product-market-fit

What Is Product-Market Fit? Product-Market Fit In A Nutshell

Don Valentine from Sequoia Capital might have coined the term. While Marc Andreessen from A16z popularised it as “being in a good market with a product that can satisfy that market.” According to Andreessen, that is when a product or service has its place in the market, thus enabling traction for the company offering that product or service.

Who coined the term product-market fit?

Andy Rachleff who cofounded the firm Benchmark Capital, and also a cofounder and CEO of Wealthfront in an interview with Mike Maples explains the origin of the term. As Andy Rachleff explained:

I learned it from Sequoia Capital. Don Valentine really invented it.

Don used to say, “I’m looking to invest in companies that can screw everything up and still succeed because the customer pulls the product out of their hands.”

I’m paraphrasing. I’m not sure I got that exactly right. He felt that way because the startup will screw everything up. I want a company that has such demand from the market that they can literally screw everything up and still succeed.

Don Valentine was an American venture capitalist, founder of Sequoia Capital, who shaped the Silicon Valley and helped build companies like Oracle, LSI Logic, and Cisco Systems.

Who popularized the term “Product-Market Fit”?

In an article entitled “The only thing that matters” Andreessen popularized the term:

At any given startup, the team will range from outstanding to remarkably flawed; the product will range from a masterpiece of engineering to barely functional; and the market will range from booming to comatose.

In other words, Andreessen takes into account three major factors for the success of any startup:

  • The team.
  • The product.
  • And the market.

He argues that if you asked Entrepreneurs and VCs of the three elements what mattered the most, they would have picked the team.

On the other hand, if you asked engineers about the most crucial element, they would argue that the product matters the most (Andreessen mentions Apple and Google as an example of that).

He takes a third path though. Rather than the team or the product, what matters is the market!

In a great market — a market with lots of real potential customers — the market pulls product out of the startup.

From here he introduces the concept of MVP or minimum viable product.

He defined it as:

The market needs to be fulfilled and the market will be fulfilled, by the first viable product that comes along…

…The product doesn’t need to be great; it just has to basically work. And, the market doesn’t care how good the team is, as long as the team can produce that viable product.

From here it is essential to understand two concepts that help startups and entrepreneurs in general to launch successful products:

We’ll also see a third element which has become critical even before an MVP can be developed: the problem/market fit.

In other words, where the lean methodology is the “How,” the MVP becomes the “What” and the problem/market fit becomes the “Why.”

The Lean Startup Methodology in a nutshell

It officially started with an HBR article of 2013 that referred to a new phenomenon in the business world “Why the Lean Start-Up Changes Everything:”

However, the origin story started in the late 1990s.

Steve Blank, a retired serial entrepreneur had the time to think through about what he had missed in terms of business frameworks, during the years, as he started several high-tech companies.

He had noticed that the only tool available at the time was the business plan. However, not only the business plan was a static document which didn’t survive the first contact with the real world.

That document was also plenty of untestable and untested assumptions.

The patterns he noticed would be all gathered into what became a manifesto, and the foundation for the lean startup movement.

In the 2013 HBR article “Why the Lean Start-Up Changes Everything” Steve Blank defined the lean startup as:

 It’s a methodology called the “lean start-up,” and it favors experimentation over elaborate planning, customer feedback over intuition, and iterative design over traditional “big design up front” development. 

In a nutshell, the lean startup methodology aims at creating a repeatable process for product development to minimize the time it takes to build a product that the market wants.

This process consists of three phases:

  • Build.
  • Measure.
  • Learn.

Once you go through the build > measure > learn that will need to be repeated over and over, thus creating a virtuous cycle or feedback loop.

Steve Blank also highlights a few core principles at the core of the lean startup methodology:

  • Business plans rarely survive first contact with customers.
  • Five-year plans are worthless and a waste of time.
  • Start-ups are not smaller versions of large companies.
  • The lean start-up movement is about agile development.

Thus, the primary purpose is to come up with a minimum viable product (MVP) which helps companies reduce the time to market.

