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How did Unicorns find their Product Market Fit?

What is more important: the product itself or the market where it is being prepared to be released? Obviously, the market cannot be opposed to the product, rather their organic synthesis is the key to the success of any company. This article is about how to find that perfect balance. You can find even more cool content about strategies and management in my telegram channel "Cards, money, KPI" - here is the link.

Generally speaking, this balance is called Product Marketing Fit. Let's look in detail at what it is and why tech company founders should spend resources on finding their PMF.

Product Marketing Fit (PMF) is a condition where a company's product perfectly meets the needs of the target market. This concept became popular thanks to venture capitalist Marc Andreessen, who first coined the term in 2007. PMF means that the product not only exists on the market, but is also actively in demand among users, and the company manages to satisfy the needs of the audience so that it is ready to pay for the product, use it and recommend it to others.

Visually, the Product Marketing Fit model looks like this: 

An example is Slack, which was originally created as a tool for gamers, but then its team discovered that it was much better suited for business communications. The company quickly adapted the product to a new target audience and achieved success in the market.

Another well—known example is Dropbox. They offered a simple and convenient way to store and share files in the cloud, which became a solution for many people who are unhappy with the complexity of other tools. This product has accurately hit the pain points of users, providing Dropbox PMF and rapid growth.

When contacting these well—known companies, you should understand that the successful discovery of a target customer is not the result of finding your PMF. In other words, if users subscribe to your product or download an application at a low cost of consumption, this does not mean that you have adequately matched your product to the market. 

Only engagement and retention metrics will tell you how to navigate the PMF search. 

As we have already said, PMF is not a universal mathematical formula, it is a complex and multi—layered process that requires in-depth analysis of the market, consumers and the product itself. You can find PMF at different stages of the company's development.

1. Market research

At the initial stage, it is extremely important to conduct a thorough analysis of the market and the target audience. Market research helps startups identify their customers, understand their needs, and identify what problems they are trying to solve. The analysis also allows you to understand where there are gaps in the market, that is, unmet needs that can be solved with the help of a new product.

Possible tools:

  • SWOT analysis 
  • A market segmentation chart (for example, a pie chart showing the distribution of the audience by segment, such as age, income, or behavioral factors).

2. Hypothesis testing

The next stage is testing product hypotheses using a minimally viable product (MVP). The Lean Startup methodology assumes that companies should bring a simplified version of their product to market as soon as possible in order to collect feedback from real users. This helps to minimize risks and verify basic assumptions.

Possible tools:

  • Engagement growth graph (a line graph showing the change in the number of users interacting with the product during the MVP testing process).
  • A user feedback chart (for example, a bubble chart where each dot corresponds to the number and type of feedback received).

3. Product Iterations

After testing the hypotheses, the company must adapt its product based on the data obtained. Product iterations are a continuous improvement process in which startups make changes to the functionality, design, and product offering. This stage is aimed at meeting the needs of users based on their feedback and preferences.

Possible tools:

  • A diagram of "iteration cycles" (in the form of a spiral or circles, showing cycles of feedback, testing and product improvement).
  • A table of product version comparisons (where each row represents improvements in each new version of the product based on user feedback).

4. Churn analysis

If the product does not retain users, it is important to find out why they refuse to use it. Churn analysis allows you to understand which aspects of the product may not be attractive or useful enough for customers. A high churn rate is an important signal that the product may not meet user expectations, and changes need to be made to increase customer loyalty and retention.

Possible tools:

  • Customer retention rate (a linear or bar graph showing the percentage of users retained over a certain period).
  • Analysis of the reasons for outflow (for example, a Pareto diagram highlighting the most common reasons for user withdrawal).

An example of a Pareto diagram:

5. Competitor Analysis

Knowing what competitors offer and what weaknesses their products have helps startups find unique competitive advantages. Companies analyze how they can stand out, which product features can be improved, or how to better position their product in the market. Studying competitors also allows startups to avoid mistakes already made by other players.

Possible tools:

  • A competitive analysis diagram (a matrix showing the strengths and weaknesses of each competitor in key parameters, such as price, quality, and unique functions).
  • Product positioning diagram (a two-axis diagram that shows how a company's product compares with competitors in terms of parameters such as price and functionality).

We mentioned above that the subscription factor or multiple downloads of the application is not an indicator that the company has found its Product Marketing Fit, then how do you know if you are close to achieving the goal or not? 

When a company reaches Product-Market Fit (PMF), it begins to experience a significant increase in demand and positive feedback from customers. 

This signals that the product solves the real problems of the audience and fully satisfies their needs. There are several signs that can help the company recognize this important stage and make sure that it is ready for further scaling and growth. 

So, the achievement of PMF can be recognized by several key features:

1. A sharp increase in demand

One of the key indicators of achieving PMF is a sharp increase in demand for the product. This means that users are not only interested in the product, but also begin to actively buy or use it. The company may face the problem of satisfying all orders, which indicates a high level of popularity and demand for the product on the market.

