Product market fit (or PMF) is one of those terms in the tech world that is constantly talked about and written about. Sometimes when a term becomes so universal it loses its impact. We stop thinking about exactly what it means and what we should do about it. I think there is a need for more definition and action around the subject.
I was talking on a panel at Saastock recently about why more European SaaS companies don’t reach scale and global success. I thought a good deal about this question and the single most important reason I could come up with was start-ups spend too much pre PMF product and then don’t spend enough post PMF.
This starts with a definition. Most definitions (including some of my own) are too vague and leave too much wiggle room. For PMF to be useful it needs to be defined in black and white terms. It also needs to be a high bar.
PMF starts with having clarity in your value proposition, your pricing and your target customer segment. Once these are in place you need to demonstrate clear evidence that they are aligned. You do this by having customers responding to you value proposition, agreeing to pay as per the pricing schedule and signing a contract to set it in stone. Once you have a representative group of customers doing this within your defined segment then the general thinking is that you have reached product market fit.
But the more I think about it, I don’t think this is enough. It is too open to interpretation. The bar is not set high enough. I want to imagine a really really high bar covered in sharp barbed wire and wired up to 500 volts of electricity. What does that look like?
I want to see a representative group of customers. One or two customers may just be lucky or the result of pre-existing relationships. You want to see enough customers to demonstrate a trend and also so you can cross-reference to identify recurring themes. As a general rule of thumb I believe the number has to be in double figures.
Can’t live without you
I want to see a level of dependency being established with the customers. The product should address a real need not a curiosity. You want to hear customers already finding it hard to imagine a world without your product and wondering how they survived before you came along. There should be a clear and direct link between the product and the success of their business.
I don’t want to hear the customer talking in a more promiscuous way. That they are taking a look across the market, looking at the product in a more experimental way and are not yet ready to settle down to a long term commitment.
Time tells you a lot
Given that this will be an early stage business, customers are unlikely to have been using the product for any length of time. But even a few months is so valuable as compared to customers who are running some kind of pilot or in their first couple of months. Time gives you dots to connect.
What you want to see is customer satisfaction and dependence trending up month on month. In the early stages, the best proxy for this is user adoption and user engagement. If more people are using the product and, of those people, using it increasingly over time then that is a pretty clear sign of growing dependence. To identify these kinds of usage trends I think the customer needs to have been using the product for a least three months and ideally six.
The commercial commitment also tells you a lot. Has the customer signed a contract and for how long? Have they signed up to a pricing schedule that is at or close to the standard pricing being proposed by the company? An annual contract reflecting standard list pricing is what you want to see. Anything else compromises the quality of these customer relationships.
Know your market
The customer segment needs to be clearly defined. But at the same time it needs to be big enough to be able to generate significant value in itself and also act as a beachhead into adjacent markets over time. You could argue that a barber shop may have product market fit in many respects. But its market of say men within a ten minutes walk is simply not big enough to generate meaningful value and it does not provide access into adjacent markets.
So here’s my real PMF checklist:
[x] At least 10 customers paying at or close to standard pricing and on annual contracts
[x] Majority of customers telling you there is a level of dependency on the product; that there is a direct link between the product and the success of their business
[x] Majority of customers have been using the product for at least 6 months and there is clear evidence of growing user adoption and engagement
[x] A market segment that is clearly defined and big enough to build meaningful value
Having all this evidence in place is a high bar that I think represents ‘gold plated’ product market fit; anything less could be considered an imitation.
I see start-ups time and time again raise money and then spend it far too freely before PMF is in place. This generally results in inefficient spend and performance that falls below plan. This in turn leads to major challenges in raising the next round of funding and the company going into a kind of holding pattern that it might never recover from.
The pre PMF stage requires allot of discipline. You should be running a lean organization and the founding team should be doing most of the work themselves. The longer you make the cash last the longer you have to get to PMF. You need to be very clear about the market you are going after, be listening to those customers and constantly iterating the product based on their feedback. You need to be flexible and prepared to pivot. It all takes time and discipline.
But once real PMF has been reached that’s the time to double down and be aggressive. PMF means you should be able to scale efficiently. The limiting factors become how much money you have raised and how large your market is. You are dealing with a different set of ‘scale up’ challenges like how to hire the right people and bring them up to speed, how to enter new markets and how to support an ever growing number of customers. This is the time to raise more money than you think you need and be bold in the knowledge that you have solid foundations in place.
Posted by Jos White, Partner at Notion Capital.
This blog was first published on Medium and the original article can be found here.