quite be there. You should monitor these as trends to know that you're moving in the right or wrong direction.
In that case, what separates companies that make it from those that do not? Successful companies find a great solution to their users' problems in a market large enough to support their business. In other words, they had a lot of other things go in their favor. Some of those things include the following:
- A deep understanding of the problems of a specific audience
- A value proposition that sets you apart from other products
- A potential market that the product can expand into
- A solution that matches user expectations
There's no magic formula for product success or finding product-market fit, but there are lots of good and bad examples you can learn from.
Examples of good product-market fit
Spotify grew up in a world where music was available for free. Between apps like Napster and BitTorrent, people could easily find music online. The question was—would a small number of people be willing to pay for legal music? And if so, what would you need to offer them?
History has shown that Spotify's hypothesis worked out. They started as an invite-only service, rolling out to only selected countries. Eventually, they opened access to everyone and offered a freemium service—you can listen for free but with a few limits—so they could lower their customer acquisition costs and churn rates. They also made it trivial to access music on any device. For those and other reasons, Spotify solved the problem of building a successful music platform where many other companies had failed.
Uber is another good model of a product that found product-market fit quickly. After identifying the problem of trying to hail a cab in San Francisco, Uber developed a product that made it simple to get you to your destination. They expanded by offering free or discounted rides to new users. They also provided extra incentives to drivers—offering them high hourly wages and bonuses to ensure that every rider got picked up quickly.
Both Spotify and Uber used their funding to conquer markets that were still forming. They raised a lot of funding to attract a large customer base early and become the top product in their area.
Examples of the lack of product-market fit
Not every product succeeds. You've already explored the failure of Pets.com. Similarly, the rise and fall of Groupon can show how the company failed to find product-market fit. At its peak, Groupon offered deals and coupons to about 50 million users, operating in 50 countries.
Since that peak, Groupon's user base has shrunk considerably, due to over-expansion, unrealistic consumer expectations, and increasing competition. Groupon's business model was easily copied by competitors, and consumers burned out on all the deals. There was a product-market fit for a time, but Groupon wasn't able to sustain it.
The startup Color famously got over $40 million in startup funding for a video sharing app before going out of business. Their large amount of funding drove a lot of hype for the company, but the app was confusing to customers and received low ratings early on. The company was never able to find a successful business model or path on which to grow.
Shyp, a company that picked up, packaged, and shipped items for its customers shut down in 2018 after burning through $60 million in four years. Their product growth was stagnating, and they kept trying to find more ways to sustain their current (failing) business rather than look for a new direction for the company. They finally made the decision to find that next, new line of business, but they also decided to hang on to the old, unprofitable ones, hastening their demise.
Pivoting
Sometimes companies discover that their product isn't gaining traction, or they spot a new opportunity—and they decide to make a change. This is often referred to as pivoting. Companies can pivot into a different market or a different business model. This decision could be based on developments in the market or on insights they've gathered from their customers. In all cases, companies pivot in hopes that the change will propel the company forward.
Kodak was the premiere American film and camera company for decades, but with the advent of digital cameras, Kodak fell far behind. Consumers didn't need film anymore. They also didn't need cameras; every cell phone had one built-in. Kodak has since turned their focus to film for traditional photography and chemical products. They are also working on blockchain-powered documents. But it's unclear if this pivot will bring the company back to its former glory. In Kodak's case, they were late in recognizing important shifts in the market.
Instagram is an example of a product that started as one thing only to become something else entirely. Initially, Instagram was a location-sharing app similar to Foursquare, which lets you check in to locations. Instagram noticed users were sending photos and other small updates via their app, and they wanted to make a version for the iPhone. They ended up building an iPhone app that allowed users to take and share photos with comments. The Instagram known around the world today was born out of that decision to pivot and focus on just that part of the interaction.
The key observation for all of these companies is that evidence of product-market fit is not always obvious. If you read more company success and failure stories, you'll see they have little in common. Sometimes someone has missed an important sign. Sometimes it was a poor market or financial climate in the first place. And sometimes strong competition has pushed a company out of business.
As a product manager, you need to actively seek out the evidence of whether or not you're achieving product-market fit. This means watching your KPIs for any signs of trouble, paying attention to the competition in your market, and always talking with your customers to make sure your product is still working for their needs.
Product-market fit and the product lifecycle
Think back to the lesson about the phases of a product's lifecycle (launch, growth, maturity, and decline). In which phases is it important to consider product-market fit?
The answer is all of them, of course. Below, you'll look at each phase in more detail.
The launch and growth phases are the most important for product-market fit. You need to ensure your product meets the needs of the people who use it. Customer demand outpacing your ability to serve them is a good sign. A common mistake is hiring a large staff before ensuring product-market fit. If your company tries to rapidly expand without hitting product-market fit, you could face the same fate as Pets.com or Groupon.
During maturity, your product may have lower or no growth expectations, so it's best to focus on retaining your users. This means keeping an eye out for competitors who can steal your business and keeping your product running. As long as things stay steady, you're probably still at product-market fit.
When your product is declining, it's a sign that your product-market fit is ending. Maybe there's new technology that makes your product obsolete, maybe it's a new competitor stealing your customers, or maybe the needs of your customer base have changed. Regardless of the reason, you have a tough decision to make—keep working on this product to maintain your product-market fit, start building a new product to replace the old one, or just sunset (shut down) the product altogether.
Matching products to user needs
Even if you already have a group of users who love your product, you may have to start over again to find product-market fit with new users in order to continue to grow.
A common example of this is found in the difference between enterprise customers and small businesses. Say you work for Salesforce, and you have two customers. One is a small business that wants to buy five licenses for its sales team. Another is an international business that wants to buy 5,000 licenses for its worldwide sales team. These two sets of customers will have very different needs. For example, training five people is much simpler than training 5,000. Also, large enterprises often have complicated systems that require integration for their Salesforce rollout to succeed. Without access to the right integrations, the company will not buy the licenses.
Related to this, it's important not to get lost in the noise of featuritis, or feature creep. This involves adding new product features one at a time to achieve a short-term goal but losing the long-term vision. Product managers are often under pressure to adapt products to fit a particular customer's needs to help close a deal or renew a contract. If you find yourself getting caught up in this kind of thinking, you can quickly get off track and end up not finding or losing your product-market fit.
A customer today may not be one tomorrow. And someone who would make a bad customer today may be a great customer in a year. The question is whether or not it's worth doing the work to make the product fit for that new market.
Similarly, your product's customers will naturally change over time. The first people who choose to use your product, also known as early adopters, are probably especially excited about new technology or trying new experiences. The later adopters will wait for the early adopters' opinions before deciding to try your product. Your product might work for the early adopters but not for later ones, and you'll have to figure out how to close that gap.
Getting your product adopted is one of the key goals of product management. If you keep your product-market fit in mind, you will always be aware of how well your product is working for your users.
The video below by Y Combinator offers some good tips for finding the first few customers for your product. It also gives helpful information about getting feedback from those customers that can help you refine your product and improve your pricing.
Activity 🎯
Analyze the product-market fit for the products listed below:
- Segway
- Paypal
- Wear OS (formerly Android Wear)
- Snapchat
- Duolingo
- Superpedestrian
For each of the products above, answer the following questions:
- Based on what you know (or research) about the product, and what you learned in this course so far, do you think this product has product-market fit?
- What metrics or other indicators would you want to see to prove whether or not there's product-market fit?
There is nothing to submit on slack. Ensure you add your thoughts and answers in your notebook/notion page