The Search for Product-Market Fit
by Jerome Kehrli
Posted on Monday Aug 17, 2020 at 10:31AM in Agile
The Search for Product-Market Fit is the sinews of war in a startup company. While the concept and whereabouts are well known by most founders, the importance of this event in the company and product building process, what it means to be Before-Product-Market-Fit and After-Product-Market-Fit and the fundamental differences in terms of objectives, processes, culture, activities, etc. between these two very distinct states is almost always underestimated or misunderstood.
Product-Market Fit is this sweet spot that startups reach when they feel eventually that the market is really pulling out their product. It's what happens when they found out that they can only deliver as fast as the customers buys their product or when they can only add new servers in the SaaS cloud as fast as is required to sustain the rise in workload.
Product-Market Fit is so important because it has to be a turn point in the life of a young company.
- Pre-Product-Market Fit, the startups needs to focus on the leanest possible ways to solve Problem-Solution Fit, define and verify its business model and eventually reach Product-Market-Fit.
- Post-Product-Market Fit, the company becomes a scale up, needs to ramp up its marketing roadmap and effort, build and scale it's sales team, build mission-centric departments, hire new roles and recruit new competencies, etc.
Dan Olsen designed the following pyramid to help figure what Product-Market Fit means (we'll be discussing this in length in this article):
Understanding Product-Market Fit and being able to measure and understand whether it's reached or not is crucial. Reaching PMF should be the core focus of a startup in its search phase and understanding whether it's reached is key before scaling up.
This article is an in-depth overview of what Product-Market-Fit means and the various perspective regarding how to get there. We will present the Lean-Startup fundamentals required to understand the process and the tools to reach product market fit, along with the Design thinking fundamentals, the metrics required to measure it, etc.
- 1. Introduction - Product Market Fit
- 2. Lean Startup Fundamentals
- 2.1 Lean Startup
- 2.2 Key principles
- 2.3 The Feedback loop
- 2.4 The Four steps to the Epiphany
- 2.5 Customer development - the practices
- 2.6 Get out of the building
- 2.7 Problem interview
- 2.8 Solution interview
- 2.9 MVP
- 2.10 Fail Fast
- 2.11 Metrics Obsession
- 2.12 Pivot
- 2.13 The Lean Canvas
- 2.14 The Value Proposition Canvas
- 3. Design Thinking Fundamentals
- 4. Reaching Product Market fit - Different perspectives
- 5. Measure Obsession
- 5.1 Net Promoter Score
- 5.2 CLV to CAC Ratio
- 5.3 Retention Ratio / Curve
- 5.4 Growth Rate
- 5.5 Further readings: pirate metrics
- 6. Conclusion
1. Introduction - Product Market Fit
"The term product/market fit describes "the moment when a startup finally finds a widespread set of customers that resonate with its product'."
by Eric Ries
In this chapter, we will detail what is Product-Market Fit, what it means and how it's defined.
1.1 Startups ...
We can find multiple definitions of a Startup online:
The Most of the time ... definition is from my perspective downright wrong. A startup is not a scaled down version of a company. There are important inherent differences between a running company and a startup (we'll come back to this later)
The wikipedia definition is better. There is the important notion of search - a startup is indeed still searching the Product-Market Fit, the very important notion of validating - need to make assumptions, test them and confirm or contradict them and the notion of scaling.
But Eric Ries' definition is the best from my perspective since it emphasizes three important aspects of a startup:
- The Notion of Human institution is better than company or project - a startup can be many things, a guy working in his garage on his idea is in some ways a startup
- The notion of new product or service
- Most importantly, the notion of Extreme uncertainty - that's the root of the problem
Startup often fail!
Most frequently cited reasons for startup failures:
One of the main reasons why products fail is because they don't meet customer needs in a way that is better than other alternatives. That is the essence of product-market fit.
Most startup fail because the founder have an idea, work in a tunnel for multiples months or even year to build their idea, and only eventually rise their head looking for customers and face the ugly truth: the idea may well be brilliant indeed, but there's no market. I've seen this so many times, so many times.
Whenever one has an idea of a product, a new technology, before writing the single Line of Code, before investing a single dollar on it, one needs to answer the single and only question that matters: Is there a market for it and what is that market?
In the reasons why startups fail mentioned above, there are a few others interesting things to note:
- Ran out of cash - why spend so much cash before Product / Market Fit. If your each Product-Market fit before heavily investing in your product / company, you can't run out of cash because investors will be killing themselves to put money in your product / company. When you reached Product - Market fit, you WILL have the data points to raise investments, BIG investments.
- Not the right team - when you reach Product Market fit , you can raise investments and then hire the right team - Founders do not necessarily need to remain CEO and COO of their company.
Interestingly, The Lean startup Methodology with its processes, principles and practices gives a solution to most of the top 10 problems listed above. Today, I intend to focus a lot on Lean Startup in this article.
1.2 From Product-Market Fit to "Lean Startup"
The "Product-market fit" term and concept is widely misattributed to Marc Andreessen by bloggers and writers, but Andy Rachleff coined the term. In a 2007 article, "The only thing that matters," Andreessen credits Rachleff for the term and synthesizes much of Rachleff's thinking
Alex Osterwalder is an Austrian guy living in Lausanne. We wrote "Business Model Generation" where he presents the business model canvas and the lean approach to it along with a lot of hints on how to efficiently (and cheaply) relieve uncertainties in startup with concepts such as prototyping, getting feedback from the market, challenging the status quo, etc.
Eric Ries is a Silicon Valley Serial Entrepreneur with failures and successes. His failures make him think of them and come up with the Lean Startup way, putting the customer at the center of the process.
Ash Maurya is an entrepreneur from Austin that understood on his end as well most of the Lean Startup principles. In his Running Lean book he details a lot of the Lean Startup principles and practices and came up with the Lean Canvas, a version of Osterwalder's Business Model Canvas adapted for Startups.
Steve Blank is the grand-father of the Lean Startup. He is a professor in Stanford University and a Silicon Valley Serial entrepreneur (search for him on Linkedin) - Steve Blank designed the customer development methodology that he presents in his "Four Steps to the Epiphany" book. Four steps to the Epiphany is a process for finding Product Market Fit and eventually scaling the company.
With Lean Startup, Product Market Fit is the step separating a startup from a scale up and Customer development methodology is the path to Product Market Fit.
1.3 Defining "Product-Market Fit"
The product/market fit (PMF) concept was developed and named by Andy Rachleff.
It answers the question some might wonder about: what correlates the most to success, team, product, or market?
Or, more bluntly, what causes success? And, for those of us who are students of startup failure, what's most dangerous: a bad team, a weak product, or a poor market?
If you ask entrepreneurs or VCs which of team, product, or market is most important, many will say team.
On the other hand, if you ask engineers, many will say product.
But actually market is the most important factor in a startup's success or failure.
In a great market - a market with lots of real potential customers - the market pulls product out of the startup.
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.
Conversely, in a terrible market, you can have the best product in the world and an absolutely killer team, and it doesn't matter -- you're going to fail.
