Demonstrating Product Market Fit

Demonstrating Product Market Fit

This guide is designed for startup founders to better understand the metrics that define product-market fit (PMF). PMF is the degree to which a startup's product meets a market demand.

To early stage founders, the search for PMF is indistinguishable from the business. While seed financing can be raised on ideas and experience, demonstrating PMF is essential to raising later rounds of capital.

Every startup is unique so there is no general formula for PMF. But all formulas must include measurements not just of your startup's product (e.g., user adoption, retention, and feedback) but the market into which you are selling your product (e.g., market size, demand, and competition).

Product-specific indicators of PMF are directly under your control. The rate at which new users adopt your product signals the willingness of the market to try your product but doesn't demonstrate PMF unto itself. It's arguably more important to assess your product's ability to retain customers than it is to get them to try your product. High adoption means you have a great sales team. But if retention is low, you probably need to focus on customer experience and customer service.

Collecting and analyzing customer feedback is one of the most important ways to boost retention and further refine your PMF. A common metric for assessing customer satisfaction, the Net Promoter Score (NPS), measures how likely are your users to recommend your product. Because NPS subtracts the less likely customers from the most likely customers, NPS is not simply a measurement of how many users like your product. It's a net measurement of loyalty.

Investors like NPS because it's a standardized metric that is hard to distort. But NPS is not perfect. Your customers might overwhelmingly recommend your product but what if they could live without it? This could be a major concern if your product is competing in a highly saturated market.

Luckily, you're a founder and can do whatever you want to customize metrics to better reflect your unique value proposition. Instead of the standard NPS, perhaps you will ask your customers how they would feel if they could no longer use your product. If a high percentage of customers report they would be very disappointed if they lost access to your product, you might be well on the way towards achieving PMF even if your NPS is mediocre.

Market-specific indicators of PMF are outside your control, but up to you to prioritize. If you're selling email software, you don't control the number of people who use email. But you will decide which segment of the email software market in which you compete. Your growth into that segment plus the willingness of users to switch from competing products are both great indicators that you are closing in on PMF.

Remember that the journey of demonstrating PMF is never complete. You cannot "achieve" it. Pursuing PMF is an ongoing process of constant refinement and response to changing market conditions. It's up to you to determine which metrics are your guide, and even invent some new ones.

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