What Is Product-Market Fit, and How Do You Know You've Found It?

Exeter St Davids station, 1934. Allen Lane is waiting for the London train after a weekend with Agatha Christie in Devon. He is in his early thirties and chairman of the publisher Bodley Head. He browses the station bookstall and cannot find a single book worth reading on the journey.

As Lane later told it, an idea came to him while he waited: sell good novels and serious books for sixpence, the price of a packet of ten cigarettes. The publisher's other directors do not like the idea. Respectable publishers of the time look down on paperbacks as cheap rubbish. Lane is only allowed to pursue it in his spare time.

The first ten titles are chosen, among them Hemingway's A Farewell to Arms and Christie's The Mysterious Affair at Styles. The covers have no pictures, only coloured bands and a penguin. The real test takes place on the desk of Prescott, the book buyer for Woolworths. According to the Penguin legend recounted by the historian Richard Cavendish, Prescott does not like the sample, but his wife's enthusiasm changes his mind and he places an order for 63,500 books.

On 30 July 1935 the books reach the shelves, and the worrying is over. Most sell out quickly and are rushed back to press. Ten months later, in March 1936, the number of Penguins printed has reached 1,000,000. Lane's product was not perfect. But the reader left empty-handed at the station was more than ready for it.

What is product-market fit?

In the startup world, this moment is called product-market fit. In his 2007 essay "The only thing that matters", Marc Andreessen describes it like this: customers are buying the product as fast as you can make it, usage is growing as fast as you can add servers, and customers' money is piling up in the company's account.

Michael Seibel, who ran Y Combinator's accelerator programme for years, takes the definition a step further in his piece in the YC Startup Library. According to Seibel, a team that has truly found fit does not even have time to change its product fundamentally, because it is too busy keeping up with rising usage. Headcount or a big funding round, on the other hand, does not count as proof.

How do you know you've found fit?

Growth should almost crush you

The picture Seibel looks for is this: happy, loyal and ideally paying customers multiplying quickly, while the founders scramble to keep up. Until you see that picture, keep the team small and spending low. In Seibel's analogy, work like a small special forces unit, not a large battalion.

Downloads alone are not proof

In the video recording that accompanies the piece, talking with Dalton Caldwell, Seibel uses Socialcam, the company he founded, as an example. As he tells it, the app was downloaded 16 million times within a few months in 2012, reached the App Store top five and was sold to Autodesk the same year. Even so, there was no fit: there was no revenue model, and the chance that someone who downloaded the app would still be using it ten days later was close to zero.

The Justin.tv story is even more instructive. As Seibel recalls, around 2010 the company was making $8 million in revenue and $1 million in profit, but it had no engine to produce growth again and again. That engine arrived when the team discovered gaming streamers and built Twitch. So retention, repeatable growth and profitability are signals that need to be read together.

Hold on to the problem, not the solution

According to Seibel, founders hold on to their solutions too tightly and to their problems too loosely. Yet the real opportunity is the problem itself, in other words the market. The brilliant idea in the first version is often wrong; the right product is found only by launching, listening to customers and iterating. In Andreessen's words, in a great market the market itself pulls the product out of the startup.

Find the customer whose hair is on fire

Seibel unpacks the "customer whose hair is on fire" analogy often heard at Sequoia. Someone whose hair is on fire cares about nothing else in that moment. Hand them a hose and they will put out the fire and carry on; hand them a brick and they will grab even that and try to beat out the flames. The problem you are looking for should be so urgent that people are willing to try even a half-baked first version.

Lane's readers were like that. They did not care about a cover without a picture or cheap paper. They wanted a good book in their hands on a long train journey.

Einstellung: the setting the mind gets stuck on

In German, "Einstellung" means a setting or an attitude. With his water jar experiments, published in 1942, the psychologist Abraham Luchins turned the word into a concept. Participants first worked on puzzles that were always solved by the same long method. When questions then came along with a much shorter solution, most of them kept taking the long route they were used to. A control group who had not seen these practice problems almost always found the shortcut.

The Einstellung effect is when a solution that worked in the past stops you seeing a new one. This is exactly where the danger lies for a founder: the more effort you have put into the first version, the more attached to it you become. The Bodley Head directors were stuck in publishing's familiar mould too. Lane looked not at the mould but at the empty bookstall at the station.

Final word

In the second book of the Republic, Plato has Socrates build a city from scratch in words. Socrates starts not with laws or walls but with people's needs:

"Come, let us build a city from the very beginning in our discussion. What will really build it, it seems, will be our needs."

Your hands build your product, but it is other people's needs that bring it to life. Today, are customers chasing you, or are you chasing them? If you set your solution aside, what problem would be left?

If you are planning the first step on the road to fit, have a look at What Is an MVP, and How Do You Plan One?