Trying to figure out how to bring your startup idea to reality?

Or your startup is not getting enough traction yet?

Building a successful startup is not an easy feat. And in fact, the failure rate of startups was around 90% in 2019.

So how can you turn your idea into a successful startup?

The key to your success is “Product/Market fit”.

What is Product/Market fit?

Marc Andreessen, co-founder of Andreessen Horowitz, famously described the concept in his 2017 blog post as follow:

Product/market fit means being in a good market with a product that can satisfy that market.

“A product that satisfies a good market” may sound a bit vague.

What does it mean in practice?

Think of 3 key criteria for a “good” fit between Product and Market.

• Value proposition — Your product solves the customers’ problem
• Channels — Your product can reach the customers cost-effectively
• Monetization— Your customers are happy to pay for the product

The 40% rule

A simple yet effective way to measure Product/Market fit (Value proposition) is PMF survey, popularized by Sean Ellis who led the early growth at Dropbox, Eventbrite, LogMeIn and Lookout.

The survey begins with the question:

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

1. Very disappointed

2. Somewhat disappointed

3. Not disappointed (it really isn’t that useful)

4. N/A — I no longer use it

If 40% or more of your customers say they would be very disappointed, then well done, you’ve achieved Product/Market fit (Value proposition).

If it’s 25–40%, then you could still hit the 40% threshold with some tweaks to your product. However, more substantial development (or pivot) would be necessary if it’s less than 25%.

LTV:CAC ratio

Measuring Product/Market fit (Channels & Monetization) is a lot more complex, but the concept is pretty straightforward.

Your customers pay you more than you spend to acquire new customers.

In technical terms, it means your customer’s Lifetime Value (LTV) is greater than your Customer Acquisition Cost (CAC).

And the ideal LTV:CAC ratio for Product/Market fit is 3 or higher.

Make sure you understand how to calculate your LTV and CAC to get the ratio right while working on your value proposition.

So how to achieve Product/Market fit?

While every startup journey is somewhat unique the top reasons startups fail to achieve Product/Market fit are pretty common and avoidable.

The top reasons startups fail to achieve Product/Market fit:

1. They don’t validate the market need in the first place
2. They don’t talk to customers
3. They focus solely on Product, not testing Channels early and often
4. They mistake “shipping features” for “making progress”

“PMF” framework: 5 steps to Product/Market fit

Once you acknowledge the common mistakes startups make, it becomes apparent that you need a more systematic, battle-tested approach to avoid those mistakes consciously and consistently (not just once).

But don’t worry, getting to Product/Market fit is not rocket science.

It’s rather simple steps, though it requires some discipline — no skipping, doing what you need (not necessarily what you want) and lots of iterations.

Step 1: Business Modeling

Step 2: Market Validation

Step 3: Customer Interviews

Step 4: Product Development & Customer Acquisition

Step 5: Product Analytics

Repeat Step 3–5 until you hit the 40% threshold (PMF survey)

Step 1: Business Modeling

First things first, take a step back and unpack (or revisit) your idea.

Use Lean Canvas and fill in the boxes quickly.

The key questions are:

• Customer Segments: Who are you selling to?
• Channels: How to reach them? How easy (time & money)?
• Problem: Do they deeply care about the problem you’re trying to solve? How many people are affected by the problem?
• Unique Value Proposition: How are you going to solve the problem? Why is it 10x better than any existing alternatives?
• Revenue vs Cost: Are they willing to pay for the solution? Would it be sufficiently profitable (think of LTV:CAC ratio)?

Keep in mind that the first version of the canvas is often what you think (or hope) works, which is often not what “actually” works in reality.

“No business plan survives first contact with customers.”

— Steve Blank, author of The Startup Owner’s Manual

Don’t overthink at this point. The key is running lots of “experiments” to find out the truth and revisiting your canvas as you learn from your customers.

The path to Product/Market fit will always be iterative, not linear.

Step 2: Market Validation

A “market-first” approach is crucially important to maximize your chances of success, avoiding the common mistakes startups make.