The Minimum Viable Product in a nutshell

Back in 2009, Eric Ries defined MVP as:

The minimum viable product is that version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort.

And he continued:

MVP, despite the name, is not about creating minimal products. If your goal is simply to scratch a clear itch or build something for a quick flip, you really don’t need the MVP. In fact, MVP is quite annoying, because it imposes extra overhead. We have to manage to learn something from our first product iteration. In a lot of cases, this requires a lot of energy invested in talking to customers or metrics and analytics.

Ash Maurya also described it as:

The smallest thing you can build that delivers customer value (and as a bonus captures some of that value back).

At the same time, other entrepreneurs like Rand Fishkin also highlighted the drawbacks of the MVP approach when you have an established brand.

Indeed when you have an established brand, it might make more sense according to Fishkin to adopt the EVP or Exceptional Viable Product approach, summarized as:

My proposal is that we embrace the reality that MVPs are ideal for some circumstances but harmful in others, and that organizations of all sizes should consider their market, their competition, and their reach before deciding what is “viable” to launch. I believe it’s often the right choice to bias to the EVP, the “exceptional viable product,” for your initial, public release.

In my view, an MVP done right should already have the features described by Fishkin EVP. However, Rand Fishkin raises an important point. A company with an established brand should be cautious the way it releases its MVP.

One classic example of what a disastrous MVP can do is Microsoft’s launch of Bing, which promised to take over the search engine industry, and replace Google as the monopolist of search and the meme of our generation (Microsoft wanted to establish the meme “bing it”) but failed miserably:

While Bing today represents a decent presence for Microsoft in the search industry (Bing makes a few billion dollars to Microsoft) it never really recovered from that MVP launch.

As of 2019, if you ask to the SEO industry (the practitioners that position their content via search) many still curl their lips at the sound of “Bing.”

Indeed, while SEOs are both a blessing and a curse for Google, that community has helped Google get better over the years.

For instance, thanks to the so-called Black SEO practices (attempts to manipulate – successfully – the Google’s algorithms) the search engine has evolved more quickly, by releasing algorithm updates that allowed it to get better and better over the years.

Product-market fit myths

In a blog post entitled The Revenge of the Fat Guy Ben Horowitz points out the four myths about product-market fit.

You might want to know them as they might compromise the all product/market fit endeavor.

Myth #1: Product market fit is always a discrete, big bang event

Some companies achieve primary product market fit in one big bang. Most don’t, instead getting there through partial fits, a few false alarms, and a big dollop of perseverance. 

Myth #2: It’s patently obvious when you have product market fit

Ben Horowitz among others uses this example:

Apple’s first iPod shipped in November 2001. It took nearly two years (91 weeks, to be precise) to sell its first million units. In contrast, Apple’s iPhone 3GS shipped June 2009 and shipped 1M units in 3 days. At what point is it obvious to the original iPod team that they’ve achieved product-market fit?

In short, determining when you have reached a product-market fit might seem obvious at hindsight but not so when that is happening!

Myth #3: Once you achieve product-market fit, you can’t lose it

As product-market fit is about the market. When the market changes dramatically you might also lose product-market fit. If that happens, you need to rebuild it again to stay in business.

Myth #4: Once you have product-market fit, you don’t have to sweat the competition

A market that has a big opportunity also has massive competition. If so, the fight will be fierce and if the fight is fierce, how do you know when the time is right to battle up? Also here there is no formula, but the ability to quickly adapt becomes a key advantage.

Key problems with the Product-Market Fit

While the concept of product-market fit is extremely powerful, it also has some flaws. In most cases, what makes a product fail in the first place is the market validation, or whether customers are willing to use or spend money for a product. Therefore, it becomes very important to build a commercially viable product.

Problem/Solution Fit comes first

running-lean-ash-maurya

MVP makes you fall into the trap of building up a product even before understanding the problem the target market faces. That might delay the ability of a company to build a product that satisfies the market.

