This is the secret formula that Uber used to scale: Product-market fit

As a tech CEO, a natural question to ask is: how did Uber scale the Great Digital Wall of China? What did it figure out that even Facebook or Google could not fathom? Just one year after Uber was launched, it had experienced so much growth that it was hiring one new driver for every seven rides–with virtually zero marketing spend. The answer: Product-market fit.

Social media leader Instagram enjoyed 25,000 sign-ups on its launch date. File-sharing site Dropbox went from 5,000 to over 75,000 sign-ups for its wait list after it successfully launched a beta video. How did they achieve this? The solution is to scale. For example, the age old question. How did Uber scale? They didn’t scale by increasing the number of people in their home office. They scaled by using a platform approach.

These are three examples of companies who nailed product market fit from day one. There was pent up demand for their product before it was even launched. Achieving a product-market fit is one of the most crucial elements of a startup to achieve in order to scale – but it is also the least understood.

According to an analysis of 3,200 companies published by the Startup Genome Report, “90% of startups fail because of premature scaling.” The report added, “70% of startups scaled before they were ready and the founders substantially underestimated the length to confirm their market.”

What is Product-Market Fit?

If you are still wondering how did Uber scale, understanding product market fit is a good place to start! Product-market fit is the point where brands have identified and validated the demand for their product or service with their target buyers and have validated the use case for their products or services. Silicon Valley venture capitalist Andreessen Horowitz, who coined this term in 2007, is quoted as saying, “Product/Market Fit means being in a good market with a product that can satisfy that market.”

Product-market fit helps startups to assess the viability of their product or service, being able to sustain itself in the market. It also helps businesses evaluate how well their product or service will meet the needs of the market.

The Lean Product Playbook author, Dan Olsen, further defined product-market fit as, “When a brand’s product meets real customer needs and does so in a way that is better than other alternatives.”

Source: Ransegall

Why is product-market fit so important?

Product market fit is the single biggest factor determining the success or failure of a business. It helps a brand understand how it can drive rapid and sustainable growth. Retention is an excellent indicator that a brand has a product-market fit. If a brand can retain its early adopter customers, it has likely found a positive product-market-fit. Real-engagement metrics from retained customers will tell brands how their customers use their product or service and how the product or service can be optimised to better meet customer’s needs.

How you can easily establish your product market fit

Some businesses struggle to establish product market fit, as brands may need to do in-depth market research by talking to potential customers. Some of the distinct phases in searching for a good product-market fit include:

  1. Build a comprehensive understanding of the market landscape and fully understand the pain points that the target customers face – which the product or service aims to solve.
  2. Study the different industries, customer segments and use cases for the product or service – and validate the demand wherever possible with customer surveys, interviews and usability studies.
  3. Bring the product to the market to validate these hypotheses. During the initial phase, a company will need to experiment and optimise its offering for a variety of target clients, cases, messaging and price points. This will help the brand establish a robust market strategy which enables it to scale.
  4. Acquire the initial customers and develop insights about how the business can scale by modelling out marketing econometrics and conversion funnel metrics.
  5. Collect data on user behaviour, such as the level of product engagement, utilisation rates, and customer churn.
  6. Use marketing and business performance data to build out solid processes which are repeatable and scalable in a larger market. This includes optimising the hiring process, training, customer onboarding and sales-to-operations handoff.
  7. Confirming the brand’s ability to scale is profitable and optimises the product to maximise customer retention.

What happens if your brand does not achieve product-market fit?

When a brand is striving to solve problems that are not validated, it is highly likely that the business will not be sustainable and will eventually fail. According to startup expert and entrepreneur Paul Graham, the most common mistake that startups make is trying to solve non-existent problems. When companies do not find a product-market fit, they will probably encounter problems such as

  • Customers don’t understand the value of their product or service
  • Insufficient number of sales
  • No repeat sales
  • Long sales cycles
  • No word-of-mouth advertising
  • Difficulty attracting media attention

What is Consumer Insight?