You can obviously screw up a great market - and that has been done, and not infrequently - but assuming the team is baseline competent and the product is fundamentally acceptable, a great market will tend to equal success and a poor market will tend to equal failure. Market matters most.
To quote Tim Shephard : "A great team is a team that will always beat a mediocre team, given the same market and product."
Second question: Can't great products sometimes create huge new markets?
And the answer is yes, this is possible. But it's really exceptional.
VMWare is a good example of this since it was so profoundly transformative out of the box that it catalyzed a whole new movement towards operating system virtualization, which turned out to be a monster market. But then again this is an exception.
Rachleff's corollary of startup success gives us the first and most crucial definition of Product Market Fit :
A good market is essential, there needs to be a market and the product needs to satisfy that market, give a solution to the market's problem.
So what is Product-Market Fit?
Looking at things from a Human Centered Design perspective - Product Market fit is the intersection between:
- A problem that a sizeable group of people really need solved = i.e.: Desirability
- A product that can actually be built well to fully solve that problem = i.e.: Feasibility
- business model that can be executed to be profitable at some point in time = i.e.: Viability
If all three of these elements are not well identified, assessed, controlled and balanced, you can't reach PMF.
- If desirability is weak, not many people want what you can make and believe you can sold => waste
- If feasibility is weak, your are not able to build the product => failure
- If viability is weak, you're not making money => failure
Product-market fit occurs when your product or service solves a problem that directly affects your target customers/audience. But it can't be just a few people. It's got to fill a gap and fix a problem for a large market. So when approximately 40% of your customers say that they can't imagine living or working without, then you know you have product-market fit.
However, there are times when there's a gap in the market, but most of the target audience doesn't know about this gap. That is, they don't know about the problem until you show them how your solution improves their lives. By doing this, you create the need for the market and you directly solve an existing problem in their niche or market.
1.4 Four myths about Product-Market Fit
MYTH 1 : Product market fit is always a discrete, big bang event
Some companies achieve primary product market fit in one big bang. But Most don't, instead getting there through partial fits, a few false alarms, and a big pile of perseverance. Most of the time it's a lot of trial and error, running around it until finally all indicators are green
MYTH 2: It's patently obvious when you have product market fit
I am sure that Twitter knew when it achieved product market fit, but it's far blurrier for most startups. Twitter is a good example because most of these myths were actually true for Twitter. But Twitter is an exception.
Determining if you reached product market fit will require you to have very good understanding of your market and your product and give a lot of thoughts into coming up with the proper metrics and indicators and the recipe to interpret them.
Pretty much every product and market will require a different set of indicators and a specific way to interpret them.
MYTH 3: Once you achieve product market fit, you can't lose it.
MYTH 4: Once you have product-market fit, you don't have to sweat the competition.
These two myths really go together and are obviously wrong.
It's fine to stay lean if you are not quite sure that you have product market fit and there are no competitors in your face every day. But usually there are. In fact, the best markets are usually the ones in which competition is fierce because the opportunity is big. The number and quality of competitors is actually a fairly good indicator of the market.
The big principle here is that post PMF, monitoring and watching competitors closely should be an every day concern, just as staying very close the customer and keeping to run lean.
1.5 Feeling Product-Market Fit
These two quotes from Marc Andreessen are spot on and give a good perspective on how Product Market Fit can be felt.
1.6 Dan Olsen's PMF Pyramid
Dan Olsen represents Product-Market Fit using the following pyramid:
The Problem Space
A market is a set of related customer needs, which rests squarely in problem space or you can say "problems" define market, not "solutions". A market is not tied to any specific solutions that meet market needs. It is a broader space. There is no product or design that exists in problem space. Instead, problem space is where all the customer needs that you'd like your product to deliver live. You shouldn't interpret the word "needs" too narrowly: Whether it's a customer pain point, a desire, a job to be done, or a user story, it lives in problem space.
The Solution Space
If I speak of solution space, any product or the product design - such as mock-ups, wire-frame, prototype, depends on and is built upon problem space, but is in solution space. So we can say problem space is at the base of solution space. Solution space includes any product or representation of a product that is used by or intended for use by a customer. When you build a product, you have chosen a specific implementation. Whether you've done so explicitly or not, you've determined how the product looks, what it does, and how it works.
The What and How Approach
"What" the product needed to accomplish for customers is Problem space. The "what" describes the benefits product should give to the target customer. Whereas, "how" the product would accomplish it, is solution space. The "how" is the way in which the product delivers the "what" to target customer. The "how" is the design of the product and the specific technology used to implement the product.
The best problem space learning often comes from feedback you receive from customers on the solution space.
1.7 A first high-level process
Based on Dan Olsen's pyramid, we can introduce here already a first idea of a process to reach Product-Market Fit:
This is a first idea only, we will see different processes and different perspective in chapter Different Perspective
2. Lean Startup Fundamentals
In this chapter we will be covering the most fundamentals aspects of Lean Startup required to understand the different perspective in the Search for Product-Market Fit presented in chapter 1. Introduction.
The Lean Startup is a movement, initiated and supported by some key people that I presented in the previous section.
But it's also a framework, an inspiration, an approach, a methodology with a set of fundamental principles and practices for helping entrepreneurs increase their odds of building a successful startup.
Lean Startup cannot be thought as a set of tactics or steps. Don't expect any checklist (well, at least not only checklists) or any recipe to be applied blindly, but it gives you a set or processes, principles and practices to reach Product-Market Fit and eventually scale the company.
2.1 Lean Startup
Lean Movement (1990)
Lean thinking is a business methodology that aims to provide a new way to think about how to organize human activities to deliver more benefits to society and value to individuals while eliminating waste.
The aim of lean thinking is to create a lean enterprise, one that sustains growth by aligning customer satisfaction with employee satisfaction, and that offers innovative products or services profitably while minimizing unnecessary over-costs to customers, suppliers and the environment.
The Lean Movement finds its roots in Toyotism and values performance, visual management (Kanban) and continuous improvement (Kaizen)
Lean Startup (2010)
Blank, Ries, Osterwalder and Maurya are the founders or initiators of the Lean Startup Movement. Eric Ries is considered as the leader of the movement, while Steve Blank considers himself as its godfather.
Osterwalder and Maurya's work on business models is considered to fill a gap in Ries and Blank's work on processes, principles and practices. In Steve Blank's "The four Steps the the Epiphany", the business model section is a vague single page.
Moreover, Maurya's "Running Lean" magnificently completes Blank's work on Customer Development. We'll get to that.
2.2 Key principles
Before digging any further into Lean Startup, below are the essential principles that characterize The Lean Startup approach, as reported by Eric Ries' book.
Entrepreneurs are everywhere
You don't have to work in a garage to be in a startup. The concept of entrepreneurship includes anyone who works within Eric Ries' definition of a startup, which I repeat here:
That means entrepreneurs are everywhere and the Lean Startup approach can work in any size company, even a very large enterprise, in any sector or industry.
Entrepreneurship is management
A startup is an institution, not just a product, and so it requires a new kind of management specifically geared to its context of extreme uncertainty.
