The validation of Product-Market Fit (PMF) is the most significant milestone for a startup. It means proving that the product has reached a sufficient level of development that the market wants to buy it. Before PMF, founders are concerned solely with customer research and product development, but after PMF, they can attract larger investments, ramp up their marketing activities and accelerate the growth of their company. We designed the PMF maturity model as a tool to use when we coach startup founders. It consists of a sequence of nine overlapping activities and milestones that range from the initial planning stage of a startup to beyond the founding of the company and the launch of the product. It was inspired by Steve Blank’s Investment Readiness Level model and is closely related to it.
What do we mean by ‘product’?
Unfortunately, there are varying definitions of what counts as Product-Market Fit. These definitions depend on what is considered to be ‘the product’.
With a narrow interpretation, the ‘product’ is viewed only as the core offer that provides the basic customer value. For Tesla, the core product is the automobile that you buy at the dealership. Viewed in this way, PMF is achieved when users
are happy with the core product’s usefulness and usability.
With a wider understanding, the ‘product’ is considered to be not just the core product, but also the entire ecosystem associated with it, which can include factors such as terms and conditions or the guaranteed availability of updates and
spare parts into the future. This expanded perspective is called the ‘whole product’. For Tesla, the whole product includes its Supercharger stations, because many customers see these as an essential component of the mobility solution they are buying.
Of course, with this wider understanding, validating Product-Market Fit means showing that customers are satisfied with the entire whole product. This can mean demonstrating an efficient customer acquisition process or meeting a specific business metric such as a monthly sales growth of more than 3%. Our PMF maturity model uses this extended approach.
Level 1: Problem-Solution Fit
“Our idea is plausible.”
Problem-Solution Fit is the first step towards creating an innovative product. Achieving Problem-Solution Fit means validating four conditions:
- You have characterized the target market for your planned solution accurately.
- The customer problem you want to solve exists, and the target market wants a (better) solution.
- Your target market considers your product concept to be an attractive solution to their problem.
- There is no immediately apparent barrier to your target market adopting your solution.
Problem-Solution Fit is a plausibility check for your solution concept that you carry out with interviews with potential customers. It is the necessary first step towards Product Market Fit since it makes no sense to start developing a product if you cannot show, even in principle, that there will be interest in it.
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Level 2: First User Experiments
“We are now learning continuously from users.”
The first step in validating an actual product (as opposed tojust the idea of a product) is to get preliminary versions into the hands of test users and to start learning from them. You receive feedback about your users’ wishes, needs and behaviors, and you discover new ways to create value for them. You also conduct experiments to test hypotheses that are critical to the success of your product.
At this early stage, the product is a Minimum Viable Product (MVP). An MVP is a much-reduced version of the final product that is designed for a specific learning goal. The learning process is iterative: each experiment generates the insights needed to create the next stage of the product design. This is what is commonly referred to as the Build
Measure-Learn Loop. As time goes on, the MVPs mature and get closer to the final core product.
Level 3. First Customer Commitments
“Potential customers see the value in our product.”
Startup founders validate customer interest in their product by obtaining commitments from them. The more the commitment costs the customer (typically measured in time or money), the stronger the evidence it represents. Early examples of commitment are:
- Crowdfunding. A successful crowdfunding campaign, for example on Kickstarter
- Letter Of Intent. Companies declare their interest in a proposed new product.
Level 3 is an important early validation milestone because it shows that potential customers can recognize the value your product promises them. On the other hand, if you cannot generate even a small amount of interest with potential customers, then your product idea likely suffers from a serious deficiency.
Level 4: Operative Go-Ahead
“Our core product meets its users’ expectations.”
At the very least, Operative Go-Ahead means that your core product solves your potential customers’ problem and meets their expectations regarding performance and usability. Ideally, you will have found the “secret sauce” that surprises and delights them, so that your solution is now the only one they are interested in.
Operative Go-Ahead also means that you have eliminated any practical obstacles to using your product, for example that it is too difficult to use, or that your customers do not
have the necessary infrastructure to accommodate it.
When only the core product is being considered, Operative Go-Ahead is usually interpreted to be equivalent to
validating Product-Market Fit. However, Operative Go Ahead does not mean the same thing as customer satisfaction.
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Level 5: Political/Psychological Go-Ahead
“There is no subjective resistance to our product.”
In addition to your customers accepting a new product practically, they must also accept it politically and/or psychologically.
Political acceptance is an important factor in large organizations where there may be several people with different opinions about a product based on their own sectional interests. Overcoming political barriers to adoption can be challenging and may require a change to the business model.
Individuals can exhibit psychological resistance to an unfamiliar product. This occurs when the product conflicts with its users’ beliefs or habits. One of the reasons that Segway failed in the early 2000s was that people thought it made them look ‘dorky’.
Level 6: Business Go-Ahead
“The switch to our product is justified.”
Business Go-Ahead means that it makes sense for customers to purchase the product from an economic point of view. Like Level 4, this milestone has both a positive and a negative aspect.
On the positive side, Business Go-Ahead means your customers believe that the product is sufficiently beneficial
to them to justify purchasing it. They measure their benefit in different ways, for example by calculating their Return On Investment or by the extent to which your product helps them to achieve a specific objective.
On the negative side, there must be no remaining business related obstacles to your product, for example that the terms and conditions are unacceptable or that it does not deliver sufficient value to them.
Level 7: Customer Satisfaction
“Customers confirm they are happy with our product.”
Measurable customer satisfaction is the first reliable indicator of Product-Market Fit for your whole product. Here are two popular approaches:
- Net Promoter Score, which is based on the question, how likely is it that you will recommend this product? ▪ Sean Ellis-Test. PMF is good, if at least 40% of customers say they would be very disappointed if they had to stop using your product.
- Unlike the levels below them, PMF validation at Levels 7, 8 and 9 can only begin after you have launched your product on the market.
Level 8: Efficient Customer Acquisition
“Our marketing process is scalable.”
Initially, you may have to invest a lot of personal effort in marketing. However, manual customer acquisition is too expensive, and it is also not scalable. Instead, you need a customer acquisition process that can generate new customers reliably, continuously and automatically.
Here are two attributes of an efficient and effective customer acquisition process:
- The ratio of Customer Lifetime Value to Customer Acquisition Cost exceeds a predetermined threshold, typically in the range of 3 to 5.
- It is scalable, in other words, increasing the marketing budget by a certain amount leads to a proportional increase in sales.
Investors are interested in this milestone because they want to be able to grow the startups in their portfolio by injecting money that will be used to ramp up their marketing activities.
Level 9. Metrics That Matter
“We can show proof of consistent success.”
The strongest proof of Product-Market Fit is achieved when you can show consistent success regarding one or more business metrics such as monthly sales growth or customer churn rate. At least one metric should be a so-called North Star Metric. North Star Metrics measure the total customer value provided by your product. For example, a North Star Metric for Uber could be the total number of completed rides per month, because a completed ride represents the value of Uber’s service to both drivers and passengers.
Getting a product from an idea to Product-Market Fit is a long, challenging and often frustrating task. However, your reward for succeeding is a product that will allow you to grow profitably and thus build a company of lasting value.
ABOUT THE AUTHORS
Jana Görs and Graham Horton are the founders of Zephram. They also teach the startup engineering courses at the University of Magdeburg and have been lecturers in our Startup School and Accelerator education programs for years.
This article contains excerpts from the online workshop „Problem-Solution-Fit“, they gave at Startup School in May 2020.
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