Try to find answers to the key market questions before you build anything.

• Do they really care about the problem you’re trying to solve?
• Can you actually reach potential customers cost-effectively?
• Are they genuinely willing to pay for your product?

Too many startups skip this step and start building a product prematurely just to realize that there is “no market need” (the #1 reason why startups fail).

Why? Some founders blindly fall in love with the idea while others don’t know (or believe) that they can test the idea without building it.

“Life is too short to build something nobody wants.”

— Ash Maurya, LEANSTACK

Whatever reasons, don’t build your idea yet.

Run some “quick and dirty” experiments to test the waters instead.

Setup:

1. Set up a simple landing page quickly (try Unbounce, Instapage or Wix)
2. Put up a tagline that explains your unique value proposition
3. Add a few blocks of text to sell the key benefits for your target audience
4. Place a “Signup” button to collect emails from visitors

Experiments:

Buy some online ads (e.g Google, Facebook, LinkedIn, etc) to drive traffic to the landing page. See how many people actually sign up and measure the conversion rate (Visitors vs Signups — 10% is generally considered good).

If you’re not getting anywhere near the 10% threshold, then try different wording to frame your value proposition and see what converts best.

Buffer explains how they approached it in their blog post, where they took it even further and validated potential customers’ willingness to pay (WTP) in a very simple yet effective way.

After some experiments, you’ll find out if the value proposition resonates with lots of people and how much it costs to acquire potential customers (CAC).

Step 3: Customer Interviews

At this point, you may or may not be getting lots of signups through the landing page. Regardless of whether you want to continue with the idea or not, what’s crucially important is learning from the experiments.

“Why are people signing up? Or not signing up?”

Contact those who signed up and book one-on-one interviews with 5–10 of them. Then ask a bunch of “open-ended” questions to learn from them.

Some of the key questions to ask during the interviews:

• How did you find our product? (Channels)
• Why did you sign up? (Value proposition)
• Are you already paying for any existing alternative? (Monetization)

If you’re already getting lots of signups with a good conversion rate, then your goal should be identifying the minimum set of key features that they are willing to pay for.

If you’re not getting signups or the conversion is not good, then your focus should be figuring out what resonated most with those who signed up. They could help you find ways to frame the value proposition more effectively or simply find a different problem/solution to consider.

In the latter case, your next step is going back to “Step 1: Business Modeling” to crystallize your new idea.

Some tips for Customer Interviews (source):

1. The goal is to learn, not to sell
2. Listen more than you talk
3. Ask “why” to get real motivations
4. Get facts, not opinions
5. Don’t mention solutions too early

Step 4: Product Development & Customer Acquisition

With lots of insights from the interviews, you should have a good idea about what “must” be in the first version of your product.

Product Development

Don’t try to build the “whole” thing that reflects your “complete” vision.

Instead, identify the “one” thing that solves the customer’s biggest problem and build the smallest possible product which is just enough to let your customers experience that “one” thing.

“Keep it simple, stupid.” — KISS principle

Ruthlessly simplify the user flow so your customers can get to experience the “aha” moment as quickly as possible. And it also means that you spend as little time as possible before you find out what works in reality, not in your mind.

Once you’ve got the smallest product in place, just launch it without thinking twice. Tell the potential customers who have signed up through your landing page and start collecting data.

Customer Acquisition

Too often, startups find themselves building the product day in day out, believing that a great product sells itself when it’s launched.

“If you build it, they will come”… is a myth.

“Poor distribution — not product — is the number one cause of failure.”

— Peter Thiel, PayPal co-founder and investor

Test various channels early and often, in parallel with Product Development, then figure out how to acquire more customers cost-effectively.

Gabriel Weinberg, CEO & founder of DuckDuckGo, also suggests in his “Traction” book that startups spend equal time on both building a product and acquiring new customers.

Don’t shoot in random directions, though.

His “Bullseye” framework helps you approach it more systematically instead, running quick and cheap experiments to identify the “core” customer acquisition channels that you should optimize for your product.

