Failory - How to Measure Product-Market Fit

Hey — It's Nico.

In August, I'm publishing content related to Product-Market Fit. This week, a guide on How to Measure PMF.

🙌 Welcome to the 456 founders who joined this week.

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If you are wondering whether you have achieved PMF or not, you most likely haven’t.

Finding PMF is a pretty unmistakable moment — you often just know you have PMF when you get there.

Lenny Rachitsky analyzed the PMF journeys of various startups and identified three signs different startups saw when they found PMF.

1. Sudden and significant market pull: It's a moment when your product “clicks” with your target market, and your sales/usage skyrocket without you having to push your product onto anyone, typically driven in a major way by word of mouth.
2. Gradual but compounding market pull: You might see demand grow steadily over time until it reaches a critical mass that feels like an intense pull for your product.
3. Hitting a milestone that proves it’s working: You might walk into a coffee shop and hear a group of people discussing how they are using your product, or you might land your first big client that switches their entire company to your product.

​Click here if you're interested in learning further about these 3 signs.

These are great ways to identify whether or not you’ve achieved product-market fit, but there are also different ways to measure PMF using more concrete metrics. Here are four of them:

1. Surveys: They aren’t the best ways to measure PMF, as they tend to be biased. But they can certainly be used alongside other metrics to confirm whether you have PMF or not. In the article, we analyze two types: PMF surveys and NPS.
2. Usage data and retention curve: Plot the percentage of (paid) active users over a period of time to get a retention curve. You are looking for a curve that levels out after some time, indicating good user retention.
3. LTV:CAC ration: Divide your customers’ lifetime value by your customer acquisition cost. If the ratio is 3:1 or higher, this is considered a benchmark for sustainable and healthy growth and can indicate PMF.
4. Exponential organic growth: If your product is really good and there is a strong demand for it, you should be able to attract customers organically, largely through existing customers referring new ones by word of mouth.

​Click here if you're interested in learning further about these 4 metrics.

Over the years, founders have used these metrics to create different frameworks for measuring product-market fit. Here are three:

1. The Trifecta (Balfour): Brian Balfour, founder of Reforge, suggests a framework that consists of looking at these three metrics together: 1) Non-trivial growth; 2) High user retention; 3) Meaningful usage.
2. Superhuman’s PMF Survey (Vohra): Raul Vohra, founder of Superhuman, created a framework to measure the company’s PMF using a PMF survey. He then worked on improving the score by segmenting users based on that metric.
3. Y Combinator’s Measurement (Alströmer): YC Partner Gustaf Alströmer states that to measure PMF, you have to identify the metric that best represents the value your users get from your product and measure the repeat usage of that metric over a certain period of time.

​Click here if you're interested in learning further about these 3 frameworks.

If you aren't familiar with the concept of Product-Market Fit, I recommend you read the introductory guide we published last week.

As every week, here are 3 recommended resources:

• ​The Bootstrapper’s Guide to Outside Funding: MicroConf has published a guide that explains how to receive funding from friends and family, accelerators, regulated crowdfunding, recurring revenue financing, and venture capital.
• ​A Guide to Product Led Growth: In this guide, two former Atlassian employees share their thoughts about product-led growth (great reading for B2B company founders).
• ​What I Miss About Working at Stripe: Brie Wolfson worked at Stripe in its early stages. In this article, she shares Stripe's work culture and a reflection on Silicon Valley's culture.

I hope you enjoyed this week’s article and curated resources.

Cheers,

Nico