How to Define Product Market Fit For Your Startup
…and why it may not be a flat retention curve or 40% of your customers saying they’d be “very disappointed” if you went away
Product-market fit (PMF) is the mythical goal of early-stage startups — and rightfully so. Once you have PMF you are at that point where you can shift your daily focus from building something people want to getting what you’ve built out into the world and making money.
Despite PMF being the central goal of an early-stage startup, it is not well defined. In fact, almost every definition of PMF I’ve seen from investors and entrepreneurs is different — and often conflicting. For example, some people will say a flat retention curve, others say when 40% of your customers say they would be “very disappointed” without your product, while others say it is when your customers spontaneously tell other people about your product.
However, when you put these definitions up against the wall, you can start to see a spectrum. We’ll use Christoph Janz’s “Five ways to build a $100 million business” blog post as a frame of reference. In his blog post, which is summarized in the diagram below, he discusses how the size of your account value, measured by Average Revenue Per Account (ARPA), dictates your go-to-market strategy. The main idea of this article is that:
ARPA should not only dictate your go-to-market strategy — but also how your business should measure PMF.
How to measure PMF based on customers size measured by Annual Revenue Per Account
Elephant hunters (~$100k/yr)
With high customer values, they can rely on a low bar like retention to measure success. With large deals as the prize, they can invest heavily in sales teams to find and win deals. As long as they close the deal and the customer doesn’t leave, it’s a win.