In fact, Ries believes "entrepreneur" should be considered a job title in all modern companies that depend on innovation for their future growth
Startups exist not just to make stuff, make money, or even serve customers. They exist to learn how to build a sustainable business. This learning can be validated scientifically by running frequent experiments that allow entrepreneurs to test each element of their vision.
To improve entrepreneurial outcomes and hold innovators accountable, we need to focus on the boring stuff: how to measure progress, how to set up milestones, and how to prioritize work. This requires a new kind of accounting designed for startups-and the people who hold them accountable.
The fundamental activity of a startup is to turn ideas into products, measure how customers respond, and then learn whether to pivot or persevere. All successful startup processes should be geared to accelerate that feedback loop.
2.3 The Feedback loop
The feedback loop is represented as below.
The five-part version of the Build-Measure-Learn schema helps us see that the real intent of building is to test "ideas" - not just to build blindly without an objective.
The need for "data" indicates that after we measure our experiments we'll use the data to further refine our learning. And the new learning will influence our next ideas. So we can see that the goal of Build-Measure-Learn isn't just to build things, the goal is to build things to validate or invalidate the initial idea.
Again, the goal of Build-Measure-Learn is not to build a final product to ship or even to build a prototype of a product, but to maximize learning through incremental and iterative engineering.
In this case, learning can be about product features, customer needs, distribution channels, the right pricing strategy, etc.
The "build" step may refer to building an MVP - Minimal Viable Product - or simply a prototype, mock-up or even simply a hand sketch, whatever works for collecting market / customer feedback.
In the end, the Build-Measure-Learn framework let startups be fast, agile and efficient by validating every single assumption of the Problem, The Solution fit and the Business Model before consenting to any heavy investment.
2.4 The Four steps to the Epiphany
Most startups lack a process for discovering their markets, locating their first customers, validating their assumptions, and growing their business.
The Customer Development Model creates the process for these goals.
The life of any startup can be divided into two parts: before product/market fit (call this "BPMF") and after product/market fit ("APMF").
When you are BPMF, focus obsessively on getting to product/market fit.
Do whatever is required to get to product/market fit. Including changing out people, rewriting your product, moving into a different market, telling customers no when you don't want to, telling customers yes when you don't want to, raising that fourth round of highly dilutive venture capital, whatever is required! When you get right down to it, you can ignore almost everything else.
Whenever you see a successful startup, you see one that has reached product/market fit, and usually along the way screwed up all kinds of other things, from channel model to pipeline development strategy to marketing plan. And the startup is still successful.
PMF means it's safe to scale !!
If you decide to scale-up a SaaS company without proven Product/Market Fit, you're taking a huge risk. There's no guarantee that a market for your product exists. Even if it does, it might not be able to sustain your business.
Without PMF, major investments into marketing, sales and customer success are premature.
- Customer discovery: is to determine who your customers are, and whether the problem you're solving is important to them. In this phase, you may spend a lot of time conducting primary research, with surveys and interviews, or looking through secondary research. For example, in the case of Uber, Travis Kalanick, decided to build the business model as a private black cab service for himself. Gradually as the service was shared with friends, they began to realize demand from others.
- Customer validation: is when you build a sales process that can be repeated by a sales and marketing team. This process is validated by selling the product to early customers for money. In the case of Uber, customers were paying for the ride from the get go, hence the business model was validated. And for Facebook, in its early days, Mark Zuckerberg was selling banners to local college businesses as a proof that the freemium monetization model will work.
- Customer creation / Get new Customers: seeks to increase demand for a product and scale the business. In the case of Uber, the referral bonus program with ride subsidies was the key to its rapid growth, or customer creation.
- Customer building / Company Creation: is when a company transitions into a more formalized structure where different specialized departments are created to specialize functions such as sales, marketing, and business development.
Shortly put, Steve Blank proposes that companies need a Customer Development process that complements, or even in large portions replaces, their Product Development Process. The Customer Development process goes directly to the theory of Product/Market Fit.
In "The four steps to the Epiphany", Steve Blank provides a roadmap for how to get to Product/Market Fit.
2.5 Customer development - the practices
So I want to present the most essentials principles and practices introduced and discussed by the Lean Startup approach.
These principles and practices are presented on the following schema attached to the stages of the Customer Development process where I think they make more sense:
We will be focusing now on the relevant practices to reach product-market fit.
2.6 Get out of the building
If you're not Getting out of the Building, you're not doing Customer Development and Lean Startup.
There are no facts inside the building, only opinions.
If you aren't actually talking to your customers, you aren't doing Customer Development. And talking here is really speaking, with your mouth. Preferably in-person, but if not, a video call would work as well, messaging or emailing doesn't.
As Steve Blank said "One good customer development interview is better for learning about your customers / product / problem / solution / market than five surveys with 10'000 statistically significant responses."
The problem here is that tech people, especially software engineers, try to avoid going out of the building as much as possible. But this is so important. Engineers need to fight against their nature and get out of the building and talk to customers as much as possible; find out who they are, how they work, what they need and what your startup needs to do, to build and then sell its solution.
Again, getting out of the building is not getting in the parking lot, it's really about getting in front of the customer.
At the end of the day, it's about Customer Discovery. And Customer Discovery is not sales, it's a lot of listening, a lot of understanding, not a lot of talking.
A difficulty that people always imagine is that young entrepreneurs with an idea believe that they don't know anybody, so how to figure out who to talk to ?
But at the time of Linkedin, Facebook, Twitter, it's hard to believe one cannot find a hundred of people to have a conversation with.
"Who else should I be talking to ?"
And because you're a pushy entrepreneur, when they give you those names, you should ask "Do you mind if I sit here while you email them introducing me ?"
"What should I have really asked you ?"
And sometimes that gets into another half hour related to what the customer is really worried about, what's really the customer's problem.
Customer Discovery becomes really easy once you realize you don't need to get the world's best first interview.
In fact its the sum of these data points over time, it's not one's just going to be doing one and one wants to call on the highest level of the organization.
In fact you actually never want to call on the highest level of the organization because you're not selling yet, you don't know enough.
What one actually wants is to understand enough about the customers, their problems and how they're solving it today, and whether one's solution is something they would want to consider.
2.7 Problem interview
Problem Interview is Ash Maurya's term for the interview you conduct to validate whether or not you have a real problem that your target audience has.
In the Problem Interview, you want to find out 3 things:
- Problem - What are you solving? - How do customers rank the top 3 problems?
- Existing Alternatives - Who is your competition? - How do customers solve these problems today?
- Customer Segments - Who has the pain? - Is this a viable customer segment?
Talking to people is hard, and talking to people in person is even harder. The best way to do this is building a script and sticking to it. Also don't tweak your script until you've done enough interviews so that your responses are consistent.
The main point is to collect the information that you will need to validate your problem, and to do it face-to-face, either in-person or by video call. It's actually important to see people and be able to study their body language as well.
The interview script - at least the initial you should follow until you have enough experience to build yours - is as follows:
If you have to remember just three rules for problem interviews here they are:
- Do not talk about your business idea or product. You are here to understand a problem, not imagine or sell a solution yet.