Ash Maurya describes this phenomenon in “Don’t Start With an MVP:

You raise your odds of success significantly by spending the requisite time first defining the MVP, then validating it using an offer, before building it. Think of it as Demo-Sell-Build versus the more traditional Build-Demo-Sell approach.

Therefore, where the entrepreneurial world has stressed so much over the solution by trying to build an MVP, that has delayed the ability to deliver a product that the market wants.

Instead, by focusing on the problem first, you can understand the problem, and as Ash Maurya said it, you’ll make the market “an offer your customers cannot refuse.

The demo > sell > build process has become common nowadays with many platforms (Kickstarter is one of them) that make it possible to validate an idea, selling it, even before the product is ready.

Key takeaways

The product-market fit can be defined as the ability of a product to satisfy the market. The market itself can be segmented to start from a niche market; throughout this process, it is critical to use a method called market segmentation.

At the same time before going to build a product through the lean startup methodology, it is essential to define the problem itself. That can be done via the problem-market fit model which goes through a process of demo-sell-build.

Thus, you will maximize the chances of success of your MVP.  Once the MVP is ready, you want to keep improving it to grab more and more market share or to broaden the market wanting the product. At that point, you’ll have reached product-market fit.

However, the product-market fit isn’t something that lasts forever. If the market conditions change, you might lose your product-market fit. Therefore, you’ll have to start the process to regain your product-market fit.

The whole point of the process highlighted in this guide is about coming up with ideas that you can validate and sell even before building a product.

Today that is possible via crowdfunding platforms, or by setting up offerings and only after enough people join in, you start building a product.

Thus, in this era, where digital allows entrepreneurs to quickly and at low costs gather feedback of a large group of people. It is possible to sell something even before you’ve built it!

Product-Market Fit vs. Problem-Solution Fit

running-lean-ash-maurya

A few key issues with product-market fit are.

Falling into the Innovator’s bias

As highlighted in my interview with Ash Maurya, is that often, especially in the tech world, founders love the technical solution, thus trying to find a problem for it.

This is one of the major pitfalls because instead of starting with a commercial use case and working a product backward, those founders fall into the innovator’s bias.

They tend to overstate the importance of the technology (in the short term) vs. the potential problem it might solve.

While technology might become critical in the long run as its adoption scales up, initially, it’s critical to scale up the commercial use case of that technology.

One example these days is how Zuckerberg fell in love with his vision of the Metaverse, throwing billions at it without a proper commercial use case.

The huge risk is that the Metaverse, according to Zuckerberg’s vision, is primarily a gaming console, and that’s it.

For a technology to become viable at scale, it needs to have roots in wider and wider commercial applications.

Hard to measure

Another major drawback of the product-market fit is it’s very hard to measure because a bit foggy as a concept.

In short, while in theory, it seems easy to say you got product-market fit when you’re growing at super speed.

How do you know if you’re getting there? And if you’re moving in the right direction? As we’ll see, a problem-solution fit framework might be way more effective for it.

Look for a too-large market segment

Another pitfall of the product-market fit is that it makes startups look for too wide market opportunities in the early days.

While we all like to hear the story of Amazon as the everything store. Or Google, as it became the dominant search player.

And Facebook, when it opened up to the world. It’s critical to remind that before becoming the everything store, Amazon was an online bookstore.

That Facebook was a social network for a few selected colleges in the US.

And that Google was a research project at Stanford! We’ll see how we can fix this by applying a Blue Sea Strategy!

How do we fix these major drawbacks?

Fall in love with the problem first

To obviate these core issues above, we need to have a reality check, an obsession with the problem at hand.

There is a trick there, though, to understand a problem, you got to narrow down (substantially) the range of action of your product.

Why? Because the more you try to tackle big problems, the more it’ll become ambiguous and the hardest it’ll be to find a proper solution for it.

Of course, as an entrepreneur, you can tackle whatever problem you want.

But, to build a viable product and create options to scale, narrowing things down help a lot to create less noisy feedback loops!

