5 Steps To Achieving Product Market Fit And The 40% Rule

It is well-known (and backed by statistics) that over 90% of startups fail. So, out of 100 startups, only 10 will survive for longer than 5-10 years. To be more exact, 20 of them won't even make it a year, and 50 will fail within the first 5 years. Why does this happen? Are the founders to blame? Yes and no. On the one hand, they are usually talented individuals who want and can create brilliant products. On the other hand, they often make the same mistake: they overlook PMF - Product Market Fit.

Why does PMF matter so much?

First, let’s start by giving it a definition. Simply put, a good PMF is a scenario where your product satisfies the needs of a specific group of consumers. In other words, it's when the product solves a problem that people face, and they are willing to pay to use the product, and even better - are willing to recommend it to others. PMF is the foundation of any startup. Without it, even the most technically advanced product with great potential is doomed to fail.

What do I need to achieve a good PMF?

To achieve good PMF, you only need to consider 3 criteria:

• Value Proposition
• Consumer communication channels
• Monetization
  

But let’s look at each one of these in detail. At the end of the day, we are all here to build great products right?

Value proposition

The value proposition is what you offer to the consumer through your product. The value proposition should be clear, well-formulated, and easy to understand for the wider audience. The product should either solve an important problem for the audience or satisfy a specific need - that is the golden rule of value proposition.

Consumer communication channels

Consumer communication channels are the ways by which you deliver your product to your target audience. They have to be convenient, efficient, and economically viable.

Here are some tips for choosing the best communication channels for your audience:

• Keep in mind the preferences of your target audience. Where do they reside in the digital space? Is it email, Twitter, or Facebook, or is it an offline post subscription?
• Diversify the channels you use. This will help you reach a wider audience.
• Test and analyze how effective the channels you choose are. This way you can track which ones yield the best results at the lowest cost.

Monetization

Monetization is the way a company earns revenue from its product. It should be efficient and sustainable. The value proposition and communication channels play a crucial role in product monetization, and if your consumer is convinced of the value of the product and the communication channels work efficiently, they will be more inclined to spend their hard-earned money on your product. To achieve good PMF, it's important to make the consumer want to buy the product, to make sure this purchase brings them happiness. Then, they will surely recommend the product to others - which will be evidence of good PMF.

5 Steps to Achieving Product Market Fit

Now that we’ve dealt with the main criteria for PMF, let’s check out the steps that will lead you to creating a product that truly fits the market.

Step 1. A good business model

This is the key to ticking off the first criterion. A good business model will not only help you identify and formulate a good value proposition but will also help you understand through which tools and actions you can convey the value to your potential consumer.

Tip: Use the Business Model Canvas template. The Business Model Canvas is a visual tool that helps companies structure their business plan. It consists of nine blocks that represent the main components of the business model.

Start with market research, find who your audience is, and what their needs and problems are. Then, highlight the key advantages of your product. What specifically makes your product unique, unlike other competitors?

Continue by formulating a clear, direct, and simple value proposition, so that you can potentially reach a wider audience and still build that connection. Bonus points if it’s memorable!

Wonder what a good value proposition looks like? Here’s a great example from Loom:

Next, now that you can consider your target audience and the value you bring with your product you can go through the Business Model Canvas blocks one-be-one to create an overall experience that is your business.

Here are some tips for when you decide to fill out the blocks:

• Specificity: Avoid general phrases and abstract concepts.

• Persuasiveness: Use vivid images and persuasive phrases to create the impression for consumers that your product or service can solve their problems.

• Measurability: Whenever possible, use measurable indicators (metrics) to demonstrate the value of your product or service.

  
  

Perhaps, the most important thing is to constantly revisit your business model to account for changes in the audience preferences and needs. Often, the first version of the business model is just a hypothesis - it may work or it may not. Therefore, it's very important to continue experimenting and testing different options. Segments will change and evolve: this is normal. The worst thing is when a founder doesn't listen to their customers and acts based on their ideas rather than customers’ real problems and needs.

