The Elusive Art and Science of Finding Product/Market Fit — Part II
Written by Harpal Singh; Last updated: December 11, 2022
4. P/MF Diagnosis
5. P/MF Root Cause Identification
6. Root Cause Actions
7. P/MF Council
4. P/MF Diagnosis
In Part I of this guide, we explored various stages of The Startup Lifecycle and basic concepts related to Product/Market Fit (P/MF).
Let's say you are in the Problem/Solution Fit stage i.e. you have a fair amount of customers using your product on a somewhat regular basis. For a consumer startup, this could be a couple of thousand users and for a B2B startup, this could be tens of pilot or paying customers.
We will begin by conducting the P/MF diagnosis.
👉 The purpose of P/MF diagnosis is to understand the state of your product and identify the root cause of not having Product/Market Fit.
The state of your product is defined by the value of your product in the eyes of your customers and how they are using it. The root cause is defined by the critical point of failure holding you back from achieving the Product/Market Fit e.g. a weak value proposition.
P/MF Diagnosis Steps
The P/MF diagnosis is an essential step to understand and align all stakeholders on the real challenges impacting P/MF. The depth and breadth of the diagnosis will vary depending on how much you already know with absolute clarity.
The P/MF diagnosis process is best carried out by the founders themselves as it needs someone who has a holistic view of the current state of the product and the business. If it's not feasible, the next best person would be a senior leader like a VP of Product, Design or Marketing.
Irrespective of whoever leads the initiative, it's vital to keep all the key stakeholders informed of the progress and the process to get their early buy-in. It should take anywhere between a few days to a couple of weeks to complete the diagnosis. Some of the activities can be done in parallel to save time e.g. arranging customer interviews while analysing data.
Let's look at each step in depth below:
4a. Data Analysis
The objective of this step is to extract insights and patterns from product usage and customer interaction data. You are trying to understand who's using your product, where they are coming from, what do they want and what's keeping them.
You need to identify the right questions to ask before diving into data.
👉 It is far more important to ask good questions than dissecting every single source of data.
Anything that helps you to get a full picture of how customers are using the product is a good question to ask.
🎬 VideoCo Data Analysis — Example Questions
- How are people using the product?
- Where they are coming from?
- What's their profile?
- How are they using the feature A?
- How often are they using feature B?
You can find most of this information from your product analytics tool like Google Analytics, Mixpanel, Amplitude etc. Some of these tools allow user journey and funnel analysis, which can be helpful in answering some questions like drop-off points, power users behaviour, acquisition path etc. You may also need to look at internal dashboards and sales and revenue reports to get some of these answers. An in-house data analyst could be really helpful for this step.
4b. Leadership Interviews
After you have completed the data analysis and have the answers to your questions, the next step is to conduct one-to-one interviews with each member of your leadership team to understand their perspective on the state of product and business.
You are effectively taking their inputs to do a gap analysis between the current state and the desired state of the product and business. You can utilise the data collected from the previous step to facilitate the interviews. The idea is to get their personal view, not the collective group view.
👉 The interviews should cover business model, pricing, customers, product/market fit, strategy, assumptions, challenges, team, revenue and competitors understanding tailored to their job profile.
When conducting the interviews, please note:
a) The interviews are for external assessment of the opportunities and threats facing the company and the competitive environment in which you are operating. It's not an internal assessment of the processes between teams, how they collaborate, company culture or hiring.
b) The majority of the discussion should focus on the big picture of the product, market, competition and the business. There is no need to go to the team or individual level i.e. how one's job relates to the bigger picture.
🎬 VideoCo — Example Interview Questions
- What's their understanding of P/MF?
- How do they define the product?
- What's their view on the market opportunity for VideoCo?
- What are the biggest risks for product adoption?
- Which acquisition channels should the company focus on?
4c. Customer Survey and Customer Interviews
The third step is to validate and enrich the insights you have gathered from data analysis and leadership interviews. You can do this via quantitative survey or qualitative interviews with your existing customers. Both survey and interviews would be ideal.
The survey needs to be short to elicit higher quality and a higher number of responses. It can have around five questions, out of which two can be open-ended questions. The question recommended by Sean Ellis to find out what percentage of users will be very disappointed if your startup or product disappeared tomorrow is a good one to include in the diagnosis survey.
🎬 VideoCo — Sample Survey Questions
- Why do you use or not use VideoCo?
- What can we do to improve VideoCo for you?
- How would you feel if you could no longer use VideoCo? a) Very disappointed b) Somewhat disappointed c) Not disappointed d) N/A - I don't use VideoCo
You need to get at least 100 responses for a consumer product for this to be useful. For a B2B product with a handful of customers, you can skip the survey and focus on qualitative interviews instead.