- Ask about past events and behaviours
- No leading question, learn from the customer
After every interview, take a leap backwards, analyze the answers, make sure you understand everything correctly and synthesize the results.
After a few dozen of interviews, you should be a able to make yourself a clear understanding of the problem and initiate a few ideas regarding the solution to it.
Finding and validating your solution brings us to the next topic: the Solution Interview.
And what if a customer tells you that the issues you thought are important really aren't? Learn that you have gained important data.
2.8 Solution interview
In the Solution Interview, you want to find out three things:
- Early Adopters - Who has this problem? - How do we identify an early adopter?
- Solution - How will you solve the problems? - What features do you need to build?
- Pricing/Revenue - What is the pricing model? - Will customers pay for it?
The key point here is to understand how to come up with a solution fitting the problem, step by step getting to the right track with your prototype and also understanding what could be a pricing model.
A demo is actually important. Many products are too hard to understand without some kind of demo. If a picture is worth a thousand words, a demonstration is probably worth a million.
Identifying early adopters is also key.
Think of something: if one of the guys you meet tells you that you definitely hold something, ask him if he would want to buy it. If he says he would definitely buy it when it's ready and available, ask him if he would commit to this. If he says he commits to this, ask him if he would be ready to pay half of it now and have it when its ready, thus becoming a partner or an investor.
If you find ten persons committing on already paying for the solution you draw, you may not even need to search for investors, you already have them. And that is the very best proof you can find that your solution is actually something.
And customers or partners are actually the best possible type of investors.
The Minimum Viable Product is an engineering product with just the set of features required to gather validated learnings about it - or some of its features - and its continuous development.
This notion of Minimum Feature Set is key in the MVP approach.
The key idea is that it makes really no sense developing a full and finalized product without actually knowing what will be the market reception and if all of it is actually worth the development costs.
Gathering insights and directions from an MVP avoids investing too much in a product based on wrong assumptions. Even further, The Lean Startup methodology seeks to avoid assumptions at all costs, see The Feedback Loop and Metrics Obsession.
The Minimum Viable Product should have just that set of initial features strictly required to have a valid product, usable for its very initial intent, and nothing more. In addition these features should be as minimalist as possible but without compromising the overall User Experience. A car should move, a balloon should be round and bounce, etc.
when adopting an MVP approach, the MVP is typically put at disposal at first only to early adopters, these customers that may be somewhat forgiving for the "naked" aspect of the product and more importantly that would be willing to give feedback and help steer the product development further.
Eric Ries defines the MVP as:
The definition's use of the words maximum and minimum means it is really not formulaic. In practice, it requires a lot of judgement and experience to figure out, for any given context, what MVP makes sense.
The following chart is pretty helpful in understanding why both terms minimum and viable are equally important and why designing an MVP is actually difficult:
When applied to a new feature of any existing product instead of a brand new product, the MVP approach is in my opinion somewhat different. It consists of implementing the feature itself not completely; rather, a mock-up or even some animation simulating the new feature should be provided.
The mock-up or links should be properly instrumented so that all user reactions are recorded and measured in order to get insights on the actual demand of the feature and the best form it should take (Measure Obsession),
This is called a deploy first, code later method.
Fred Voorhorst' work does a pretty good job in explaining what an MVP is:
Developing an MVP is most definitely not the same as developing a sequence of elements which maybe, eventually combine into a product. A single wheel is not of much interest to a user wanting a personal transporter like a car, as illustrated by the first line.
Instead, developing an MVP is about developing the vision. This is not the same as developing a sequence of intermediate visions, especially not, if these are valuable products by themselves. As an example, a skateboard will likely neither interest someone in search for a car, as illustrated by the second line.
Developing an MVP means developing a sequence of prototypes through which you explore what is key for your product idea and what can be omitted.
Sidenote on Product Design Artifacts
This is important: The MVP is not the only solution to capture user feedback, there are multiple different tools.
For instance during the first customer solution interviews, something as stupid as a multiples hand sketch move around with your hands may well be sufficient to capture feedback.
You should always settle to the simplest form of demonstration that is required to capture the feedback you need from your customer to verify your assumption, your hypothesis or your idea.
2.10 Fail Fast
The key point of the "fail fast" principle is to quickly abandon ideas that aren't working. And the big difficulty of course is not giving up too soon on an idea that could potentially be working. should one find the right channel, the right approach.
Fail fast means getting out of planning mode and into testing mode, eventually for every component, every single feature, every idea around your product or model of change. Customer development is the process that embodies this principle and helps you determine which hypotheses to start with and which are the most critical for your new idea.
It really is OK to fail if one knows the reason of the failure, and that is where most people go wrong. Once a site or a product fails then one needs to analyse why it bombed. It's only then that one can learn from it.
The key aspect here is really learning. And learning comes from experimenting, trying things, measuring their success and adapting.
An entrepreneur should really be a pathologist investigating a death and finding the cause of the failure. Understanding the cause of a failure can only work if the appropriate measures and metrics around the experiment are in place.
Now failing is OK as long as we learn from it and as long as we fail as fast as possible. Again, the whole lean idea is to avoid waste as much as possible and there's no greater waste than keeping investing on something that can ultimately not work. Failing as fast as possible, adapting the product, pivoting the startup towards its next approach as soon as possible is key.
But then again, the big difficulty is not to give up too soon on something that could possible work.
Succeed sooner !
So how do you know when to turn, when to drop an approach and adapt your solution ? How can you know it's not too soon?
Measure, measure, measure of course!
The testing of new concepts, failing, and building on failures are necessary when creating a great product.
The adage, "If you can't measure it, you can't manage it" is often used in management and is very important in The Lean Startup approach.
Lean Startup is about verifying all your assumptions and hypothesis, and the only way to verify them is to take measures, compute metrics, infer insights and adapt.
2.11 Metrics Obsession
In the build-measure-learn loop, there is measure ... The Lean Startup makes from measuring everything an actual obsession. And I believe that this is a damn' good thing.
Think of it: what if you have an idea regarding a new feature or an evolution of your product and you don't already have the metrics that can help you take a sound and enlightened decision? You'll need to introduce the new measure and wait until you get the data. Waiting is not good for startups.
This is why I like thinking of it as a Metrics Obsession. Measure everything, everything you can think of!
And repeat a hundred times:
Instead I will measure that ...
Or as Edward Deming said :
We'll come back to this
In the process of learning by iterations, a startup can discover through field returns with real customers that its product is either not adapted to the identified need, that it does not meet that need.
However, during this learning process, the startup may have identified another need (often related to the first product) or another way to answer the original need.
When the startup changes its product to meet either this new need or the former need in a different way, it is said to have performed a Pivot.
A startup can pivot several times during its existence.
A pivot is ultimately a change in strategy without a change in vision.
It is defined as a structured course correction designed to test a new fundamental hypothesis about the product, business model and engine of growth.
The vision is important. A startup is created because the founder has a vision and the startup is really built and organized around this vision. If the feedback from the field compromises the vision, the startup doesn't need to pivot, it needs to resign, cease its activities and another startup, another organization aligned to the new vision should perhaps be created.
