Official Tests For Product Market Fit

The only thing that matters for your startup’s success… know if you have it or not.

These tests will allow you to be sure you have the one thing that is crucial for your success or not. If you make the common mistake of thinking you have product market fit and in fact you don’t, your company will 100% fail. These concepts should be used not only to see if you have reached product market fit but they should also be used to continually monitor if you are maintaining it or not.

This in not a guide on what product market fit is or how to find it, it is a guide on measuring having it or not. To learn more general info about the crucial concept of product market fit view my post here on how to obtain P/MF.

Most startups need retention to grow, but not only that it shows how much people care about your product and more importantly, these data metrics don’t lie. Where surveys can lead to false positives, peoples’ actions are the undeniable truth as to what is really happening.

This practice requires you have a large enough number of users and enough time to wait and collect the data. Of course if you’ve been collecting data already you are all set, just open up your analytics crystal ball and look into the past. The amount of users is a judgment call and should be based off of how closely your current users mirror the market you are going after. If they are representative of your large enough market and behaviors will be consistent then you are good to go.

Depending on how many users you acquire, be sure to segment your data. Start by sorting new acquisitions into cohorts based on the day, week or month they started and track what percentage of them you retain over time. You may also want to segment the data further if you have enough users. This will allow you to further see who your best customer is and isn’t. Brian suggests segmenting by sources, usage behaviors or any demographics you think matter in your business.

You are looking for a retention curve that flattens out parallel to the X axis. obviously the higher up the better, but your industry benchmark may be lower.

Alex Schultz is a big believer of this as well and has a great talk that goes over in more detail.

If you have “enough” people that closely represent your large enough target market using your product, then conduct a survey like Sean’s. Enough people will be subjective but always the more the better. Surveys are a smart thing to do when you are small any way you look at it, so utilize this one however early stage your business is.

How would you feel if you could no longer use X product?

“If 40% or more of people say they would be very disappointing if the product is no longer available then its a scalable business of value.”

This strategy works to quantify something qualitative. Sean has worked with many companies and found that this is the sweet spot that has proven to be an indicator of pmf for every one. Surveying your users will always help you make improvements whatever way you look at it. So employ this and take it one step further to find more improvements for your business. (See more on surveys in my article on it here.)

This metric is much more of a monitor of where your P/MF “line in the sand” is moving to and how to reach it. This score allows you to see how your users currently feel about your product. After knowing this you can ask those users what they like and dislike, and this will help you adjust your product in the interest to correct for those likes/dislikes and raise your overall NPS. Companies with a raising NPS can grow as much as 69% compared to companies with a steady NPS, that grow around 6%. If your NPS is declining you can expect revenues to drop by 24%. So this is an important metric to track.

The opening question is: How likely are you to recommend this product to a friend? Allow users to rate 1–10.

After this question you will need to find out what those people like and dislike. This will be from continuing the survey with follow up questions but if possible should also involve data you have been collecting to see what people are truly doing in real life. Are they referring people? Do they understand how to use the features they love/hate? Did they complete the onboarding flow? Knowing what people like and dislike and why will allow you to adjust your business to fit these market needs and boost your NPS.

The illustration below shows you the three groups you have based on the rating of 1–10 they gave. Find the percentage of Promoters and percentage of Detractors, then subtract the percentage of Detractors from Promoters to get your score.

You want to collect this score regularly so that you can optimize your business. The score you get your first time is not as relevant as it is to comparing the rise and fall from two scores at different times.

If you have the resources, gathering data about your competitors NPS scores can allow you a benchmark and see what a good score for your industry is.

All companies vary and will have different experiences with how and when they find product market fit. This example will go over the most common situations with SaaS companies.

If you are a SaaS company you will likely have many more users than B2C before you know if you have PMF or not. This will require more use of software tools in the beginning than other B2C companies. Analytics tools, data fiddling and revenue milestones will be important to finding your sweet spot.

If most of your users are using your product multiple times a day everyday, you most likely have PMF. Just make sure those users truly represent a market that is big enough. If your users are logging in once a week, depending on your product, you most likely are working with a “nice to have” product — this is not the goal.

He states that from $0-$10k MRR you can not typically find PMF.

Don’t get too excited between $10k-$100k MRR, although you have a lot of sales this is a very shaky time. A lot can be shifting and changing that effects the stability of PMF, but if you are “growing a compounded 10% each month this is a good sign.” If not keep tinkering.

$100k-$500k MRR is your product/market fit sweet spot. You likely have it but watch all your engagement metrics to make sure nothing starts to change and fall off. Understand the reason you got to this point and don’t rock the boat with new strategies that aren’t monitored closely because you can lose PMF just as easy as you found it.

Most large orgs widely use the NPS Score and I suggest you do too although the results may be marginal unless you are at scale. If you are smaller, instill the other two tests more heavily with your sales and marketing department. Anytime an account executive is on a call with a client it is an opportunity to slip in a Sean Ellis type questionnaire. Not only can you gather data for that test, you can get 1 on 1 feedback about what improvements to make. For the marketing team, not only should they be tracking Brian Balfour’s retention metrics but retention should be held as the company’s North Star as well.

Do your best to instill the importance of P/MF in all your organization and your company will be sure to pull ahead of the pack.

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