How it looks in practice:

  • Limited product availability: Successful startups who have reached PMF may face the fact that their product becomes unavailable due to an overload of orders (for example, a long delivery time or a waiting list).
  • Limited resources: A company may lack resources (production capacity, personnel, or infrastructure) to meet sharply increased demand.

Important indicators:

  • Number of new users and customers:  This can be tracked through linear graphs of user growth.
  • Growth rate: how quickly the number of registrations, purchases, or orders increases (for example, on a chart with weekly/monthly indicators).

2. Positive user reviews

Users not only actively use the product, but also share positive reviews about it, recommending it to friends and colleagues. This creates organic growth when loyal customers become an important source of new users.

Important indicators:

  • The Net Promoter Score (NPS) is one of the main indicators of how satisfied users are with the product and are ready to recommend it. A high NPS indicates a positive perception of the product and a high level of user loyalty.
  • The increase in organic registrations is an increase in the number of users who came through recommendations, rather than through paid advertising. This can be tracked through analytical reports and sales funnels.

Visualization:

  • Growth charts of organic registrations (line graphs broken down by traffic sources).
  • NPS reports with distribution by customer satisfaction levels.

3. Low failure rate

Another important sign of achieving PMF is the low bounce rate (user churn). This means that customers are not only interested in the product, but also continue to use it on an ongoing basis. The lower the percentage of users who refuse to use the product, the more likely it is that the product meets their needs and solves their problems.

Important indicators:

  • Churn Rate is the percentage of users who have opted out of a product over a certain period of time. A decrease in this indicator signals that the product effectively solves the tasks of customers.
  • Retention Rate is the percentage of users who continue to use the product one month, three months, or a year after registration. This is important for evaluating customer loyalty and understanding how long they stay with the product.

Visualization:

  • Linear graphs of user retention — show how the percentage of retained customers changes over time.
  • Churn diagrams — show the dynamics of user churn and the reasons for their refusal to use the product (in the form of a Pareto diagram).

4. High customer Value indicators (LTV)

One of the most important economic indicators when achieving PMF is the high indicators of the customer's life value (LTV, Lifetime Value) and the low cost of attracting a customer (CAC, Customer Acquisition Cost). When the customer's LTV significantly exceeds the CAC, it means that the company can scale effectively, attracting new users at minimal cost and getting the most out of it.

Important indicators:

  • LTV (Lifetime Value) is the total revenue that the company expects to receive from one customer over the entire period of their interaction with the product.
  • CAC (Customer Acquisition Cost) — the cost of attracting one customer. The key factor is that the LTV should be significantly higher than the CAC (the ideal ratio is at least 3:1).

Examples of companies that have found Product Marketing Fit

Each unicorn company has gone its own unique way to finding PMF, but there are several common approaches and strategies that have led to success.

1. Deep understanding of the target audience

Many startups start with intuitive guesses about who their target audience is and what problem they need to solve. Unicorn companies like Airbnb and Uber have been successful because they not only offered solutions that they thought the market needed, but also studied their users in depth.

Example: Airbnb

Initially, the founders of Airbnb offered users to rent out spare rooms in their apartments. However, the real turning point came when the company began to actively analyze user behavior and realized that many of them were interested in short-term rentals of entire apartments or houses. This adaptation of the product to the real needs of users helped Airbnb find its Product Market Fit and begin rapid growth.

Example: Uber

Uber was initially launched as a service for calling premium taxis, but it soon became obvious that the majority of users were looking for a more affordable and convenient way to get around the city. The company has changed its business model by offering a service for calling regular cars through a mobile application, which has become a key moment in finding a Product Market Fit.

2. Flexibility and adaptability

One of the key features of successful unicorn companies is their willingness to change. Many startups fail because they focus too much on the initial idea or product, which may not resonate with the audience. Unicorn companies, on the other hand, have the ability to flexibly respond to market changes and adapt their product.

Example: Slack

Slack, which we mentioned at the beginning of the article, a popular service for corporate communications, began as an internal communication platform for a video game development company. When it became obvious that the video game would not be a success, the team focused on their communication tool, which, as it turned out, turned out to be much more in demand in the market. This is how Slack found its Product Market Fit, becoming an essential tool for many companies around the world.

Example: Zoom

Zoom was originally launched as a video platform for corporate clients. However, with the growing popularity of remote work and study, Zoom quickly adapted to new conditions, becoming accessible to all users, regardless of their professional activities. This flexibility has helped the company not only consolidate its PMF, but also become one of the leaders in the video conferencing market.

3. Focus on solving real problems

Another important aspect that distinguishes successful unicorn companies is their ability to focus on solving specific and tangible problems for their target audience. Instead of creating products "for the sake of the product", such companies strive to create solutions that make users' lives easier, more convenient and more efficient.

Example: Dropbox

Dropbox has solved one of the key problems of many users — simple and convenient file storage and sharing. At the time of launch, there were many alternatives, but most of them were difficult to use or had limitations on the amount of data. Dropbox offered a simple, intuitive solution that helped it quickly gain popularity and find a Product Market Fit.