There are various kind of pivots:
- Zoom-In : a single feature becomes the whole product
- Zoom-Out : the whole initial product becomes a feature of a new product
- Customer segment : Good product, bad customer segment
- Customer need : Repositioning, designing a completely new product (still sticking to the vision)
- Platform : Change from an application to a platform, or vice versa
- Many others ...
Pivot or Persevere
Since entrepreneurs are typically emotionally attached to their product ideas, there is a tendency to hang in there too long. This wastes time and money. The pivot or persevere process forces a non-emotional review of the hypothesis.
Unsuprisingly, knowing when to pivot is an art, not a science. It requires to be well thought through and can be pretty complicated to manage.
At the end of the day, knowing when to pivot or persevere requires experience and, more importantly, metrics: proper performance indicators giving the entrepreneur clear insights about the market reception of the product and the fitting of customer needs.
One thing seems pretty clear though, if it becomes clear to everyone in the company that another approach would better suit the customer needs, the startup needs to pivot, and fast.
2.13 The Lean Canvas
Evolution on Business Models and the relative processes were surprisingly missing or poorly addressed from Ries' and Blank's initial work.
Fortunately, Osterwalder and Maurya caught up and filled the gap.
Business Model Canvas
The Business Model Canvas is a strategic management template invented by Alexander Osterwalder and Yves Pigneur for developing new business models or documenting existing ones.
It is a visual chart with elements describing a company's value proposition, infrastructure, customers, and finances. It assists companies in aligning their activities by illustrating potential trade-offs.
The Lean Canvas is a version of the Business Model Canvas adapted by Ash Maurya specifically for startups. The Lean Canvas focuses on addressing broad customer problems and solutions and delivering them to customer segments through a unique value proposition.
So how should one use the Lean Canvas?
- Customer Segment and Problem
Both Customer Segment and Problem sections should be filled in together.
Fill in the list of potential customers and users of your product, distinguish customers (willing to pay) clearly from users, then refine each and every identified customer segment. Be careful not no try to focus on a too broad segment at first, think of Facebook whose first segment was only Harvard students.
Fill in carefully the problem encountered by your identified customers.
Identify carefully your early adopters since they will help you test and refine your business model
- UVP - Unique Value Proposition
For new products, the initial battle is about how to get noticed ? How will you get the customer's attention ?
The UVP is the unique characteristic of your product or your service making it different from what is already available on the market an that makes it worth the consideration of your customers. Focus on the main problem you are solving and what makes your solution different.
Filling this is initially is tricky, since knowing about the solution for real requires trial and error, build-measure-learn loop, etc. In an initial stage one shouldn't try to be to precise here and keep things pretty open.
This consists in answering: how should you get in touch with your users and customers ? How do you get them to know about your product ? Indicate clearly your communication channels.
it's one of the riskiest item on your canvas! Start testing from day 1! (Social networks, Newsletter, Ads, Friends, Events, SEO, Etc.)
- Revenue Stream and Cost Structure
Both these sections should also be filled in together.
At first, at the time of the initial stage of the startup, this should really be focused on the costs and revenues related to launching the MVP (how to interview 50 customers ? Whats the initial burn rate ? etc.)
Later this should evolve towards an initial startup structure and focus on identifying the break-even point by answering the question : how many customers are required to cover my costs ?
- Key Metrics
Ash Maurya refers to Dave McClure Pirate Metrics to identify the relevant KPIs to be followed :
Aquisition - How do user find you ?
Activation - Do user have a great first experience ?
Retention - Do users come back ?
Revenue - How do you make money ?
Referral - Do users tell others ?
- Unfair Advantage
This consists in indicating the adoption barriers as well as the competitive advantages of your solution. An unfair advantage is defined as something that cannot be copied easily neither bought.
Examples: Insider Information, Personal authority, A dream team, Existing customers, "Right" celebrity endorsement, Large network effect, Community, SEO ranking, Patents, Core values, etc.
Lean Startup : test your plan !
Using the new "Build - Measure - Learn" diagram, the question then becomes, "What hypotheses should I test?". This is precisely the purpose of the initial Lean Canvas,
Product Market Fit on the Lean Canvas
The Lean-Canvas is a formidable tool to capture the assumptions and hypothesis leading to Product Market Fit.
Product Market Fit happens here on the Lean Canvas:
Filling up these two parts can be challenging, so another tool comes in the game to help identify Assumptions leading to Product-Market Fit.
2.14 The Value Propostion Canvas
The Value Proposition Canvas is a tool which can help ensure that a product or service is positioned around what the customer values and needs.
The Value Proposition Canvas was initially developed by Dr Alexander Osterwalder as a framework to ensure that there is a fit between the product and market. It is a detailed look at the relationship between two parts of the Osterwalder's broader Business Model Canvas; customer segments and value propositions.
The Value Proposition Canvas can be used when there is need to refine an existing product or service offering or where a new offering is being developed from scratch.
- Customer jobs - the functional, social and emotional tasks customers are trying to perform, problems they are trying to solve and needs they wish to satisfy. A customer profile should be created for each customer segment, as each segment has distinct gains, pains and jobs.
- Gains - the benefits which the customer expects and needs, what would delight customers and the things which may increase likelihood of adopting a value proposition.
- Pains - the negative experiences, emotions and risks that the customer experiences in the process of getting the job done.
- Gain creators - how the product or service creates customer gains and how it offers added value to the customer.
- Pain relievers - a description of exactly how the product or service alleviates customer pains.
- Products and services - the products and services which create gain and relieve pain, and which underpin the creation of value for the customer.
Achieving fit between the value proposition and customer profileAfter listing gain creators, pain relievers and products and services, each point identified can be ranked from nice to have to essential in terms of value to the customer. A fit is achieved when the products and services offered as part of the value proposition address the most significant pains and gains from the customer profile. Identifying the value proposition on paper is only the first stage. It is then necessary to validate what is important to customers and get their feedback on the value proposition. These insights can then be used to go back and continually refine the proposition.
3. Design Thinking Fundamentals
Just as the previous chapter intended to cover the Lean Startup fundamentals required to present the different perspective in the Search for Product-Market fit presented in the next chapter, this one covers the most essential Design Thinking Fundamentals
3.1 Design Thinking
Design Thinking is an iterative process in which we seek to understand the user, challenge assumptions, and redefine problems in an attempt to identify alternative and innovative strategies and solutions that might not be instantly apparent with our initial level of understanding (Creative thinking, Outside-the-box thinking, ...).
Design thinking is a way of thinking and working as well as a collection of hands-on methods.
The Design Thinking Process involves five phases: Empathize, Define, Ideate, Prototype and Test-it is most useful to tackle problems that are ill-defined or unknown.
Design Thinking revolves around a deep interest in developing an understanding of the people for whom we're designing the products or services. Experience says customers are not likely to communicate their needs clearly. It's not how the human brain works. We have a natural tendency to think in terms of solutions.
Design Thinking is based on the assumption that designers' work processes can help us systematically extract, teach, learn, and apply these human-centered techniques to solve problems in a creative and innovative way. It is kind of a capture of the best practices in use by designers for ages, formalized and collected in a process and set of tools. It's an attempt to leverage designer's ways of working and thinking to other business fields where brainstorming is required to converge to a solution to a given problem.
