The Single Most Important Thing for Growth

Product/Market Fit

Marc Andreessen defines Product/Market Fit as “being in a good market with a product that can satisfy that market,” and the feeling when “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.” Put another way, you have reached Product/Market Fit when you have built a product customers actually want, and they are knocking down your door to get it, to the point that it feels like the market is pulling the product out of your startup.

Product/Market Fit is essential because, without it, growing your startup makes little sense. If you haven’t built a product customers actually want, why would you want to scale up your hiring, marketing, sales, spending, and capital raising? Founders who step on the gas believing they have found Product/Market Fit when they haven’t is a common reason startups fail.

So how does one measure Product/Market Fit quantitatively to know it is time to invest in growth?

Retention

Retention, the percentage of users who return consistently after their first use of your product, is the best indicator of Product/Market Fit.

The key to accurately measuring Retention lies in identifying the right unit of measurement to give you the best read of product usage. You can do this through two steps:

1. Choosing a metric that best represents the value users get from your product (e.g. Opens for Instagram, Rides for Lyft, Bookings for Airbnb).

2. Determining an ideal frequency with which the metric should happen by asking yourself, “do users need to engage with my product daily, weekly, or annually to be considered active?” (e.g. Daily for Instagram, Weekly for Lyft, Annually for Airbnb).

Now you can plot a Retention curve for your acquisition cohorts with the percentage of users triggering the value metric over time (e.g. % of users with a Ride Completed vs. Weeks In), which allows you to visualize if you have Product/Market Fit.

If your Retention curve flattens off at some point, like Product A, it means that users are repeatedly using your product in a valuable way. In other words, you have found Product/Market Fit. This is the best proof to know it is time to accelerate growth, shift to distribution, and win the market.

If your Retention curve is trending towards zero, like Product B, it means that you are not retaining a healthy percentage of your existing users. So even the best growth strategies to acquire new users will fill a leaky bucket. In this case, it would be a good idea to focus on talking to users and iterating quickly instead.

Growth

So let’s say you have a product like Product A that has Product/Market Fit. What do you do now? Luckily, this part is much easier than reaching Product/Market Fit because you are just figuring out how to distribute your product cheaply to as many customers as possible.

You can get on your way to scaling up your startup by raising money and hiring operators to focus on these two things:

1. Conversion rate optimization by having engineers, data scientists, and product managers working on improving specific parts of your product to get more people through the funnel (e.g. translating your product for internationalization, reducing friction for your product’s authentication flow, asking users questions during onboarding to improve their experience).

2. Growth channels that people tend to discover products on (e.g. Referrals if users already share your product through word of mouth, Viral Loops if your product gets better with more users, Search Engine Optimization if your product addresses a rare behaviour).

Keep in mind that most successful companies only use one or two channels, like Airbnb’s referral program shown above, LinkedIn asking users to invite their contacts to join, or Tripadvisor ranking highly in Google search results.

To wrap up, growth is important for startups, but when to focus on growth is often misunderstood. If there’s one takeaway, it’s that you should not scale until you have Product/Market Fit, and you can’t prove that you have Product/Market Fit unless you nail your Retention. So focus on Retention first. Then step on the gas.