When ideating new product ideas or potential strategic pivots, there are several ways to assess product-market fit. The approach often taken involves first defining the product and then assessing its market potential. The steps that are taken usually look something like this:
- Define the product hypothesis
- Identify the feature set
- Build the product
- Release the product
There are several problems with this approach. In fact, it is ass backward. Start with the market, instead of the product, which provides a more logical sequence and accurate framework in defining a winning product strategy.
What is Product-Market Fit?
The product-market fit concept was created by Andy Rachleff (CEO and co-founder of Wealthfront and co-founder of Benchmark Capital). The core of Rachleff’s idea for PMF was based on his analysis of the investing style of venture capitalist Sequoia founder Don Valentine.
In the words of Andy Rachleff:
“A value hypothesis is an attempt to articulate the key assumption that underlies why a customer is likely to use your product. Identifying a compelling value hypothesis is what I call finding product/market fit. A value hypothesis identifies the features you need to build, the audience that’s likely to care, and the business model required to entice a customer to buy your product. Companies often go through many iterations before they find product/market fit if they ever do.When a great team meets a lousy market, market wins. When a lousy team meets a great market, market wins. When a great team meets a great market, something special happens. If you address a market that really wants your product — if the dogs are eating the dog food — then you can screw up almost everything in the company and you will succeed. Conversely, if you’re really good at execution but the dogs don’t want to eat the dog food, you have no chance of winning.”
A key takeaway from Rachleff’s remarks is that markets matter more than anything else. You can develop the best product in the world, but if the product isn’t meeting a significant, must-have customer/user need, it’s a pointless endeavor.
Finding Product-Market Fit
A common myth of product-market fit is the notion that rapid product/feature iteration alone will get you there. Perhaps with luck, this approach may work, but of course, making bets backed by empirical evidence greatly increases the probability of success.
Prior to defining the product, one should define and test multiple value hypotheses against different market scenarios. Once your value hypothesis is proven (or you have a high degree of evidence-based confidence) you can move on to a growth hypothesis.
Identify underserved or latent customer needs
Once you’ve defined your user you need to understand and enumerate their needs. To create value, you have to identify the specific needs that correspond to the market opportunity.
Identifying this latent market need is the foundational mission that all successful technology enterprises share.
When you make a new product, you should ensure that one of two scenarios exists:
- Address customer needs that aren’t adequately met by current solutions. These are “underserved” needs. Customers are going to judge your product in relation to a myriad of alternatives, so the relative degree to which your product meets their needs depends on the competitive landscape. Take email clients for example. It seems like every day there is a new “game-changing” email client that seeks to reduce the inherent pain of email overload. All of these are seeking to address the frustration of email users. Each purports to have some type of secret sauce that will make email suck less. This is a tough space to play in. With literally hundreds of competitors, your solution needs to address the unmet needs of the entire market (you don’t want to capture a fragment of the market — that is not a business).
- Identify a “latent” customer need. These are generally innovative products that, rather than seek to improve upon what already exists, they attempt to create a new category of product that users didn’t know they wanted. This is hard from an ideation standpoint (i.e. where do we find these latent needs?), but can be achieved by applying a methodology of discovery where problems are considered with a fresh, often technology inspired lense. Take event ticketing for example. One could endeavor to create an easier to use but essentially uninspired product, barely differentiated from a myriad of competitors, or they can seek to upend existing business models and usage behaviors by considering the core problems of event producers and attendees, considering how new value can be created for both and how different business models could be applied to the industry.
Thanks for reading. In the next issue I’ll pick up with the top of the pyramid, discussing how to develop your value proposition, minimum feature set, and user experience strategy.