3.2 The Design Thinking Process
Design thinking starts with Empathy and uses collaborative and participatory methods, repeating all 5 steps as many times as needed to achieve a complete solution.
The process helps not skipping to solution thinking before crystal clear problem understanding and formulation !
Design Thinking is an iterative and non-linear process. This simply means that the design team continuously use their results to review, question and improve their initial assumptions, understandings and results. Results from the final stage of the initial work process inform our understanding of the problem, help us determine the parameters of the problem, enable us to redefine the problem, and, perhaps most importantly, provide us with new insights so we can see any alternative solutions that might not have been available with our previous level of understanding.
- Get back to the customer for further refinement of the problem expression
- Working on the prototype give new ideas : challenge them and reprioritize!
- Tests give new ideas : challenge them and reprioritize!
- Tests reveal insights that redefine the problem
Designers don't become designers from day 1, there are design schools, it requires experience etc.
Design thinking is just the same. It requires a lot of practice and familiarity with the process and the tools to become good at it.
3.3 The Design Thinking Framework
This is intended as a map of the different tools and practices in use in the different stages of the design thinking process.
I wont go any deeper today in detailing these practices and tools and let the reader google them.
I will likely dedicate a full article to design thinking on this very blog in the short term
At the end of the day, Design thinking is a lot about bringing Agility and Lean practices to the design and problem solving process.
In this perspective, it is different to the traditional thinking process in many ways, just as Agile Development is different than Waterfall Development.
|Traditional thinking||Design thinking|
|Process||Planning of flawless intellect||Enlightened trial and error|
|Path to success||Avoid failure, secure||Fail fast|
|Factor of success||Expert Advantage||Ignorance advantage|
|Right answers||Right questions|
|Rigorous Analysis||Rigorous Testing|
|Subject experts||Process experts|
|Rituals||Presentations and meetings||Experiments and experiences|
|Base||Headquarters||In the field|
|Customer involvement||Arm's length customer research||Deep customer immersion|
|Activities||Thinking and planning||Doing|
3.4 Thinking Outside of the Box
The best way to illustrate this key aspect of Design Thinking is with the following quote from Henri Ford:
I'd like to illustrate this quote with the following process as an example, to show what a over-simplied design thinking process to the problem above could look like:
Design Thinking is essentially
- a problem-solving approach specific to design,
- which involves assessing known aspects of a problem and
- identifying the more ambiguous or peripheral factors that contribute to the conditions of a problem.
It contrasts with a more scientific approach where the concrete and known aspects are tested in order to arrive at a solution.
Design Thinking is
- an iterative process to identify alternative strategies and solutions that might not be instantly apparent with our initial level of understanding.
- often referred to as "outside the box thinking', as designers are attempting to develop new ways of thinking that do not abide by the dominant or more common problem-solving methods - just like artists do.
At the heart of Design Thinking is the intention to improve products by analyzing how users interact with them and investigating the conditions in which they operate.
Design Thinking offers a means of digging that bit deeper to uncover ways of improving User eXperiences.
4. Reaching Product Market fit - Different perspectives
Now with all we have covered above - lean startup and design thinking fundamentals - we can come back to this very article topic, the search for Product-Market Fit.
When searching online articles or posts about Product Market Fit, you will mostly likely fall in one of the following four perspectives
The Lean-Startup perspective: with actually two sub-cases that converge to the same thing:
- The Feedback-loop perspective: Searching Product-market fit is applying the Build-Measure-Learn feedback loop comprehensively throughout the product identification and design lifecycle and the business plan definition to shape a product fulfilling perfectly the customer needs.
- The Four-Steps-to-the-Epiphany perspective: Product-market fit is the result of the search phase, when the solution to the customer problem is clearly identified along with its feature set, market potential, business plan, foreseen evolutions, etc.
- The MVP-Centric perspective: For many, searching product-market fit is iterating around a Minimum Viable Product. It is the result of a process centered around the MVP design iterations, when the MVP and what we learned from it enabled to identify the product fulfilling the market needs.
- The Lean-Canvas-Centric perspective: For others, Product-market fit happens when you succeeded in designing great value propositions that match your customer needs and jobs-to-be-done and helps solve their problems.
- The Design Thinking perspective: Product-market-fit is what happens when applying successfully Lean-Startup principles to the last design-thinking process stages to reach maturity and the growth stage.
These different perspectives are all, well, perspectives ... Different visions of the same thing: putting the customer needs at the center of the Solution Search and Design process and being lean-by-the-book as long as the Problem, the Solution, the Market and the Product along with its minimum features are not well identified.
We should now detail these different perspectives.
4.1 The Lean Startup Perspective
Again, actually the Feedback loop and the Four Steps to the Epiphany - both described and referenced often in the literature - converge to the very same thing: The Lean Startup way, which can be represented this way:
The Lean Startup perspective to product market fit consists, well, in being Lean Startup by the book:
- "4-steps to the Epiphany" as a high level process
- Lower-level process is represented by the Lean-Startup Feedback Loop
- First Problem-Solution Fit
- Then Business-Model validation
- Eventually Product-Market Fit
- MVP happens late in the process, most assumptions are verified during interviews with mock-ups and prototype (Lean-by-the-book)
At the end of the day Lean Startup is about reaching Product-Market Fit.
The Lean Startup way to product market fit is fundamentally Customer-centric: Get out of the building, work with your customers:
- Understand your customer's problem
- Understand if your solution works for your customer!
- Understand your market, capture its constraints, abilities, means.
It's lean-by-the-book, only very little investment should be made upfront, focus on Problem-Solution Fit first, then design your business mode, all of this can be done almost for free.
Only then one should develop an MVP - which requires some investment - at the latest stage, in any case after Problem-Solution Fit.
The whole process is fundamentally Data-driven: make an hypothesis, test it, measure, learn, adapt or persevere, move to next assumption, etc.
Product-Market Fit is reached when the metrics measured from the MVP confirms it.
4.2 The "MVP-Centric" Perspective
The MVP-centric perspective is very similar to the Lean-Startup perspective, with only one fundamental difference.
Instead of remaining lean too long and focusing a lot on Problem / Solution fit and the Business Model Design from a theoretical perspective (through interview, design sessions with customers, etc.), for some it makes more sense to rush it to the MVP and capture better feedback based on something concrete, the MVP, instead of remaining nearly theoretical too long.
The MVP-Centric approach puts the iterations on MVP at the center of the process.
it is very relevant approach for online and very wide audience services, such as SaaS platform, online services, etc.
- Jump to the MVP development stage as fast as possible - without neglecting Problem / Solution fit though - and iterate on MVP as long as required to reach PMF
- Getting IRL - In Real Life - and live as fast as possible to optimize feedback
Note about MVP
Refer to section MVP, the first version of the MVP in this context can very well be a prototype or a simple mock-up of even sketch-up.
What the MVP-centric approach is saying is that at every stage (Problem/Solution fit, etc.) you should have something concrete to present to the customer to have him react on something real, not just open questions or theoretical solutions.