The customer interviews are about digging deeper on top of the information you have from the survey. You are looking for things like:
Motivations for using / not using the product.
Key benefits of the product in their eyes.
How they use the product and the features they find most valuable.
Their needs, tech savviness, buying / discovery process, what they read, watch etc.
4d. Product Value Matrix
This step is about creating a Product Value Matrix. The matrix highlights the most valuable parts of your product in the eyes of your existing users, as shown in the diagram below for our hypothetical startup, 🎬 VideoCo.
4e. Lean Canvas
By this step, you would have formed a good understanding of your product, market, competitors and the health of your business. Now, you need to bring it all together by pulling in the key stakeholders and leadership team to discuss and fill in a Lean Canvas by Ash Maurya (also referred by some as the Product/Market Canvas).
The Lean Canvas is an adaptation of the Business Model Canvas by Alex Osterwalder and is far more effective for this particular exercise. It's an excellent way to organize and visualize the vast amount of information gathered earlier in the process for the key stakeholders to understand and act upon.
The Lean Canvas will help you identify the root cause and starting point for addressing P/MF. This collaborative exercise shouldn’t take more than 90-120 mins. The canvas should be filled in the marked order with information backed by data and insights, and with assumptions where both are missing.
Lean canvas Exception — Marketplace Startups
Two-sided marketplaces are an exception for this step. If you’re mapping out a two-sided marketplace on the Lean Canvas, you need to create a canvas for each side of the marketplace. As an example, for Debut talent marketplace, we made two versions, one for graduates and another one for employers. It's likely you have different problems to solve for each side and satisfying only one side doesn't guarantee P/MF for the overall marketplace.
5. Product/Market Fit Root Cause Identification
After completing all the diagnosis steps, you would have a deeper understanding of all sections of the Lean Canvas and which ones are more problematic than others.
👉 You can use the Lean Canvas to identify the root cause of why you have not yet achieved Product/Market Fit.
There will always be problems with more than one area of the canvas. For example, maybe you haven’t identified a Unique Value Proposition (UVP) and you also haven’t developed a proven channel to acquire customers.
But you’re looking for one root cause in the Lean Canvas — the one section that has the biggest negative impact on getting traction for your product or service e.g. you aren't solving a hair-on-fire problem for the masses.
👉 If you don’t identify the true root cause, you will end up only addressing parts of the overall problem.
The misidentification generally happens due to improper diagnosis e.g. not gathering customer inputs correctly, not selecting the right data or valuing co-founders inputs above others. Sometimes the lack of tangible experience or being too close to everything gets in the way to see things clearly. You can always hire an external consultant to get a fresh perspective.
🎬 VideoCo Root Cause
There are too many tools to choose from. VideoCo isn't solving a deep "Problem" directly. The value proposition is somewhat unique.
P/MF Diagnosis Case Studies
Here are some examples of the diagnosis results from various startups I've worked with to give you a flavour of how different the root causes can be.
📕 For a B2B AI platform, we discovered the root cause to be weak and ambiguous "Unique Value Proposition" which was impacting customer acquisition. They were solving an important problem and existing clients rated them highly with an upwards of 80% retention. Our diagnosis uncovered the product positioning wasn't at all clear to prospective customers. Their sales team members described the product in any way necessary to move to the next step and it took them 3-4 meetings for the prospect to fully grasp the capabilities of the platform. Additionally, the engineering team had a completely different understanding of what they were building and why.
📕 For a marketplace client, we discovered the startup wasn't solving a hair-on-fire "Problem" for one side (the paying side) of the marketplace while the other side loved and rated the product highly. The imbalance resulted in low retention and poor sales across the board.
📕 For an eCommerce product focusing on a single basket universal checkout from multiple brands, we found "Solution" to be the root cause as large retailers weren't willing to participate in the universal checkout for branding reasons. Customers really wanted to buy in that way because of the ease of delivery, discounts and matching outfits from different retailers but delivering that solution wasn't possible for business reasons.
📕 For a B2B startup that solved the problem really well for a niche "Customer Segment" by doing things that's don't scale, we discovered the market size was too small for the segment that product resonated with.
The case studies will hopefully give you an idea how different the root causes can be.
👉 The cost of identifying and acting on an incorrect root cause can be huge for your startup runway.
6. Root Cause Actions
Once you have completed the P/MF diagnosis and identified the root cause correctly, you need to figure out what to do next. Here are the recommended steps to take based on the root cause:
Change/Improve — Make changes and improvements (described in the table below) when the root cause is Value Proposition, Business Model or Solution from the Lean Canvas.