The first step in finding product-market fit is to develop a bank of robust customer and market insights. In an ideal world, developing insight should be done by analysing existing market research, the competitive landscape, consulting with regulatory bodies, benchmarking the performance of similar businesses and approximating the total size of the market.

Insight from social networking platforms like Facebook, Instagram, and Twitter can help businesses understand the need for a product or service. Sometimes, insight can be gained around a problem that the business’s product is trying to solve. Analysing social media insight can empower businesses to know the exact approach required to launch into the market

There is a multitude of resources from which businesses can develop this insight. When brands understand what their target customers expect and how consumers want the product to work, they can make key decisions which can provide better product-market fit.

Improve your value proposition in 4 Simple Steps with a Product Market Fit Pyramid

Step 1: Initial product concept 

A product market fit pyramid is divided into two main levels. The first level is the market, and the second is the product. In the product market fit pyramid, the second layer is the area where brands have the most control, and where they can capitalise on research.

This diagram shows an example of a product market fit pyramid. It is divided into two stages, the Market and the product which must meet halfway.
Source: Leanstartup

As shown above, the product market fit pyramid has five layers, starting from the bottom: your target customer, your customer’s underserved needs, your value proposition, your feature set, and your user experience (UX).

Define the value proposition–This refers to the value that a brand promises to deliver to consumers if they purchase their goods. It should ideally be presented in a single sentence – a laser-focused customer proposition which summarises the benefits the customer will enjoy.

Feature set–This is a collection of functionalities and features that a product’s minimum viable product needs to have when it launches, in order to deliver what was promised in the value proposition. A minimum viable product can be developed and tested through prototypes. Prototypes can be showed to customers who represent a brand’s target audiences in order to understand how these prototypes can be tweaked and optimised to better meet customer needs.

UX design–The design of the product. This is when a product or service comes alive.

Step 2: Validate the target customers and find a problem-solution fit

Moving from concept into the market, the business now needs to validate the product with prospective customers. This is broken down into four steps:

  1. Confirm your MVP (minimum viable product)–There are many ways to confirm the MVP, such as social media monitoring, talking to customers, attending meetups or exchanging ideas with customers. This area is practically endless, which is why so many successful brands do so much of it.
  2. Determine who your perfect customer is–By engaging with a variety of potential customers, the business can zone in on the exact customers that have the greatest desire to solve the problem that the product/service offers to fix.
  3. Come to a problem-solution fit–Once identified, the business can tailor the MVP, design and functionality to best meet the needs of their perfect customer – and then launch it to the market.
  4. Pivot or Persevere–From the market feedback, the brand should consider whether it will persevere (if the strategy is working) or pivot (if there is no progress towards finding a product-market fit).
Product-market fit illustration which shows how the product, distribution and customer must all be aligned to create a product value proposition.
Source: Medium

Step 3: Refine the value proposition with a repeatable and scalable sales process

Once brands have a clear view of their ideal customers – and have a core group of satisfied customers who will be happy to refer the brand to friends, the last step is to refine the proposition and build scale. It’s a challenging moment, but it can be hugely significant for a company. Some things that a brand must prepare for this phase are:

  1. Success metrics–To help brands monitor their progress and stay on track, they should measure customer retention and customer acquisition cost (CAC).
  2. Customer feedback loop–The business should build customer feedback loops into the business from day one in order to understand customer issues and refine the product on a progressive basis.
  3. Focus and win in one market at a time–The business will want to scale fast, but the danger here is losing focus. The simple rule of thumb is to choose one new market and to win. Win in that one new market first, before moving on to another new market. A new market could be a different type of customer, geography or vertical (use case).

Step 4: Product-market fit Achieved

Using the product market fit pyramid, businesses can replicate its success across several markets and experience consistently high demand and high customer retention rates. Brands can then scale substantially and consider product market fit achieved.

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About James

James is the founder of Customer Devoted and was previously the managing director of customer engagement agency Ogilvy One and the strategy director for customer loyalty consultancy The Collinson Group.

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