This article was co-authored with Matt Walton, who grew FutureLearn from 0->£100m valuation as founding CPO, and is now an early-stage startup coach and advisor.
Product market fit (PMF) describes the effort required to grow your business. If you have a strong PMF, your business will grow rapidly, with little effort. Without PMF your business will grow slowly, if at all, and only with significant effort.
PMF has its roots in venture capital. It is a way of describing a business in a way that articulates how big the business can be, how much traction it has and how attractive it is to invest in.
As a result product market fit is a common term, especially when discussing the prospects of startups. However it can be a complex concept to grasp and is often interpreted in different ways by different people.
In this article, we’ll define what product market fit is, the dimensions that contribute to it, how to grade the level of PMF a business has, and how to strengthen it further.
"You can always feel product/market fit when it's happening. The customers are buying the product just as fast as you can make it -- or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You're hiring sales and customer support staff as fast as you can. Reporters are calling because they've heard about your hot new thing and they want to talk to you about it. You start getting entrepreneur of the year awards from Harvard Business School. Investment bankers are staking out your house."
- Marc Andreessen, co-founder Andreessen Horowitz VC
What is product market fit?
Dimensions of product market fit
Product market fit describes the potential for a start up to grow.
It is a function of three dimensions:
- Demand - the number of people who share an unmet need, and how severe that need or pain point is.
- Solution - how well your product solves the need, and what you can charge for it.
- Distribution - how people hear about your product. Your Go-To-Market motion.
The degree of matching between demand and solution determines how fast your startup grows, and dictates both how you distribute your product and whether you can grow profitably.
Product market fit as a spectrum
Rather than being a binary quality that startups have or don’t have, product market fit is a spectrum.
Startups with strong product market fit grow rapidly with little effort put into distribution. Startups with poor product market fit grow slowly, and require much more distribution effort.
We describe 5 levels of product market fit:
- Level 0: NA - You haven’t gone to market and have no signals.
- Level 1: Light - You have variable signals from a small number of users.
- Level 2: Moderate - You have a small, stable group of users who like your product. You don’t understand how to reach them at scale.
- Level 3: Strong - You are growing steadily, and understand how your solution serves demand, and how to reach demand at scale.
- Level 4: Intense - You know it. You have found a large pool of customers with an acute pain point. Your solution is 10x better than the alternatives. You are experiencing hyper-growth.
Where the dimensions describe the components of PMF, the levels describe how strong your PMF is. They also help you to further develop your PMF: they help you understand where you are, and as a result what to measure and focus on.
How much PMF you need to succeed
It’s important to note, that while level 4 is the holy grail of start ups, very few make it to this level. You can have a successful business without getting intense PMF - as long as you have enough to grow at a reasonable rate of return.
Intense PMF is the kind of growth that makes the headlines or gets shouted about on LinkedIn. One moment you’ve never heard of a product, and the next everyone you know is using it. For example:
- ChatGPT - had 1m people try it in the first 5 days. Suddenly everyone was buying a subscription.
- Monzo - grew from 70k to 600k customers in 2017. Suddenly it felt like everyone in London had a hot coral bank card.
- Figma - grew from $4m ARR in 2018 to $450m in 2022. It felt like overnight it was the default tool for designers.
This sort of hypergrowth is a rarity, even amongst companies that go on to be very successful and have large valuations.
More common is that startups mostly live between levels 1-3, iterate continuously trying to increase the level of product market fit they have, and growing as best they can at the same time.
We’ll explore each of these dimensions and the levels of product market fit in more detail. But first, let’s look at how the concept of product market fit has evolved, and what has informed our definition.
Why is product market fit important?
‘Is it a big idea?’
- Jeff Bezos
Product market fit is important because it demonstrates
- Size of demand: how big a market the business serves, and therefore how big that business can be.
- Fit between demand and solution: how fast the business can grow, and how profitable the business can be
- Go-To-Market: will users bring users, or will the business have to work to acquire users.
Strong product market fit signals that a company has found a large, underserved market, as well as a solution that can serve this market. When supply matches demand, distribution is easy and the company scales quickly.
When people ask: “Do you have product market fit?”, they are effectively saying: “I’m not sure how good your business is.”
The potential a startup has is a key indicator for everyone involved in early stage companies:
- Venture capitalists and investors who want to know if they should invest
- Current and potential employees, who want to know if working at startup will be financially rewarding and provide them with good career opportunities
- Founders who want to know if they should keep investing their time and effort into a particular idea.
As a result the concept of product market fit has been refined over time, and reviewing this helps flesh out our understanding of it.
The history of product market fit
It starts with a good market
The term product market fit was first coined by the internet pioneer and now one of Silicon Valley’s biggest investors Marc Andreesen in his 2007 essay The Only Thing That Matters. He described it as “being in a good market with a product that can satisfy that market”.
His contention was that startups spend too much time thinking about the product and don’t pay enough attention to the market that they aim to address. In his view the market is the most important factor - and it’s the one you can’t control.
He suggested that:
“In a great market—a market with lots of real potential customers—the market pulls product out of the startup… Conversely, in a terrible market, you can have the best product in the world and an absolutely killer team, and it doesn’t matter—you’re going to fail.”
This highlights the first important dimension: for your product to be successful there needs to be enough people who have the same unserved problem who are willing to pay for a solution (i.e. demand).
Solutions effectively serve this market
Since then, the idea has been built upon by many others. Steve Blank described the feeling you get when your solution matches this pool of demand tightly:
“Are people grabbing the product out of your hands saying I want it, or I'm using it, or I'm buying it, or I’m downloading it, or I'm giving you my email address.”
Distribution follows a tight fit between demand and supply
While Merci Victoria Grace, former Head of Growth at Slack, talks about how strong product market fit drives distribution:
“Organic growth is the key indicator of product/market fit. People love to seem smart and cool. They want to recommend something great to their friends. They don’t need a share button to do it. If they love your product, they will tell people about it. Ideally more than 50% of your new accounts come from direct or organic traffic.”
In combination this leads us to the three dimensions we’ve identified: demand, solution and distribution.
Product market fit is a journey
While PMF was originally described as a binary state, it’s now more commonly portrayed as a spectrum. The strength of your PMF is something that changes over time, and you can work towards.
Jeff Bezos noted this in his 1998 letter to shareholders when he described how quickly customers can leave you for a better alternative:
"I constantly remind our employees to be afraid, to wake up every morning terrified. Not of our competition, but of our customers. Our customers have made our business what it is, they are the ones with whom we have a relationship, and they are the ones to whom we owe a great obligation. And we consider them to be loyal to us – right up until the second that someone else offers them a better service.”
As the landscape changes, your degree of product market fit changes, meaning that product market fit is a continuous journey. You always need to be looking for ways to offer customers more value.
This recognition of product market fit as a spectrum, and finding it as an ongoing activity, leads us to break it down into levels.
These describe the intensity of product market fit a company has, and outline the pathway a business follows to gather insights, develop the product, and build its Go-To-Market strategy.
The dimensions of product market fit