In this perspective, every kind of feedback that is not measured on something real (in the sense of existing, as real as a simple sketch-up can be) is simply useless. This is opposed to the previous Lean-by-the-book perspective where the first stages can me made through simple interviews.
Some believe that reasoning on a concrete MVP is the best way (again, the definition of MVP in this context is wide)
The principles behind the underlying process are:
- Build MVP, put it live in real-life and start getting feedback
- Feedback and metrics collection automation is key
- A/B Testing / UX Metrics / etc.
In contrary to the Lean-Startup perspective, in this approach there some more significant investment up-front required, one needs to develop the MVP.
The Problem-Solution fit search phase is not neglected, but shorten as much as possible to reach the more concrete MVP stage faster.
Product-Market Fit is reached when the metrics measured from the MVP confirms it (as usual).
4.3 The "Lean Canvas-Centric" Perspective
The Lean Canvas-Centric perspective is kind of the the symmetric of the MVP-Centric perspective if the Lean Startup perspective is the pivot point.
It's fundamental idea is the exact opposite of the MVP Centric approach: postponing the MVP and the investment required in it as much as possible and stay lean and theoretical as long as possible, even as long as is required to reach "theoretical Product-Market fit"
The Lean-Canvas centric approach puts a strong emphasis on the theoretical work and customer representatives / market experts interviews instead of the MVP
Theoretical Product-Market fit would be defined as "Designing a Product and a Business Model that has the potential to have Product-Market Fit" as measured by whatever possible means to confirm most assumptions without having the actual product or even only an MVP.
The Lean Canvas and the Value proposition Canvas form a formidable tool to drive researches with customers towards Product-Market fit and discussion with Investors. They sum up the findings and validated assumptions based on theoretical work (such as prototype, academic research, scientific findings, etc.) leads to theoretical product market-fit before actually building anything on the product
Developing, evolving and maintaining these canvas is
- Useful during the search phase for every startup
- Essential when an MVP is not possible or very expensive. These canvas provide a guiding line for the theoretical search phase.
Designing a lean-Canvas, maintaining and evolving it , along with a Value proposition canvas, always makes sense and should always be done to drive the initial assumptions on the Problem solution fit, the Business Model and the Product Market-Fit and their evolutions.
But most of the time, coming back over and over again to the Lean Canvas is dropped in favor of iterations around the MVP and it's predominant usage to capture customer feedback and converge to Product-Market Fit.
When working with and around the MVP is not possible - heavy industry, Bio-Tech, Pharma, etc. - the lean canvas and its maintenance remains the principal guideline when searching for Product Market Fit Every customer interview, expert consulting, scientific research should lead to evolving the Lean Canvas and the Value Proposition Canvas. The Lean canvas is the Big Picture of the Business Plan leading discussions with investors
The Lean canvas is the map to the data points that need to be collected before talking to investors.
4.4 The "Design Thinking-Centric" Perspective
The Design Thinking-Centric perspective is actually not a variation of the previous ones, but rather a complementary approach.
Lean startup doesn't tell a lot about how to conduct brainstorming and the thinking process towards solutions. This is where Design Thinking kicks in.
The Design-Thinking Perspective is actually a way to structure and formalize the Problem-solving approach in the search phase.
There's some overlap between Lean Startup and Design Thinking
- Design thinking emphasizes on Problem / Solution Fit, MVP design and UX as ultimate results from a Design perspective,
- while Lean Startup focuses on reaching Product Market Fit before scaling.
Both are very complementary!
- The design thinking process is a very good fit for the Lean-Startup Search Phase
- Lean Startup doesn't give much processes and tools on how to get to Problem / Solution Fit (aside from some general principles, Get out of the building, Problem / Solution interview, etc.), how to design the MVP, etc.
- This is where Design thinking kicks in.
Applying the Design-thinking process to the required brainstorming in the Lean-Startup search phase is a striking fit.
Lean-Startup insists on the need to reach Problem Solution Fit, a working Business Model and eventually Product Market fit and gives principles and practices to it (Get out of the Building, Converge to MVP, Lean Canvas, etc.).
But Lean startup doesn't give much recipe for how to conduct brainstorming, how to search for solution, how to design the MVP, etc.
Here comes Design thinking!
- The Design thinking process can be applied every time a solution to a problem, a design job or simply a brainstorming exercise has to be performed in the search phase … or after.
- Design thinking and Lean Startup share some genes (getting feedback, iterate, etc.), but they are rather very much complementary with each other
5. Measure Obsession
There is one fairly important topic that I haven't covered in this paper and that would require a dedicate blog post on its own.
And that is "How do you know when you have reached Product-Market Fit" ?
I said in the introduction that a lot of it is about feeling, when you really feel the market pulling out your product.
But fortunately, knowing whether your startup reached product-market fit or whether simply you are going in the right direction is a lot more than feelings. It's all about metrics !
Or, as W. Edwards Deming said:
Now the question of course is which metrics makes sense in measuring whether one is going in the right direction (Product-Market Fit)?
Honestly there is no magic silver bullet and it can in fact be pretty difficult to pick up the right metric that would be most helpful to validate a certain hypothesis. However, metrics should at all cost respect the three A's.
- are actionable,
- can be audited and
- are accessible
An actionable metric is one that ties specific and repeatable actions to observed results. The actionable property of picked up metrics is important since it prevents the entrepreneur from distorting the reality to his own vision.
We speak of Actionable vs. Vanity Metrics.
Meaningless metrics such as "How many visitors ?", "How many followers ?" are vanity metrics and are useless.
Ultimately, your metrics should be useful to measure progress against your own questions.
Now giving you a list of metrics and the proper way to interpret them is a topic on his own and I might write another article on this blog in a near future to define and present such metrics.
Since this article is already long enough this way, I'll just mention four metrics that I believe should be among the minimum set of metrics that any startup retain:
- NPS - Net Promoter Score
- CLV (or LTV) to CAC Ratio Customer LifeTime Value to Customer Acquisition Cost Ratio
- Retention Ratio
- Growth Rate
5.1 Net Promoter Score
The Net promoter Score - or NPS - is perhaps both the simplest metrics to gather and computer as well as one of the most meaningful.
It consists in understanding how great your product is by capturing how much your users are so enthusiastic about it that they would recommend it to others. On other words, it's really about how much your product is susceptible to generate a Wow effect.
The Net Promoter Score is a metric that has become a standard for measuring customer loyalty and satisfaction by many companies.
It is built on the power of one simple question: "how likely is it that you would recommend your product to a friend or colleague?"
it's now used by companies of all sizes in virtually every industry all over the world.
While NPS is a good leading indicator of business growth, it can also be a vanity metric if used alone without looking at the context of why your customers would recommend (or not recommend) your product.
If your company is committed to measuring NPS, here's a tip that you can use to understand the "why" behind your NPS score and potentially increase it. Follow up the standard NPS question with one additional question, "What would it take for you to recommend my product to someone you know?", and target the people who are not your promoters, which means they rated their likelihood to recommend your product an 8 or lower. You can then analyze those open-ended responses to identify key trends in the data.
