What is Product/Market Fit?

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“And you can always feel product/market fit when it’s happening. The customers are buying the product just as fast as you can make it—or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You’re hiring sales and customer support staff as fast as you can. Reporters are calling because they’ve heard about your hot new thing and they want to talk to you about it. You start getting entrepreneur of the year awards from Harvard Business School. Investment bankers are staking out your house. You could eat free for a year at Buck’s.”

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What Product/Market Fit Looks like

“The customers are buying the product just as fast as you can make it or usage is growing just as fast as you can add more servers.”

• Rapid user growth, either in increased repeat usage and/or explosive sales.

“Money from customers is piling up in your company checking account.”

• Executing a profitable business model.

“You’re hiring sales and customer support staff as fast as you can.”

• Growing the team to support the product fast growth.

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How to Achieve Product/Market Fit

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July 2013, Paul Graham, Founder of ViaWeb & Y-Combinator, the original startup accelerator, wrote “Do things that don’t scale”. Outlining how early stage companies need to focus on making a small group of users love their product.

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Stage One: Do things that don’t scale.

Many massive businesses today started by making a small group of users truly love their product. The insights, feedback, and observations from these early, humble beginnings can be seen decades later, laying the foundation for long term success.

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Apple

Apple started by selling their Apple 1 to members of The Home Brew Computer Club, which consisted of about 20 to 40 people. The learnings from these members informed vital product decisions, notably that the Apple 1 shouldn’t be sold as a kit, but as a fully assembled computer. An insight that created the personal computer industry.

Airbnb

After two years and multiple launches, Airbnb had 30 users listing homes in New York. Over a 30 day period, the founders were able to gain feedback by going door to door visiting their hosts. Airbnb discovered that homes should be professional photographed and payments should be handled online. Insights that impacted Airbnb’s growth immediately and began their rapid growth stage.

Gmail

Gmail started life as an internal project at Google, but before launching to the world and becoming the email client for 1.8 million people, the lead developer asked early users one question. “Are you happy with Gmail?”. If someone answered “no” he would ask them how he could improve the product for them and only after having 100 users answer “yes” would gmail be launched to the world. The key insight from this period was email storage, Gmail launched with 1GB of free storage, 512 times larger than Hotmail's 2MB, 256 times larger than Yahoo! Mail's 4MB and 100 times larger than AOL Mail's 10MB.

Doing things that don’t scale is about getting in front of real users, people who are willing to pay for the product (or are inline with your business model) and learning how your product can be improved for them.

The danger here is getting feedback from “anyone”. If someone isn’t your target market and/or isn’t willing to pay for your product then you can be lead down the wrong path. They must be true, ideally paying users.

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Stage Two: Measure impact.

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There are many metrics that can be misleading or empty when it comes to Product/Market Fit. Surveying users can be misleading and NPS scores don’t tell you anything about users behaviour. A user can be happy with your product, but isn’t using it regularly enough to make a viable business.

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Tracking Main User Actions

A Main User Action is the core “action” a user has to do to get value from your product. The table below shows examples for well known companies.It’s important to not make this action to low of a bar, for instance, browsing properties on Airbnb, adding items to a wish list on Amazon or drafting emails in Gmail aren’t main user actions. The main user action needs to be how a user gets value from the core of your product.

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Cohort Retention

Cohort Retention allows you to measure how your users are getting value from your product over time.

Once you have the Main User Action, you then need to identify the timeframe you expect users to perform this action.

For instance, Uber’s MUA is Rides Completed, and they expect users to need their service on a weekly basis. So Ubers Cohort Retention looks at how many users in a given week completed at-least one ride, then how many of those same users completed at least one ride in the following weeks over a long time horizon, ideally years.

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The Types of Cohort Retention Curve

Declining

A Declining Cohort Retention Curve is characterised by any curve going to zero and staying at zero. This curve indicates that users have stopped using the product over time and are no longer receiving value.

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Flattening

A Flattening Retention Curve is characterised by any curve staying above zero over time. This shows that some users are retaining and, by performing the MUA, are receiving value from the product.

This is where most viable businesses live. This is a scalable and repeatable business, as long as the business model makes sense with the level of retention. In companies with this usage, sales and marketing are the key levers for growth. The users will compound over time creating a sustainable business.

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Smiling

A Smiling Retention Curve is the visual indication of Product/Market Fit. This curve is characterised by an increase in users performing MUA over time.

This is what high growth, rocket ship companies experience. Companies with a network effect or virtuous cycles benefit massively from increased MUA’s over time.

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Virtuous Cycles

In a marketplace business like Amazon or Airbnb, if users are performing the MUA, purchasing items and booking homes, more over time, this attracts more sellers to the platform, increasing selection for users, creating a better users experience and further increasing the a users MUA rate. This cycle rapidly grows the value to users, sellers and the company experience.

Growth in these companies will inevitably includes marketing and sales, however word of mouth is a key component. Also when this type of company spends on marketing/sales the ROI is dramatic over time. This is famously why companies like Uber, Airbnb and Amazon reinvested large amount of capital over decades because users would perform the MUA more over time creating outsized, long term value.

A similar effect is seen in Social Media companies, the more a user performs the MUA of posting content, the more value there is for the network. In B2B Saas companies, like Slack and Notion, the more a user performs the MUA of messaging a colleague and the more documents created, the more value the company gets from these platforms for organising communication and documentation, leading to more usage over time.

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How to go from Curve to Curve

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From Declining to Flattening.

If the Cohort Retention curve is going to zero then over time the users are no longer getting value for the solution. This could be for a number of reasons but is never a positive sign.

To go from Declining to Flattening, the company must speak to their user base, discuss the biggest problems they are facing, ideally daily or weekly problems, and create new solutions for their problems. Then iterate with a small group of active, ideally paying, users to create something they love.

Usability and product quality could be an issue too, however, if someone needs your product badly enough, it being clunky, slow or inconvenient to use would more likely result in a low repeat usage rate rather than zero. This is seen in enterprise software, that is often outdated, slow, hard to use but is used because “it works”.

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From Flattening to Smiling.

Companies with a flat retention curve have an opportunity to create something users love. When some percentage of users are repeatably using the product over time it’s important to double down on the key things users care about and get users to value quicker in the product. This process follows two ideas, invest in things that don’t change and removing friction in the product.

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Invest in things that don’t change

Through speaking to users and understanding what is important to them you’ll learn concepts that will always be true for them. These are the features of your product that need to be strengthened and doubled down on.

For instance, Amazon found that a number of things to always be true. Customers will always want faster delivery times, more selection and cheaper items. Therefore they doubled down on next day delivery, improving the seller experience and used their scale to offer cheaper prices.

I’m important to understand what will also be true for your customers. Investing in these areas have outsized returns because they aren’t “bets”, they are investments in the customer experience.

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Removing friction

Once a company knows what users value and users are performing the MUA, it’s important to make that action as frictionless and easy to trigger as possible. This might include bringing the MUA to front of the experience, reducing steps for achieving the MUA and getting the user to value quicker.

Examples of companies reducing friction for MUA including Amazons One Click Buy using saved user data to make purchases quick and easy to achieve. Apples three click rule on the original iPod, users from anywhere in the product can play a song within three clicks.

By doubling down on the parts of the user experience that won’t change and removing friction for users to achieve the MUA, companies are able to go from a flat retention curve to a smiling retention curve.

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Wrap Up

A the core of achieving Product/Market Fit is understanding users. This is through speaking to them and measuring behaviour. At any point in a company, or in product development, you can start deeply engaging with users and undergoing this process.

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