Step 2. Market validation

This is a very important step that will help you maximize your chances of success. Before starting product development, it's important to answer the following questions:

• Does the problem your product solves exist? (1. Value proposition)
• Can you attract potential customers to your product with minimal costs? (2. Communication channels)
• Are your potential customers willing to pay for your product? (3. Monetization)

Some entrepreneurs fall in love with their idea (understandably so, we’ve all been there) and forget to test their product before launch which inevitably leads to failure. To test the market, you can create a landing page with your value proposition and unique product features, and add a button that leads to an email subscription (so you can collect those email addresses later on). Buy online ads to drive traffic and analyze your conversions. Done.

A landing page gives you the opportunity (and ability) to really perfect your first impression on your potential customer. In order to make it effective, your value proposition needs to be clear as day. Talk about the problem your product solves and present a solution that is bound to make your clients’ lives better and easier. Once again, the landing page has to be simple and easy to understand to drive a potential customer’s attention to all the right places (such as leaving his contact info). A great example of this - Ahrefs (pictured above).\

A good landing page conversion rate is 5%. If your percentage is lower, something needs to change. Try changing wordings or blocks with offers, and if you get no conversions at all, perhaps you should go back to step 1 and once again reconsider your business model and value proposition. Maybe the problem or need you are addressing is not as concerning to the consumer as you might have anticipated. It happens!

Step 3. Audience interviews

Now it’s time to do audience interviews. Reach out to those who have left their contact information and organize 5 to 10-minute calls. These interviews are important no matter your conversion rates, they still give you an insight into what works - and what doesn’t.

If you see low conversion rates, interviews will help you understand and come up with ideas on how to improve the product or service to increase its attractiveness to consumers. On the other hand, if conversions are high, these calls will give you a manual on retaining and increasing the number of satisfied and interested customers.\

Lost on what to discuss? Here are a few things you might want to ask your customers:

• How did you hear about the product? (Channels)
• Why did you decide to subscribe? (Value proposition)
• Are you currently paying for an alternative? (Monetization)

These interviews are an opportunity to learn, not sell. It’s the perfect time to listen to your audience and ask questions to gather facts instead of opinions. Use your discernment and don't fall into biases about your product. It’s also not the time for solutions just yet!

Step 4. Product Creation and Customer Base Building

After gathering all that information on what works and what doesn’t for your audience you can move on to the next step - creating the product and building your customer base.

When creating the product, it's important to start with aMinimum Viable Product (MVP).

An MVP is an early version of the product that has enough features and capabilities to attract early adopters. Audience feedback will provide insight into which specific feature needs to be added to the product (or removed). This feature should address the most pressing problem or need of the audience, and the product itself should be simplified as much as possible and given to your audience to test.

While you are creating the final version of your product, keeping an eye on creating a customer base is just as important. Customers won't come on their own, so alongside product development, you should be testing various communication channels to understand which ones are most profitable for you.

A systematic approach is key.

**For that, you can use a Bullseye Framework: \

Here you can choose the main 3 channels out of this list and write them in the middle of the diagram. Then, pick 6 more in the next round. Once you test them, cross out the ones that don’t work and do so until you find the ones that do.

Step 5. Analyze results

Once the product is launched, analyzing how effective it is is key. This will help you understand what works and what doesn't, and give you the tools to make necessary changes. Even if there were many conversions at the second stage, it's not a given that all of them will start paying you money.

One of the most important tools for product analysis is the sales funnel–a model that describes the user's journey from the first contact with the product down to the purchase. Analyzing the sales funnel helps identify "gaps" that hinder users from progressing to the next stage.

Here are a few questions you can ask yourself when analyzing the sales funnel:

• How many users visit your website or app?

• How many of them made an account?

• How many of the registered users made a purchase?