Pivot — When less than 10% of users would be very disappointed if your product disappeared and/or most customers don't find enough value from your existing product. Alternatively, you can also target a new customer segment with the same product before taking the drastic step to pivot.
P/MF Process — Follow the P/MF Flywheel process described in Part-III when the root cause is Problem, Market Size or Customer Segments (Market) on the Lean Canvas.
The table below gives an overview of actions to take based on the root cause with some remarks for additional clarity.
| Root Cause | Actions | Remarks |
|---|---|---|
| Value Proposition | Change the positioning. Use customer language. | Easiest fix if everything else is working. |
| Business Model | Review, test and update your pricing and packaging strategy. Review your business model and the makeup of it e.g. freemium. | If CAC is too high, the root cause is likely to be Channel or not solving a hair-on-fire Problem instead of the Business Model. |
| Solution | Use prototypes or solve problems manually while you workout the technological breakthrough, legislative restrictions and regulatory compliance. | Some startups use this to advantage by providing a service first and building product later. |
| Distribution Channel | Review your messaging and channel choice. Focus on one channel at a time. Validate by trying to acquire customers through the selected channel. Paid ads isn't a channel. | This implies you know your customers well and problems you solve for them but don't have a good way to acquire them. |
| Market Size | Not big enough market? Follow P/MF Flywheel process described in the next part. | |
| No hair-on-fire problem | Not solving a hair-on-fire problem for your customers? Follow P/MF Flywheel process described in the next Part. | |
| Customer segments (Market) | Not clear on who the customer really is? Follow P/MF Flywheel process described in the next Part. |
Root Cause — Value Proposition, Business Model or Solution
You are in a comparatively good position if the root cause from the P/MF diagnosis is either of these three i.e. Value Proposition, Business Model or Solution.
User Value Proposition / Positioning
Positioning is as important as the product itself, if not more. It clarifies the problems you solve and why you solve those problems to customers and every stakeholder in your business.
You can utilise the insights gathered from the diagnosis process earlier to change or refine your positioning. You may need to do more work to understand the competitive environment and customer mindset to build a strong value proposition. I recommend April Dunford's book, Obviously Awesome, on the topic of positioning.
In the meantime, you can continue to use prototypes and less-than-ideal solutions to build up your user base and engagement.
Business Model
There are two elements to your business model — Either you have to change your pricing and packaging or you have to change the business model itself e.g. SaaS, Marketplace, Ad-supported and Freemium.
Developing new pricing strategy and rolling it out is generally a large undertaking but it's doable without major challenges when you have fewer users and customers. It becomes harder with a large user base post P/MF.
I've successfully used Van Westendorp's Price Sensitivity Meter questions for pricing strategy and understanding the customer's willingness to pay, in the past. The approach revolves around four questions:
At what price would you consider the product to be so expensive that you would not consider buying it? (Too expensive)
At what price would you consider the product to be priced so low that you would feel the quality couldn’t be very good? (Too cheap)
At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it? (Expensive/High Side)
At what price would you consider the product to be a bargain — a great buy for the money? (Cheap/Good Value)
You can use lower price as a key differentiator but it only works
When your strategy is to acquire a large market share superfast like Uber, or
When you are the first mover in a new category like Airbnb.
It's generally a bad idea to compete on price as it ultimately becomes a race to the bottom.
Solution
The "Solution" is likely going to be the root cause
When you are too early in the market and solution isn't technically feasible yet for the desired quality, or
When there are business, industry, legislative, cultural and regulatory barriers.
Both require its own course of time to address the barriers. My recommendation would be to participate in the wider discussion within your industry while you work it out.
Root Cause — Channel
When the root cause of not having P/MF is "Channel" i.e. there is no easy way to acquire customers and distribute the product, it's worth double-checking if you are really solving a hair-on-fire problem for a defined segment. Theoretically, you would need to figure out where people from the defined segment hang out as putting your product in front of them with the right messaging should bring them right to you.
If the distribution is still proving difficult, your messaging may not be right or you are focusing on the wrong channel or multiple channels at once e.g. SEO, partnerships, ads, direct outreach, marketing campaigns, events etc. You need to pick out the most promising channel and give it your best shot to validate a channel. It's not an easy thing for marketers to put all their eggs in one basket.
The actions like updating positioning, changing pricing and validating acquisition channel could take a couple of months. Making these changes successfully doesn't mean you have P/MF. You would need to actively measure the P/MF (see Part-III) and if you don't have it, you need to do a short diagnosis again.