Computing the Net Promoter Score
Understanding the Net Promoter Score
There's a simple rule of thumb:
- A positive value is OK/li>
- A value above 20% is what you want to reach/li>
- A value above 50% is extremely good
5.2 CLV to CAC Ratio
The CLV to CAC Ratio is an expression of how much money you can make built on two key figures:
CAC - Customer Acquisition Costs - is the figure representing what it costs to your company in average to acquire a new customer.
It's the total cost of converting a prospect or convincing a potential customer to become an actual customer. It's the total cost devoted to your sales and marketing effort - cross department, domains and worldwide divided by the number of your new customers over the period.
CLV - Customer Lifetime Value (or often LTV in the literature) - is the figure representing how much money you make in average with one of your customer. CLV is more difficult to compute and no formula working out of the box can be expressed easily since one need to account upselling, sales model such as subscriptions vs. one time license, etc.
One can however simplify it by considering incomes only incomes from new customers
The CLV to CAC ratio gives you an indication of how much your business is profitable.
The metric is computed by dividing LTV by CAC. It is a signal of customer profitability, and sales and marketing efficiency.
5.3 Retention Ratio / Curve
Acquisition isn't the whole answer. Retention is even more important!
- N-Day Retention: The proportion of users who come back on the 'Nth' day after first use.
- Retention Curve: A line graph depicting the average percentage of active users for each day within a specified timeframe.
At a high level, retention is a measure of how many users return to your product over time.
It is the mathematical inverse of the customer churn (which can be another metric)
The point is, every improvement that you make to retention also improves all of these other things-virality, LTV, payback period. It is literally the foundation to all of growth, and that's really why retention is the king
A good way of visualizing retention rate is by plotting a retention curve:
Retention can actually indicate if you have a product-market fit problem; if you plot out your retention numbers as a percentage of active users over time and you have a flat line that reaches zero instead of a curve that stabilizes-you need to solve a product-market fit problem, not a retention problem.
5.4 Growth Rate
The Growth Rate is an expression of the speed at which your business is growing.
The Growth Rate is unfortunately a metric that is simple to understand, yet fairly difficult to compute since a lot of different elements need to be accounted.
Imagine a situation where the growth would be 10% monthly, composed by 40% new customers every months and 30% customers leaving or stopping to use the product.
In such a situation, even though the monthly growth seems interesting, the company is actually losing all its customers every 3 months!
Under such conditions, the survival of the company is almost impossible after the hype effect passes.
For this reason, the growth rate metrics needs to account the ability of the company to retain its customers, the churn rate, etc.
Growth accounting framework
The Growth Accounting Framework proposed on tribecap.co at https://tribecap.co/a-quantitative-approach-to-product-market-fit/ presents a fairly relevant approach to computing the Growth Rate.
Shortly put, it consists of working with the Compound Monthly Growth Rate over past X months as illustrated here:
Product Market Fit is confirmed when these indicators - the cmgr3, cmgr6 and cmgr12 go up consistently.
If you intend to work to use the Growth Rate as key metric, you definitely should read very carefully the article above.
5.5 Further readings: pirate metrics
In this article, I have presented four example metrics, the ones that are used most of the time. But there are many more.
The reader should get familiar with the Pirate Metrics framework proposed by Dave McClure.
Pirate metrics is a helpful customer-lifecycle framework invented by Dave McClure from 500 startups that you can use to determine where you should focus on optimizing your marketing funnel, to make the most of your scarcest resource - your time.
Pirate metrics is essentially a way of categorizing different metrics and KPIs, and is made up of the metric “categories” Awareness, Acquisition, Activation, Revenue, Retention, Referral - or AAARRR for short (like a pirate. Pirate metrics, get it?).
The reader might want to head on over to Slideshare to read the original slide deck outlining Pirate Metrics.
So there is a recipe for success.
Entrepreneurship has a magic power, it triggers positive energies and it leaves people with an irresistible willingness to start doing things.
However, all these positive energies can very easily become negative when they are not channeled in the correct direction. And by negative we mean: having quit a day job, having spent most of our savings, having re-mortgaged the house and ultimately having trouble explaining to our life partner, family and friends why we have done all of that and we still haven't been able to succeed. That's awful.
Luckily there is a process that we can follow, developed after having worked with hundreds of entrepreneurs.
Instead of starting to develop a product and hiring people immediately, these are the questions that we need to answer in order to build and launch a product that customers need and for which there is market demand:
- Which problem are we going to solve?
- Who has the problem in our market?
- Who are the early adopters?
- What is the value proposition able to satisfy their needs?
- How much are they willing to pay for it?
- What is the minimum set of features required for launch?
The way to answer most of these questions is to engage with customers from the very early stage of a new business idea, get to know them profoundly, create a value proposition based on the insights captured that relies on the company's key strengths to create a competitive advantage customers care about, and test and iterate that proposition on the market until we reach Product-Market Fit.
Most of this can be done before investing any substantial resource into the business, and that's really the best thing about Lean Startup methodology. The most difficult thing is to resist from the instinct to jump into “build mode”. Instead, we invest some time to de-risk an idea before investing heavily in it. Everyone is in love with their idea, and the last thing we want to know is that it's not a good one. But the sooner we realize an idea is flawed - i.e. there is no market need for it - the better it is.
In terms of practical steps, this is a possible process to validate a new business idea and achieve product-market fit:
- Compile a lean canvas to have clarity of a business idea (with Value Proposition Canvas)
- Identify the riskiest assumptions for the business idea.
Hint: usually these are the ones around target segment, problems and market size.
- (Problem Interview) Conduct a round of qualitative interviews with target customers, to understand if they have the problem, how big it is, and what they currently do to solve it.
- Run a collaborative workshop with the entire team to refine the value proposition based on customer insights collected so far. This is how disruptive ideas are generated!
- Prepare a cheap and quick form of a prototype.
- (Solution Interview) Conduct another round of qualitative interviews with target customers, to understand if the solution prepared solves the problem and if they are willing to pay for it. At this stage it is mandatory to attempt to get a commitment from them.
- Iterate the solution, and conduct new interviews if they didn't commit already.
- (MVP) When we get enough commitment, we define a MVP (Minimum Viable Product) and start proper development (when an MVP is not possible - heavy industry, pharma, etc. - we conduct additional confirmation research and engage with more potential customers)
- Put MVP on the market, collect feedback on MVP and evolve / adapt / pivot as required until reaching Product-Market-Fit
An on-going health check
A new solution achieves PMF, and manages to capture the lion's share of the market.
They become the dominant player, and stay that way, until new technology appears and supersedes their solution.
By failing to stay ahead of changing technology, the incumbent company loses market share to a smaller, disruptive business, who in turn, go on to dominate the market.
Rinse and repeat.
In this narrative, the market for a product evolved over time, and the definition of Product/Market Fit changed with it. As a result of developing technology, a solution that fits the market in the here-and-now might not fit the same market in the future.
PMF is like an ongoing health check for your business, allowing you to periodically test the key assumptions that underpin your business:
- Does the problem we solve still exist?
- Is the problem important enough?
- Is the market for our product still a 'good' market?