How to Think About Product-Market Fit

Achieving product-market fit (PMF) is a prerequisite for building a successful company because PMF speaks directly to a company’s ability to profitably and repeatably acquire and retain customers. Before I dive into how I think about and visualize PMF, let me preface my discussion with the following:

1. The topic of PMF is relevant not only to startups but to any company at any stage of its lifecycle.?
2. PMF is not a mathematical or accounting term and can look different for different companies.?
3. PMF is never static, and once it is “achieved,” it needs to be actively maintained due to the changing competitor landscape, shifting customer demands, new technologies or regulations, and so on. The pursuit of PMF is never “done”.?
4. PMF is relevant to every product you launch. Some will automatically have a PMF, but often you will need to rediscover it — perhaps not at the macro, company level, but at least at the micro, feature level (see below for more about this distinction).?
5. PMF is not guaranteed. Many companies (or shall I say, most startup companies) never find it.?

Company’s Product-Market Fit

When I think of PMF, an image something like this pops into my head:

This represents the market, where on the x-axis you have various industries (although in the real world there are often no clear lines separating them) and the y-axis indicates the size of client/customer companies. (There is no one objective way to define “size.” Revenue, headcount, market cap, market share, number of locations — you can define it however you like.)

Once you acquire your first customer, you can plot them on the chart.

Having PMF may include factors like high profitability, high net promoter score (NPS), high retention, etc. So one way to visualize the customer is by the size of the dot: a larger dot equals a better PMF. A smaller dot indicates a weaker PMF.?

Many startups wait too long before trying to nail their PMF. As a result, their customer base looks something like this:

In this situation, how would you know where your next customer will come from? How would you know what distribution channels you need to develop and what expertise is required on your sales team? How would you know what use cases marketing should be talking about? How can you reliably structure your support teams, avoid drowning in thousands of custom deals, and not balloon your product with features that only a handful of customers use??

My advice: don’t wait. After you land your very first customer, you need to start developing hypotheses and methodically test them out around your customer size and industry. If your first customer has metrics indicating a good PMF, look for more customers just like them to see if the whole segment is similar or just this one customer. Also, look at adjacent customer segments to see if you can land new customers that are similar in size or industry but might have even better PMF.

If your first customer isn’t very profitable, it’s not the end of the world. However, lower profitability (in our “lumped” definition here) could result in higher churn, so you really need to work on landing more logos and diversifying your customer base.?

A successful PMF would look something like this “customer cluster” below. Not every customer will be equally profitable, but with these results you can accurately describe your ideal customer, which here would be characterized as “mid-to-large customers in Industry 3.”?

Note, by the way, that having customers spanning all sizes and industries is not a problem, as long you have a clear understanding where your PMF is:

In the above-pictured scenario, you can direct 100% of your sales and marketing efforts to winning as much market share as possible within the identified PMF, before expanding into new industries or customer sizes. Also, it’s okay to accept some select customers outside of your PMF if they come inbound and require little custom work to support. This could even help you earmark areas of future growth.?

Feature Product-Market Fit

When people talk about PMF they are usually referring to a company’s PMF, that is, how to profitably fulfill a need of a target market. Another dimension that’s less talked about but that’s also worth discussing is the feature PMF. Feature PMF refers to the alignment of a particular feature of a product with the needs of a segment of the product's user base. Thus, this concept extends the idea of PMF to the level of individual features within a product, in an effort to understand the dynamic between features and the end user.

I’ve noticed that feature PMF becomes very relevant at scale because development resources expand and the volume of shipped features increases rapidly.?

Consider again a company with the following PMF:?

Suppose this company decides they need to introduce a manager dashboard feature to their product. If they did proper customer discovery, we could presume it went smoothly and that companies within their PMF suddenly exhibited increased stickiness by virtue of having managers using the product too. But imagine the opposite scenario where the discovery was done poorly and only after introducing the new feature did the company realize that in Industry 3 some dynamic prevents manager adoption of this feature. On top of that, in this fictional example, only after the feature was launched did the company learn that medium-sized companies in this industry don’t have a pronounced middle manager role and that the feature is too tactical for them. However, the company saw the adoption of the new feature within a handful of large customers in Industry 1:

Is this bad? In my view, yes. And the smaller the company, the worse it is. New features that don’t satisfy your PMF customers (specifically, features that miss the mark vs. ones that were built intentionally to enter new market segments) result in less precise sales and marketing messages, require maintenance by the engineers, and will likely never get another upgrade (and, thus, continue living like zombies in your product as perpetual reminders of your poor decision making).?

As I alluded to previously, strategically-built features can help you enter new market segments that you expect to be your new growth frontier, grow existing accounts by expanding into adjacent use cases, and increase retention with existing customers. However, features that are built without thorough validation often distract and hurt companies. Every company at some point will go through this — just make sure when it happens that it doesn’t kill you and that you learn from it.?

What to do next??

As I mentioned previously, PMF is not a rigid term and can look different for each company. Here are some easy things you can do to learn about your own business’s PMF:

1. Break down customers by size and industry and, at the very least, report on churn, revenue retention, lifetime value (LTV), and acquisition cost (CAC) by segment. Focus on segments with better ROI.?
2. See how your customer mix and count change over time. Focus on segments that are growing faster.
3. If you operate in multiple countries, break it down by location. Analyze the results alongside market size data to see how much growth potential each market has.?
4. Send your customers an email to measure net promoter score (NPS), then segment it by customer size and industry. A better PMF likely has a higher NPS. Another way to gauge product-market fit is by using the Sean Ellis test, which suggests that if more than 40% of your users would be "very disappointed" without your product, you likely have a strong product-market fit.

Once you identify a “cluster of customers” that look and behave the same, this is what you can consider your company’s PMF. Now you can go to work on marketing and sales messaging, have a go-to customer group for your product team to validate ideas with, and importantly, start saying “No” to opportunities that don’t fit your established PMF so that you can double down on what actually works.?

Good luck!?

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Thanks to Alex, Sean, and Pablo for reading versions of this article.