For a startup to succeed, achieving product-market fit is critical before you spend millions of dollars marketing your product. The term "product-market fit" was originally popularized by Andy Rachleff, the co-founder of Benchmark Capital. According to entrepreneur and investor Marc Andreessen, product-market fit means "being in a good market with a product that can satisfy the market."
User growth is not product-market fit.
It is easy to mistake customer growth for product-market fit. Growth is easy to buy, especially if you are lucky enough to raise a boatload of money based on your reputation and idea. What is critical to sustainable growth is driving real customer engagement and retention. With real product-market fit, you will see material customer growth without spending significant marketing dollars because the word of mouth for your product is so powerful.
BranchOut was a professional networking product that was launched in 2011 on the Facebook platform. At that time, it was possible for an app to leverage Facebook's social graph to spam a user's friends. BranchOut grew to 33 million users and raised $49 million in funding. However, they had no real engagement and retention. Once Facebook shut off access to their social graph, its user growth lost steam leading to an ignominious ending.
What does product-market fit look like?
You will know it when you have achieved product-market fit. Customers will return your calls, your sales cycle will be short, the press will be contacting you to write about your hot product, and, most importantly, customer engagement and retention will be high.
It took Netflix 18 months to find a repeatable, scalable business model that worked. The original idea didn't work, and users didn't rent subsequent DVDs after the first set of free DVDs. But hundreds of failed experiments later, they finally tested the combination of no due dates, no late fees, and subscriptions that ultimately ended up working. Within days of testing, they knew they had a winner. Engagement soared and churn went dramatically down.
How to achieve product-market fit.
Having a clear target market for your product is critical to achieving product-market fit. The narrower the market that you focus on initially, the better. This is contrary to what most startups want to do since they believe that targeting a broader market will maximize customer acquisition. However, a narrow customer focus will ensure that your messaging, marketing efforts and feature set are highly tuned to your customers' needs.
OfferUp is a top mobile shopping app and competitor to Craigslist that launched initially only in the Seattle market. They leveraged Facebook advertising to target users in specific zip codes in Seattle. In addition, they focused initially on women since they are the primary shoppers who like to put up items for sale and make purchases. They saw great engagement from female shoppers in the Seattle market, which allowed them to then raise the funding needed to expand to additional markets nationwide. Today, OfferUp is a top 50 app in the App Store and has raised $380 million in funding.
Focus on engagement and retention.
During your product iteration process, it is critical that all your focus for product development is around driving higher engagement and retention.
To measure engagement, track your daily active users (DAU) and monthly active users (MAU). The DAU/MAU ratio is a measure of the frequency of user visits during the month. Usually, apps over 20 percent are considered to be good, and 50 percent or more is world-class (Facebook falls into this category). You should also measure critical user activities that are representative of active engagement (e.g., how many people are creating or contributing content as opposed to simply logging in).
Retention is an even more important metric than engagement. With high retention, you will have more users using your product for a longer period, which will drive strong word of mouth and user growth.
To measure retention, track daily cohorts of users and see how many are returning on day 1, day 7, and day 30. To be a top 5000 app, you need to see 40 percent of users returning on day 1, 20 percent on day 7, and 10 percent on day 30.
As a general rule of thumb, you should give yourself a good three months before deciding whether to pivot to a different idea if you are not seeing good retention. You should spend time really understanding if there are certain aspects of your product that users liked, and pivot around it.
For example, Instagram started as a social check-in app called Burbn. The founders discovered that its users didn't really care much about telling their friends where they were. However, they constantly shared pictures about the places that they visited. The Instagram team "basically cut everything in the Burbn app except for its photo, comment, and like capabilities. What remained was Instagram," said Kevin Systrom, founder of Instagram.