Root Cause — No hair-on-Fire problem, Market Size or Customer Segments (Market)
These are the most likely reasons for not having Product/Market Fit in my experience:
You aren't solving an acute hair-on-fire problem for a specific target audience. You might be solving an important problem but that's not enough.
You don't know who your customer really is i.e. for whom you are solving the problem and whether they care enough about the problem or your solution to change their behaviour.
Since you don't know customer segments, it's hard to pin down the exact market and market size. It's possible to solve a hair-on-fire problem for a customer segment in a small market but that won't translate into a financially successful venture business.
Please follow the Product/Market Fit Flywheel process described in the Part-III if the root cause is any of the above three.
Common Denominator Features
The P/MF Flywheel process takes a couple of months to discover the right product, channel, customers and market. While you are figuring this out, you could end up developing product features that may not be needed in the long-run. Therefore, when you are executing the P/MF process, it's best for your development team to focus on the common denominator features that will be applicable to almost every user of your product irrespective of the direction of the product.
🎬 VideoCo Common Denominator Feature Example
Improve the audio quality and add the capability to join calls via phone.
The P/MF Flywheel process will undoubtedly reshape your product roadmap. You should defer any nice-to-have features and the ones specific to a type of audience.
🎬 VideoCo Deferred Feature Example
Defer the auto attendance for students present on the call meant for teacher-student segment.
7. P/MF Council
Who's responsible for delivering the Product/Market Fit?
The road to Product/Market Fit is a long one. There are startups who don't pay attention to it and eventually bite the dust. There are startups who are aware of it but don't assign a leader to drive it forward also leading to startup's demise.
Given the importance of Product/Market Fit to a startup, the co-founders are ultimately accountable to make it happen. As they aren't going to have enough time to manage it all by themselves, my recommendation is to assign the leadership role to your Head/VP of Product and form a small P/MF Council to move it forward.
P/MF Council
👉 The Product/Market Fit Council is responsible for delivering and monitoring the health of Product/Market Fit until the startup transitions to exponential growth stage.
The P/MF Council comprises of the
Founder (or a Co-founder)
Product Leader
Head of Design/Research for customer development
Head of Marketing
Head of Sales (for B2B startups)
These are necessary roles for this team and if you don't have a full-time person on board like Head of Product or Head of Marketing, I recommend bringing a consultant on board, specifically for P/MF.
The P/MF Council represents the four pillars — Market, Product, Channel and Business Model. The council should be less than five people to make it effective. It relies heavily on collaboration and support from engineers, designers, data analysts, user researchers and others.
CTO/Head of Engineering is a key stakeholder but not required to be in the core working group responsible for delivering P/MF. Their attention is required to serve the existing customers, build the product further and keep the engineering teams in shape.
The diagnosis work can be carried out by the P/MF Council should you decide to set it up right at the beginning. This is what RACI matrix for the P/MF Council looks like:
Responsible (R) — P/MF Council (All)
Accountable (A) — Co-founders
Consulted (C) — CTO, Designers, Engineers, Analysts, Researchers etc.
Informed (I) — Everyone (Employees, Board, Investors); Customer Advisory Board (CAB) if you have one.
It surprises me how easy it is for teams to drift away from P/MF and get back to the Business As Usual (BAU) stuff. The P/MF Council itself can drift away; hence, a leader is required in the group for consistent progress.
The P/MF council is responsible for:
Communication
The council meets on a regular basis to review the P/MF progress, strategy and share learnings. They report the progress to all stakeholders and update the entire company in a monthly meeting. Without good communication and constant alignment, you won't be able to gather the necessary support to execute the actions from diagnosis or the P/MF process.Alignment
It's critical for the council to keep all employees aligned on where you stand in regards to P/MF. Otherwise, they will rely on signals like hiring, funding and marketing dollars to draw their own conclusion influencing their day-2-day decisions. Additionally, the P/MF Council should keep leadership, board and investors updated at all times.Prioritisation
You aren't starting on this process from scratch i.e. an idea. You already have a product, customers and possibly a roadmap against which you are developing. The diagnosis will reveal insights that will impact priorities across the board. You might have to throw away months of your work as you discover new evidence and insights.
👉 Keeping the company on track towards finding P/MF is the single most important thing for P/MF Council to do during the process.
📜
Key Takeaways (Part II)
Use P/MF Diagnosis process to identify the root cause of not having P/MF.
P/MF Diagnosis involve data analysis, Lean Canvas, customer and leadership interviews.
Follow the PMF Flywheel if you don't know about your customers and market in depth.
Put together a P/MF team to deliver and monitor the health of Product/Market Fit.