Market Fit or how to find point G at a startup

Business founders seek to acquire as many users as possible, but is it really a problem of their growth in lack of customers? Funders often rely on their own guesses, ignore feedback and can easily “miss” the point of no return, followed by the death of the project.
At the same time, the real problem lies not in the size of the base, but in Product / Market Fit (PMF). If you throw all the power to increase users and do not get feedback, this article is for you.

We took the publication of start-up development expert Pierre Leshel as a basis and adapted it with our own examples and comments. So, what lies behind the mysterious concept of Market Fit?

What is PMF?
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When you have a product that meets the needs of a specific market, and without which your audience will lose a lot, this is called a Product / Market Fit (PMF).

So says Mark Endressin - a well-known investor and entrepreneur, co-founder of the largest venture capital fund in the field of IT Andreessen Horowitz. It was he who coined this term to determine the viability of a startup. We did not find an adequate translation in RuNet, so we keep it in the original. In the free interpretation - "a happy union of the product and the target market."

The basis of the hypotheses are three parameters:

Customer: you clearly know your customers who need it.

Problem: they have “pain” - a need or a situation that you can solve.

Solution: they use your product, are willing to pay for it.



In other words, a sufficient number of people are willing to pay for your decision. What exactly is the quantity and how to measure it?

At the heart of the marketing strategy is the product. The verification of the business model revolves around the question “Does the market need a particular product or service and can it be profitable?” As soon as there is a positive response, you can set about developing a marketing plan.



Here's how to portray the startup path relative to PMF:



This is a sketchy cycle from creating a value proposition to the appearance of competitors, after which everything is from the beginning. Competition implies a periodic “upgrade” of the value proposition when it is necessary to “twist” the capabilities of the product itself or its associated service.

PMF Myths

Mark Endressin warns against several dangerous delusions:

# 1 Product market fit can be achieved with the help of "chips" and point corrections like changing the color of the CTA button. This does not happen quickly.

PMF number 2 is easy to measure on a single rule. It all depends on the size of a particular market: about 10 customers will be a sign of PMF, and about 500,000 will mean failure.

3 PMF can not be lost. In fact, in business, especially in large markets, things can change drastically. And you need to keep your ears open, so as not to lose not only PMF, but the entire business. Moreover, this is not a raider seizure a la 90s, but a change in technology solutions. So it was with the producers of audio cassettes and film cameras. People didn't stop listening to music and taking photos. Just the way has become different. And those who did not catch the coming changes in time disappeared from the face of the Earth. Read more about the ups and downs at the end of the article.

No. 4 PMF insures against competition. Not here it was) Competitors can easily copy the product, add new features to it and pick up your audience.
Look at the callback market (callback services). Three years ago CallBackHunter appeared and since then 20 more clones. In fairness, almost every competitor has “finished” something of his own. And where would CallBackHunter be today if they stood still and did not turn from a simple “dialer” into a powerful analytical tool?

Concentration on the right things.

The "father" of growth-hacking strategy, Sean Ellis, describes PMF as the first step towards building a company.



The first is the creation of a value proposition. There is no point in long-term plans, until there is a clear message - what do you do and for whom, and why should consumers choose you. If there is this understanding, we launch the product and develop a plan to attract users (purchase):



Mark Endressin advises making a landing page and testing channel 1-2. Only then, if there is a stable increase, expand the sources of lead generation. For a start, PPC (contextual advertising) and Social media (social media targeting) are suitable. They will give an understanding of the response from the audience (conversion of the advertising campaign and landing page). The remaining methods are consistent, as the product “matures”.

How to measure PMF

Sean Ellis uses a stressful approach: ask current users how they would react if they have lost access to the product. If at least 40% are very disappointed, the product has reached the level of product / market fit. This is the easiest way; you just need to provide for the survey a sufficient sample of users. Help with specialized services (Simpoll, SurveyMonkey, etc.)

Example KISSmetrics:



Empirical method

You can always feel when product / market fit is missing. Customers say "this is too expensive", word of mouth does not work, the sales cycle is too long, most of the negotiations with the leaders do not close for sale, the target page bounce rate is off scale (low conversion). All these are clear signals - something goes wrong.
And vice versa, when the market fit is up to par, you do not have time to hire new sales managers and technical support operators, media editors call you for an interview, you are interested in steep investment funds.

And one more indicator. Net Promoter Score (NPS) is the “referral” index of your product. In other words, as far as users are willing to recommend it.



And finally, financial indicators:



The investment fund K9 Ventures uses the following scheme:



However, there is a dependence on other metrics (ARPU, LTV), as well as on the size of the market.

Further you will see several examples of business ups and downs regarding the Market Fit.