Step 5: Product Analytics

You’ve got your product out on the market now? Awesome! The good news is that you’re onto something really exciting (assuming you’ve already validated the market by now) and the maybe-no-so-good news is that you’re not done yet as it’s still the very beginning of your journey to Product/Market fit.

So, now is the reality check.

You’ve got lots of signups and some potential customers telling you that they’d buy your product. But do they really use your product now?

Try Mixpanel, Amplitude, or simply Google Analytics to find out the truth.

The most common approach to understand your customer’s behavior is Pirate Metrics (AARRR), created by 500 Startups’ Dave McClure.

Think of your product as a leaky bucket. The AARRR framework reveals the holes worth plugging, where people are dropping off during the journey to become your loyal customers.

Find out what’s holding you back from achieving Product/Market fit.

Some of the key metrics you should be tracking:

Retention

Generally speaking, a 40–20–10 retention (D1: 40%, D7: 20% and D30: 10%) is considered good. Though, what good looks like totally depends on your product category.

Set your own target based on the desired product usage then aim to get your retention curve to flatten off at a reasonable point that meets your target.

Stickiness (DAU/MAU)

Stickiness is the ratio of Daily Active Users (DAU) to Monthly Active Users (MAU), which is a popular metric among startups to gauge user engagement.

The ratio is typically 10–20%. Over 20% is good and 50%+ is world class.

Growth rate

Measure your growth rate in Revenue (e.g. monthly recurring revenue) or Active users if you’re not charging yet. To prove you’re getting good traction, set your goal at 5–7% a week or 15–20% a month.

A good growth rate during YC is 5–7% a week. If you can hit 10% a week you’re doing exceptionally well. If you can only manage 1%, it’s a sign you haven’t yet figured out what you’re doing.

— Paul Graham, co-founder of Y combinator

Back to Step 3: Customer Interviews

Product Analytics helps you better understand your customer’s behavior and identify the bottlenecks, answering most of the questions you may have.

Except the “why”.

Have more one-on-one interviews with your customers until you get an idea about why something is working or not working as you expect. Uncover the motivations behind the desired/undesired customer behavior.

You may not get “clear” answers after some interviews, however, it will certainly spark lots of ideas to potentially address what’s holding you back from achieving Product/Market fit.

Back to Step 4: Product Development & Customer Acquisition

Lots of ideas to move the needle? Great, but don’t try it all in one go because:

1. It takes too long to see results
2. It’s hard to see what worked or didn’t work afterward

Try the ICE score system (developed by Sean Ellis) to quickly prioritize the ideas and decide on the next “one” thing to focus on.

• Impact — How much the idea will positively affect your key metrics

• Confidence — How sure you are about Impact and Ease

• Ease — How easy to implement the idea

Don’t forget that you need to continue on Customer Acquisition in parallel. Keep looking for ways to optimize your channels and make sure you have those ideas in the mix when planning your next move.

Back to Step 5: Product Analytics

The danger of iterative processes (e.g. Agile, Lean Startup, etc) is that it feels like you’re “progressing” as you go through more iterations. You’re definitely “moving” but the question is whether it’s in the right direction or not.

When it comes to Product/Market fit, you need to measure your progress against the 40% threshold (PMF survey), as explained earlier.

Don’t mistake “shipping features” for making progress.

Segment your users (User segmentation) relentlessly to identify the most engaged user group and find out their unique traits and usage. Figure out what makes them tick so you can double down on the “core” value.

Repeat Step 3–5 until you hit the 40% threshold

Iteratively improve your product and optimize your customer acquisition channels. And make sure you make moves based on both quantitative insights (Product Analytics) and qualitative insights (Customer Interviews) until you hit the 40% threshold (PMF survey), while keeping an eye on LTV:CAC ratio.

Questions?

That’s it! Hope it helps you navigate through your startup journey. Feel free to drop your comment here and share your thoughts and experience.

Or let’s have a chat if you want to try the “PMF” framework with us at Radikal.Studio. We co-build digital products with early-stage Impact startups.

Drop us a line at hello@radikal.studio.

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