The term “product-market fit” is tossed around with the fervor of a magical incantation. Marc Andreessen stated that achieving product-market fit is the only thing that matters for a new venture.
Yet, despite its ubiquitous use, the definition of product-market fit often remains nebulous and subjective.
The Hazards of Subjectivity
ChatGPT informs us that: “product-market fit refers to the stage where a company’s product or service satisfies strong market demand.”
The problem is that when product-market fit is defined subjectively, it becomes a moving target. A critical milestone for early-stage founders should not be a subjective moving target, based on anecdotal evidence.
Subjective assessment can lead to premature scaling efforts that misallocate valuable, limited resources. Without a clear, measurable definition, startups risk conflating early traction with genuine market demand.
Establishing Objective Metrics
Revenue is the most obvious objective metric, but it has led to lots of false-positives. For example, SaaS investors started equating $1M of ARR with having product-market fit, and therefore, being investment-ready for Series A.
However, $1M of revenue from a wide variety of customer types and use cases, each with their own reasons to buy and authentic levels of need, does not translate into product-market fit.
Each category of customer type and/or use case most often requires a nuanced sales motion, including, for example, messaging and customer acquisition strategy.
Different customer types also do not refer to each other when making important business decisions. Most founders confuse their TAM for a single market. In reality, most TAMs are comprised of several discrete markets.
Revenue from multiple customer types makes it much more difficult for startups to build enough testimonials, case studies, etc. that they need to cross the chasm from early adopters (a small percentage of revenue opportunities) to later-stage adopters (where the majority of revenue opportunities exist), as testimonials from one customer type will not give unrelated customer types the security they need to do business with an unproven, new company.
For example, a startup selling software to help small businesses more efficiently schedule customer appointments might be equally as valuable to an auto mechanic and a dentist. But, auto mechanics and dentists do not refer to each other when making important business decisions. Therefore, the testimonials from auto mechanics will not encourage dentists who are later-stage adopters to do business with the startup. And that startup will not be able to cross the chasm to the majority of revenue from that customer type.
Revenue is one of the indicators that a startup has product-market fit, but a given threshold of revenue does not in-and-of-itself equate to having product-market fit.
What is Product-Market Fit?
So then, what is the objective definition of product-market fit? For B2B founders, here is the five-part objective definition of product-market fit:
- You have a narrowly defined customer type and use case;
- You have acquired ~3-5 satisfied customers who fit that customer type and use case following a similar sales motion;
- Those customers will kick and scream if you take your product or service away;
- You and the customer both know and can express the specific and objective reasons why the customer would be upset if they lost access to your product or serive; and
- Your LTV:CAC is better than 1:1
Here’s an entire post that we published that details each of these five steps with useful insights and common mistakes to avoid.
The Role of Customer Feedback
While objective metrics are essential, they should be complemented by qualitative insights. Regularly soliciting customer feedback helps ensure that the product evolves in alignment with market needs. However, this feedback should be systematically gathered and analyzed rather than relied upon anecdotally.
Importantly, customer feedback should be used to validate quantitative metrics. Combining quantitative data with qualitative insights provides a holistic view of product-market fit.
Investment-Readiness
For investors, an objective product-market fit definition serves as a critical due diligence tool. It offers a transparent, verifiable measure of a startup’s potential, reducing the risks associated with subjective assessments.
Hiring a sales team and building a marketing and sales tech stack before reaching product-market fit wastes valuable capital and time and reduces the likelihood that the startup will reach break even or achieve the traction metrics required to raise a subsequent round.
Conclusion
Having an objective definition of product-market fit is not just about avoiding premature scaling; it is a strategic imperative that informs every aspect of a startup’s operations.
Clear product-market fit metrics guide product development, marketing strategies, and customer success. They help prioritize features that matter most to users, allocate marketing resources more effectively, and tailor customer success initiatives to enhance user satisfaction and retention.
An objective definition of product-market fit also promotes transparency that facilitates more informed business and investment decisions, fostering a healthier and more sustainable startup ecosystem better insulated against wild cycles of boom and bust.
This is especially important in rising cities where innovation and startup success is helping to fuel economic growth, spread prosperity and enable economic mobility.
Together we rise.