• How many of the buyers became repeat customers?

  
  

Answers to these questions will help you understand where people drop off in the sales funnel and what steps you can take to improve its effectiveness.

Measuring PMF: the 40% rule

Now, after completing all 5 steps, you can try to measure whether you have achieved a good PMF.

One way to determine this is to conduct customer surveys. Ask them this question: "How would you feel if you could no longer use our product?" If 40% or more of the customers say that they would be very disappointed: the product solves an important problem for them, PMF is achieved.

If the percentage is below 40%, it may mean that either the product does not yet provide a complete solution to the problem, or the product does not meet the needs of the target audience. If the survey results indicate that PMF has not been achieved, then you need to return to step 3 and conduct interviews with customers again. This will help you understand where the product does not solve the problem well enough, or that the product does not meet the needs of the target audience.

During the interviews, ask customers the following questions:

• What do you like about our product?
• What do you dislike about our product?
• What would you like to change about our product?
• What problems are you trying to solve with our product?
• How much does our product help you solve these problems?

Answers to these questions will help you determine what needs to be changed or added to the product. Or maybe you will have to change the criteria of the target audience. If you decide to make changes to the product, it is important to choose the most important aspects and focus on them. You can use the ICE system to evaluate ideas, where:

• Impact - How much will this change affect users?
• Confidence - How confident are you that this change will be successful?
• Ease - How easy will it be to implement it?
  

To evaluate the ICE of a feature/idea, rate each of these items from 1 to 10, and multiply them together. For example, for the first feature I = 7, C = 6, and E = 5, and for the second - I = 9, C = 2, and E = 2. ICE scores will be 210 for the first feature and 126 for the second.

Ideas with a high ICE value should be a priority!

You can also try other channels for more productive communication with customers. For example, you can conduct a survey or launch a pilot project with a small group of customers. After you make changes to the product or target audience, you need to conduct the survey again to evaluate the results. If the percentage of satisfied customers is still below 40%, then it is necessary to repeat the cycle of changes and testing. The wheel turns again.

The ideal recipe is: return to steps 3, 4, and 5 again and again until the 40% rule (or a convincing LTV:CAC ratio) is achieved.

LTV:CAC

Another way to determine PMF is to calculate the [LTV:CAC ratio](https://www.klipfolio.com/resources/kpi-examples/saas/customer-lifetime-value-to-customer-acquisition-cost#:~:text=The%20Customer%20Lifetime%20Value%20(LTV,is%20a%20signal%20of%20profitability).

LTV (lifetime value) is the amount of money a customer spends on the product over the entire period of its use. CAC (customer acquisition cost) is the cost of acquiring a new customer. This way, you can assess the effectiveness of communication channels and monetization.

If LTV is higher than CAC, it means that one user generates more revenue during product usage than what was spent to acquire them. A good LTV:CAC ratio is 3:1 or higher.

If it’s so straightforward, why do so many startups fail to achieve PMF?

There are many reasons that can explain this issue.

• Ignoring market needs/pains. Many startups begin product development without first conducting market research. They think they know what customers need, but in reality, they don’t.

  
  

• Lack of communication with consumers. Even if a startup has conducted market research, it is important to continue communicating with customers throughout the whole product development process to stay up to date with your customers’ needs. This will also help you understand what works and what doesn't and will help you make necessary changes.

  
  

• Focusing solely on the product without testing channels early on and regularly during development. Many startups focus only on product development and overlook the importance of proper marketing. To achieve PMF, it is important to test various customer acquisition channels and find the ones that work best – for you.

  
  

• Adding new features to replace real progress. Some startups believe that adding new features is a sign of progress. However, this is not always the case. Sometimes it is better to focus on improving existing features rather than adding new ones.

So, PMF is a key component for any startup, and the 40% rule is a simple way to determine whether it has been achieved. Without PMF, a product will not be successful and will become one of the 90% that fail.