4. Prototyping and iterative development process

Successful unicorn companies tend to start with a minimally viable product (MVP), which allows you to test an idea early and get feedback from users. Continuous improvement and refinement of the product based on this data helps the company achieve PMF.

Example: Instagram

Instagram was originally launched as a photo sharing app with various filters. However, the team quickly realized that the key value for users is not filters, but the ability to easily and quickly share photos with friends. The iterative approach to development allowed Instagram to quickly improve the user experience and find its Product Market Fit, which eventually led to massive success.

5. Focus on User Experience (UX)

One of the key characteristics of most unicorn companies is their commitment to a high level of user experience. Intuitive interface, ease of use and simplicity are the main factors that allow companies to stand out from competitors and find PMFs.

Example: Spotify

Spotify has offered its users not just the ability to stream music, but also a user-friendly, easily customizable interface with recommendations, playlists and the ability to share music with friends. This focus on user experience has helped Spotify win the hearts of millions of users around the world.

6. Careful data handling

Unicorn companies actively use data to make decisions, ranging from analyzing user behavior to optimizing marketing strategies. Data allows companies not only to react faster to market changes, but also to understand exactly what works and what doesn't.

Example: Netflix

Netflix was originally a DVD rental service, but by carefully analyzing data on the preferences of its users, the company made a successful transition to a streaming model. Today, Netflix uses sophisticated machine learning algorithms to offer users content based on their preferences, which has become a key factor in the company's success.

Challenges the company will face on its way to PMF

  1. Lack of market data. At the start, companies often face a lack of reliable information about the real needs and problems of customers. Mistakes at this stage can lead to the creation of a product that will not be in demand.
  2. Lack of sufficient feedback. If a company does not receive enough feedback from users or does not conduct research, it may not notice that the product does not meet the needs of the target audience.
  3. Competition. In highly competitive industries, achieving PMF can be more difficult because other companies already offer solutions in the market. Differentiation and the unique advantages of the product are important here.
  4. Problems with scaling. Sometimes companies find PMF at the level of small groups of users, but face difficulties when trying to scale success to a wider audience.
  5. User retention. Even if the product meets the needs of the market, companies may face problems retaining users. A high level of churn may signal the need for additional product improvements.

The problem of many companies working with AI

AI startups often face special challenges when searching for PMFs. One of the main problems is too narrow a niche or the specificity of solutions. For example, AI products may be focused on complex tasks that are not clear to all potential users.

The issue of trust in technology is also important. Many companies developing AI solutions face the problem of distrust from users, again due to the complexity and unpredictability of the algorithms. This requires additional efforts to explain and educate the audience.

The tactics of successful startups working with AI include the following steps:

  1. Focus on solving a specific problem. Successful startups first identify a clear and pressing problem, and then offer an AI-based solution that is understandable and useful to the target audience.
  2. The simplicity and accessibility of the interface. AI technology can be complex, but the interfaces through which users interact with it should be simple. A good example is ChatGPT, which hides the complexity of algorithms behind an intuitive chat.
  3. Product adaptation based on reviews. Constant interaction with users and adaptation based on feedback helps to improve the product and find PMF.

Why look for a Product Marketing Fit at all?

PMF is a key factor in the success of a product on the market. Without it, the company risks spending a huge amount of resources on developing a product that will not be in demand, or will face problems retaining customers. If the product finds its place in the market, the company can count on stable growth, positive feedback from users and increased revenue.

However, it is worth remembering that PMF is not an endpoint. For example, PMF ChatGPT can be considered as an advantage for a certain category of users, but not for everyone. Some people find it extremely useful for everyday tasks, while others believe that the product still needs to be improved. This is controversial: is PMF the ultimate goal or should the product continue to evolve even after it is achieved?

Conclusion

Finding PMF is a difficult but important stage in the development of any product. Most startups close down without finding their market match to the product due to a banal lack of funding, which is why it is important to spend resources on finding their PMF already at the first stages of product implementation. PMF requires in-depth market research, close interaction with users and continuous improvements. 

For a more in-depth study of the Product Marketing Fit topic, you can find a number of useful resources:

  • Eric Rice's book "Lean Startup", which describes the process of creating products using MVP and hypothesis testing.

Several Youtube channels that will help you better understand the topic of PMF search: 

  • Product School is one of the largest product management training resources. Here you will find materials about PMF, as well as about product management and business growth. Videos are often presented 
  • Mind the Product is a channel where the materials of the world's largest conference for product managers are posted. There are detailed discussions on the causes of product failures, market needs analysis, and PMF search. 
  • Productized is a resource with lectures and workshops from leading product experts. Here you can find in-depth discussions on how to achieve Product Marketing Fit and manage successful products. 
  • Neil Patel — His channel covers digital marketing and product management extensively, including practical tips on achieving PMF. The videos are short and informative, which makes them suitable for quick study of important topics. 
  • An article about dynamic PMF in modern business from the channel "Cards, money, KPI"
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Егор Болконский

Oct. 21, 2024 14:21