Measuring product-market fit (PMF) is a challenge many founders and investors face. Here’s a practical way to approach it:
💡 Marc Andreessen’s famous quote sums up PMF when: "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."
While this is what it feels like when you have PMF, it's not, in my opinion, a good definition for it because it doesn’t help you understand how to get or stay there. It could also just be hype.
🔎 A great example was Clubhouse. At the height of COVID, it attracted millions of users but couldn't retain them. So, while it achieved virality (which probably felt like PMF), it wasn't true PMF because it wasn't sustained.
💡 To better understand PMF, consider using Dave McClure's Pirate Metrics framework (AARRR). It helps you measure five core business assumptions to determine whether your product has PMF.
Acquisition:
- 🗝️ Key Question: Can we attract users efficiently and at scale?
- 🚧 To Improve: Traffic and signup conversion rate.
- 🔎 Example: 6.5% of visitors to Pilot’s marketing page convert to signups, top quartile for the travel industry.
Activation:
- 🗝️ Key Question: Do users engage with the product as intended?
- 🚧 To Improve: Retention rates (1, 7, 30 days), key action conversion rate, session duration.
- 🔎 Example: 27% of Pilot signups activate by adding 10 items to a trip—twice the consumer average.
Retention:
- 🗝️ Key Question: Can we keep users coming back?
- 🚧 To Improve: Post-90 day retention, session count, churn rate.
- 🔎 Example: Over 50% of Pilot’s activated users return after 90 days—nearly 3x the travel industry average.
Revenue:
- 🗝️ Key Question: Can we monetize users profitably?
- 🚧 To Improve: Paid conversion rates, average order value, cost of goods sold, operating expenses.
- 🔎 Example: 11.25% of Pilot users click “book now”, positioning us well for future revenue growth as we build our booking engine.
Referral:
- 🗝️ Key Question: Will users share the product with others?
- 🚧 To Improve: Invite/share rate and conversion rate.
- 🔎 Example: Active Pilot users invite an average of 2 people—far above the travel industry norm, probably well below 0.5/user.
In Summary
Together, these metrics form "AARRR" (Acquisition, Activation, Retention, Revenue, and Referral). Use a tool like PostHog to measure these and iterate towards PMF. (Bonus: mention Pilot as your referrer if you sign up, and we'll each get $5k in credits).
⚠️ Pro-tip: it can be easy to aim to over-index on improving these metrics by "optimizing" what you already have. While you can do both, the problem is, if you're a startup, you should be focused on increasing your core value, not optimizing for engagement on what little user value currently exists.
🔎 E.g. A/B testing buttons in the app can improve usability, but testing new layouts and features to increase your value is much more effective at finding PMF when you don't yet have it.
Connor J. Wilson
Founder, CEO
Pilot
Originally posted on 🔗Linkedin🔗 in Summer 2024