Blue Sea Strategy: Start with a Microniche to develop your Minimum Viable Audience

To achieve that, you want to start from a Blue Sea.

blue-sea-strategy

This is such a narrow space in an existing marketplace that:

  • It is too tiny for a dominant player to go after.
  • Yet, interesting enough for you to build a viable business.
  • And where it’s easy to establish feedback loops that are valuable to iterate fast on the product.

Therefore, the first step is to develop and go after your microniche and find your Minimum Viable Audience:

minimum-viable-audience
The minimum viable audience (MVA) represents the smallest possible audience that can sustain your business as you get it started from a microniche (the smallest subset of a market). The main aspect of the MVA is to zoom into existing markets to find those people which needs are unmet by existing players.

Product-Market Fit vs. Founder-Problem Fit

There is also another core aspect to this.

It’s about the founder-problem fit.

In an interview by Tim Ferris with Roelof Botha, the partner at Sequoia Capital, Botha explained that well:

“It starts with an authentic identification with a problem.

I think when that founding inspiration because if you’re trying to start a business for the sake of starting a business, it’s so hard; there are so many challenges on the way to building a successful company. 

If you’re doing it for the wrong reasons, you’re going to wilt, you simply won’t persevere.

But if you’re deeply motivated by what you’re doing, you’ll keep going, and you’ll overcome obstacle after obstacle and so that, to me, is one of the key starting conditions. 

It is founder-problem fit!”

Thus, are you in love with the problem you’re trying to solve as a founder? The diagram below might help assess that.

how-to-come-up-with-a-business-idea

Other business resources:

FourWeekMBA Business Toolbox

Tech Business Model Template

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A tech business model is made of four main components: value model (value propositions, missionvision), technological model (R&D management), distribution model (sales and marketing organizational structure), and financial model (revenue modeling, cost structure, profitability and cash generation/management). Those elements coming together can serve as the basis to build a solid tech business model.

Web3 Business Model Template

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A Blockchain Business Model according to the FourWeekMBA framework is made of four main components: Value Model (Core Philosophy, Core Values and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics/incentives through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.

Asymmetric Business Models

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In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.

Business Competition

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In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.

Technological Modeling

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Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.

Transitional Business Models

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A transitional business model is used by companies to enter a market (usually a niche) to gain initial traction and prove the idea is sound. The transitional business model helps the company secure the needed capital while having a reality check. It helps shape the long-term vision and a scalable business model.

Minimum Viable Audience

minimum-viable-audience
The minimum viable audience (MVA) represents the smallest possible audience that can sustain your business as you get it started from a microniche (the smallest subset of a market). The main aspect of the MVA is to zoom into existing markets to find those people which needs are unmet by existing players.

Business Scaling

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Business scaling is the process of transformation of a business as the product is validated by wider and wider market segments. Business scaling is about creating traction for a product that fits a small market segment. As the product is validated it becomes critical to build a viable business model. And as the product is offered at wider and wider market segments, it’s important to align product, business model, and organizational design, to enable wider and wider scale.

Market Expansion Theory

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The market expansion consists in providing a product or service to a broader portion of an existing market or perhaps expanding that market. Or yet, market expansions can be about creating a whole new market. At each step, as a result, a company scales together with the market covered.

Speed-Reversibility

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Asymmetric Betting

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Growth Matrix

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In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).

Revenue Streams Matrix

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In the FourWeekMBA Revenue Streams Matrix, revenue streams are classified according to the kind of interactions the business has with its key customers. The first dimension is the “Frequency” of interaction with the key customer. As the second dimension, there is the “Ownership” of the interaction with the key customer.

Revenue Modeling

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Revenue model patterns are a way for companies to monetize their business models. A revenue model pattern is a crucial building block of a business model because it informs how the company will generate short-term financial resources to invest back into the business. Thus, the way a company makes money will also influence its overall business model.

Pricing Strategies

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A pricing strategy or model helps companies find the pricing formula in fit with their business models. Thus aligning the customer needs with the product type while trying to enable profitability for the company. A good pricing strategy aligns the customer with the company’s long term financial sustainability to build a solid business model.

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