Airbnb

International Home Booking Service - one of the pioneers of Growth hacking. At one time, they invented a brilliant move when they “built in” into the Craigslist ad portal and received hundreds of thousands of users for free. And here we will tell you how they "hacked" word of mouth.

According to the rules of the AirBNB referral program, everyone who recommends the service receives $ 25. The same amount gets the one who was invited when paying for the reservation. However, the program worked very poorly (only 5% of invites from the total number of users and conversion of 15% of invites into an order).
Set the task to increase the number of customers who recommend the service. To do this, restart the program on the site, in iOS and Android applications (with the ability to activate the referral code from a mobile device). To understand the effectiveness, we set up conversion tracking at every stage, from sending invitations to housing rentals, in total more than 20 events.

The main feature is a personal invitation with a code. Especially cool it looks on the smartphone. At the beginning, the user receives this message:



And then, when clicking on the link and downloading the application, this is the screen:



Well, and, of course, the important role played by tracking behavioral factors and segmentation. The client sees the referral program advertising at the moment when he is most likely ready to invite friends. In addition, two different approaches in emails with invitations. In one case, it is proposed to earn money, and in the other, to give $ 25 to your friend (altruistic letters worked better).

Results: an increase in the number of sent invitations (invites) by 264%; increase in the conversion of invitations to a subsequent order - by 497%. Thus, the AirBNB team completed the scheme that leads to Market Fit: problem definition - goal setting - definition of metrics - product creation - testing - further product development - experience scaling.

Slack

This application for organizing teamwork is used by 750,000 users daily. Among others, it stands out overgrowth and crowns monsters like Trello and Basecamp. Here we will not describe the merits of Slack, but turn your attention to the results of one independent study , which was conducted by the well-known marketer Hiten Shah. In social networks, he called the audience (731 respondents) to answer a few simple questions. The key - "What would you feel if you were" cut off "the ability to use Slack?"

Results:



51% are very upset;
39% are a little disappointed;
10% are not upset (do not use the application).

Remember, we talked about 40% of fans using the method of Sean Ellis? So, Slack - 51% (!). They consider the application as the main source of internal communications in the company, and communications are the heart of any business. This is an extra level Market Fit!

Hiten Shah also identified the following user segments:

1) They use the app daily, they are aware of all the possibilities, they follow the updates;
2) Work in conjunction with other products, note the lack of functionality;
3) They do not see significant differences from competitors; they use Slack only as a messenger (instead of Skype, for example) most often for personal use.

Such segmentation helps to understand who is using the product, what should be “screwed up” in the functional and where to go further. And in terms of marketing strategy, create personalized advertising campaigns. Each audience has its own message. For example, for fans - new opportunities, and for the third group - chips and benefits of the application in comparison with competitors.

We will not dwell on unsuccessful examples for a long time, for sure you have already heard these stories - Polaroid, Kodak, Nokia and so on. At one time, each of these companies considered itself the unshakable market leader, had billions of dollars in turnover, a network of branches in dozens of countries around the world. And then everything collapsed ...

Commentary by the head of Yagla.ru Alexander Alimov

In conclusion, a little about my own experience. A few years ago, we were faced with a "ceiling" in return from the campaigns in Yandex Direct, both our own and client ones. “Shamans” with advertisements, auto bidders set up for bid management, developed their own campaign management system for over 10,000 Giga Direct key requests, but this didn’t give the effect we expected. How to get the growth of conversions not by 30-40%, but several times?

As a result, they came to the conclusion that it was necessary to work with the landing pages, because there, as in the Bermuda triangle, the whole effect of Yandex.Direct optimization disappeared. What is the use of reducing rates when landing conversion is 1%? We collected user feedback with the question "why do you not leave a request on the landing page?" In the first place - the negative of the discrepancy between the request and the proposal. Yes, the company provides a specific service or sells a specific product, but the user does not see it, you have to dig in there and where.

They wrote a script that replaces the headings and part of the text for requests from the context, in the very first tests received a conversion increase of 44%. Disadvantages - complicated setup and management of results, manual recalculation of statistics in Google Analytics - on projects with more than 1,000 key queries it takes several days.
The next step was the Optimizely A / B testing system - it is already more convenient, but again, a lot of time for setting up substitutions for subgroups of requests. Plus, the current campaign in Yandex.Direct needed to be specifically “dopilivat” (each group of requests in a separate campaign).

And only after that, having stuffed cones on their own experience, they made the Yagla dynamic content system . In more detail about how it allows you to increase the return on contextual advertising by 200% with specific examples you can read in this article . Thus, we have come from solving our own “pain” to scaling to the market. At the same time, the Market Fit project is still ahead)

Share your comments in the comments and what you think about all this.