A How-To Guide to Product-Market Fit
When ideating new product ideas or potential strategic pivots, there are several ways to assess product-market fit. The approach often taken involves first defining the product and then assessing its market potential. The steps that are taken usually look something like this:
- Define the product hypothesis
- Identify the feature set
- Build the product
- Release the product
There are several problems with this approach. In fact, it is ass backward. Start with the market, instead of the product, which provides a more logical sequence and accurate framework in defining a winning product strategy.
What is Product-Market Fit?
The product-market fit concept was created by Andy Rachleff (CEO and co-founder of Wealthfront and co-founder of Benchmark Capital). The core of Rachleff’s idea for PMF was based on his analysis of the investing style of venture capitalist Sequoia founder Don Valentine.
In the words of Andy Rachleff:
“A value hypothesis is an attempt to articulate the key assumption that underlies why a customer is likely to use your product. Identifying a compelling value hypothesis is what I call finding product/market fit. A value hypothesis identifies the features you need to build, the audience that’s likely to care, and the business model required to entice a customer to buy your product. Companies often go through many iterations before they find product/market fit if they ever do. When a great team meets a lousy market, market wins. When a lousy team meets a great market, market wins. When a great team meets a great market, something special happens. If you address a market that really wants your product — if the dogs are eating the dog food — then you can screw up almost everything in the company and you will succeed. Conversely, if you’re really good at execution but the dogs don’t want to eat the dog food, you have no chance of winning.”
A key takeaway from Rachleff’s remarks is that markets matter more than anything else. You can develop the best product in the world, but if the product isn’t meeting a significant, must-have customer/user need, it’s a pointless endeavor.
Finding Product-Market Fit
A common myth of product-market fit is the notion that rapid product/feature iteration alone will get you there. Perhaps with luck, this approach may work, but of course, making bets backed by empirical evidence greatly increases the probability of success.
Prior to defining the product, one should define and test multiple value hypotheses against different market scenarios. Once your value hypothesis is proven (or you have a high degree of evidence-based confidence) you can move on to a growth hypothesis.
Identify underserved or latent customer needs
Once you’ve defined your user you need to understand and enumerate their needs. To create value, you have to identify the specific needs that correspond to the market opportunity.
Identifying this latent market need is the foundational mission that all successful technology enterprises share.
When you make a new product, you should ensure that one of two scenarios exists:
- Address customer needs that aren’t adequately met by current solutions. These are “underserved” needs. Customers are going to judge your product in relation to a myriad of alternatives, so the relative degree to which your product meets their needs depends on the competitive landscape. Take email clients for example. It seems like every day there is a new “game-changing” email client that seeks to reduce the inherent pain of email overload. All of these are seeking to address the frustration of email users. Each purports to have some type of secret sauce that will make email suck less. This is a tough space to play in. With literally hundreds of competitors, your solution needs to address the unmet needs of the entire market (you don’t want to capture a fragment of the market — that is not a business).
- Identify a “latent” customer need. These are generally innovative products that, rather than seek to improve upon what already exists, they attempt to create a new category of product that users didn’t know they wanted. This is hard from an ideation standpoint (i.e. where do we find these latent needs?), but can be achieved by applying a methodology of discovery where problems are considered with a fresh, often technology inspired lense. Take event ticketing for example. One could endeavor to create an easier to use but essentially uninspired product, barely differentiated from a myriad of competitors, or they can seek to upend existing business models and usage behaviors by considering the core problems of event producers and attendees, considering how new value can be created for both and how different business models could be applied to the industry.
Define your value proposition
A value proposition is a promise to your users that illustrates how your product will address customer needs better than any alternative. Out of all the potential customer needs your product could address, which ones matter most. Which will have the biggest impact and take the least amount of time and effort to produce?
The value hypothesis defines the what, the who, and the how:
- What: the product you are building
- Who: the user with a significant need for the product is desperate for
- How: the business model employed to deliver the product; the marketing strategy used to drive growth
Specify your minimum viable product (MVP)
Now that you’ve defined the value you intend to deliver, you need to specify how to deliver that value as quickly and simply as possible. This means saying no to a myriad of great ideas and having the evidence to establish the confidence you need that what you say yes to has a high probabilistic outcome of providing significant user value.
You can’t afford to spend months developing a large number of features, only to discover that your base hypothesis simply isn’t resonating in the market. By that time you’ve burned through your capital and it’s time to call it quits.
The MVP approach is aimed at building only what is needed to create enough value in the eyes of your target customer to validate that you are heading in the right direction.
It’s relatively easy to enumerate a laundry list of customer needs, but a hell of a lot harder to reduce that list to just the one or two needs you will tackle first.
Steve Jobs once said:
“People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully. I’m actually as proud of the things we haven’t done as the things I have done. Innovation is saying no to 1,000 things.”
You need to figure out how your product will be substantially different from what is already in the market. What will make your product great, immediately obvious to whoever uses it? What unique features of your product will users praise? This is the essence of product strategy.
Customers, co-workers, bosses, the media, and investors will tell you that your MVP is lacking this and that. And they aren’t wrong. These gaps will be filled over time. One needs to combat these remarks by reminding stakeholders that the questions you are seeking to answer are the following: a) is our value proposition resonating in the market?; and b) is our hypothesis right and are our base features instilling trust with users and confidence that we are on the right path?
Create a prototype
Most companies skip this step, which is costly and foolish. No matter how much research you’ve done, you simply do not know how your product will be received until people are actually using it (or not).
To mitigate risk, create a functional, but non-production ready prototype so you can, as quickly as possible, get a facsimile of the product in front of real users. Don’t worry about scalability or architecture. Focus entirely on the user experience and functional capabilities, as experienced by the user.
Today there are a handful of excellent products that make the process of creating usable prototypes relatively painless and easy. InVision and other product design tool companies are innovating in this area at an incredible pace. So there is no excuse to skip this critical step.
Assuming that you received valuable feedback from your prototype testing and have the confidence that your MVP will work, it’s time to build the actual product. Again, I wouldn’t worry too much about scalability and elegant architecture design at this stage. You still haven’t proven you have something people want, so why worry about scale?
Consider providing pre-release access to a small number of qualified users, and just like with the prototype, instrument the product and provide channels for qualitative feedback. Keep iterating with this group until you’re confident that you’re ready to go broad and launch the product with the necessary marketing and communications muscle to get the word out.
About 30 days after shipping your MVP, do a deep and objective analysis of the impact. What’s working? what’s not? what features should we add or lose? The answers to these questions constitute your roadmap and the iterations to come.
After analyzing the customer feedback, you may want to revise your hypothesis based on what you learned and loop back to an earlier step in the process. The feedback will determine which step you should return to. If you only need to improve your UX design, then iterate on that. But if your hypothesis is fundamentally flawed, or target customer needs have changed, be honest with these shortcomings and go back to step one.
You may conclude that in order to achieve higher levels of product-market fit you need to pivot (change one or more of your major hypotheses).
Ideally, customers love your product, consider it easy to use, and find it of great value. Congrats, you now have a real business. You have validated your key hypothesis and have designed a product with a strong product-market fit. With this knowledge, you should feel comfortable raising and investing the resources required to scale your product to meet demand in other parts of the world, or in adjacent industries with similar problems.