The thinking behind how products create value across customers stretches back to founder and legendary Sequoia Capital investor Don Valentine, which Andy Rachlef of Benchmark Capital christened as product-market fit. 

In our Start, Build, Scale framework, achieving a high degree of product-market fit should be the primary objective of the start phase before moving onto building a repeatable go-to-market engine and investing in growth. 

The term is now so widely embedded in the start-up ecosystem that it’s almost impossible to have a conversation without it coming up. In reality product-market fit is much messier than the way it is typically spoken about, which can unfortunately lead to some very difficult situations for both founders and investors which we will touch on in this article.

My intention here is to formalise the definition so that we establish clarity over what it is and isn’t, and to ultimately drive better decision making. There will be variations in the words people use to define it, but essentially comes down to creating value for customers in a way that is repeatable for a given market.

More precisely, I propose that there are five axioms of product-market fit:

1. Product-market fit is a function of customer value created, not value captured
2. Product-market fit is a function of market scale
3. Product-market fit requires repeatable value creation
4. There are only ever degrees of product-market fit
5. Product-market fit is tightly bounded to common customer and market characteristics

Axiom 1: Product-market fit is a function of customer value created, not value captured

Invention is the mother of product-market fit. Peter Thiel argues that inventors should be aiming to create technologies that are 10x better than alternatives. I think his definition is too restrictive, focusing only on technology, when there are other sources of innovation, but his fundamental point of value creation sits at the heart of product-market fit.

Importantly, value creation has nothing to do with the prices that suppliers charge or the margins they earn. Being able to charge high prices is an indication that you have created something valuable for someone, but it is not a requirement for product-market fit. Your ability to capture value depends on your ability to first create value, but the logic doesn’t flow backwards i.e. your ability to create value for customers doesn’t depend on your ability to capture it. That depends much more on industry economics and competitive position.

“Price is what you pay, value is what you get” - Warren Buffet. Take a simple example: two situations for buying a chocolate bar i) a busy street with many shops ii) a train with one shop. Your willingness-to-pay is different because it is shaped by competitive forces, the value you get is the same (assuming you are about as hungry).

‍Action for founders: Invest time in understanding the magnitude and nature of value your solution drives for customers, including the economic value to the corporate, social value to employees and stakeholders, and psychological and emotional value to the buyer. Finally, don’t confuse price for value, even though it can be a good indication of having built something valuable.

Axiom 2: Product-market fit is a function of market scale

For a business to achieve significant scale, there is no use creating something immensely valuable if it is only valuable to one customer. It’s in the name, but product-market fit depends on creating value for a (large) market of customers. As markets vary in size, product market-fit is a function of market scale, which one can think of simply as the number of potential customers you could sell to based on your market definition.

The shape of product-market fit will be idiosyncratic to the invention and target market. A company selling an operational risk management solution into tier one banks in the UK will only have a handful of potential customers, but will create immense value for those customers. Whereas, a business selling an email service solution to small retailers may have tens of thousands of customers, but will only create modest value for each customer. The total area for these respective businesses may be the same but the shape will be totally different.

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Action for founders: Invest time in getting a sense for market scale, and how that can be broken down by different needs-based segments. There is no need to do a large expensive market study early on, but you should have a good feel for the scale of the market and where the value pools are.

Axiom 3: Product-market fit requires repeatable value creation

Axiom 2 infers repeatability but it’s worth calling out separately as it’s so fundamental to the definition. The value that a new invention/proposition creates has to be repeatable across the market i.e. the invention has to fit a market as a whole not just individual customers. Founders are in the business of building repeatable, scalable products where the same product can be sold to multiple customers, not where every customer sale is a bespoke project.

Building highly customised propositions can generate significant revenue in the short term, but isn’t particularly scalable and will act as a drag on growth. Early stage investors, including at Notion Capital sometimes invest in a start-up partly on the basis that it has achieved a high level of fit for a marque logo. The assumption is that success can be replicated in logos which look similar. Unfortunately this is not always the case, and to create repeatability the business needs to either pivot its solution or the market it’s targeting.

Action for founders: Do not assume that just because you have created something valuable for a large customer that is paying a lot, that your solution will create value in a repeatable way for similar looking customers. Get to the bottom of which customer needs are driving fit, avoiding reliance on descriptive customer characteristics which can be misleading. Test repeatability with similar customers before investing in go-to-market.

Axiom 4: There are only ever degrees of product-market fit

Hopefully you have picked up by now that since both value and market scale are continuous variables, so is product-market fit. We can only ever talk about degrees of product-market fit. Statements like “we’ve achieved product-market fit” are unhelpful and can be misleading and potentially dangerous as it can lead to investments into go-to-market built on shaky assumptions. Shortcomings could be driven by the value side (not creating enough value for customers) or due to market scale, which as we will see in axiom 5 is sensitive to how precisely we define the market. It’s also important to remember that the world is dynamic, not static, so the value created for customers and the scale of the market can and will shift over time. Product-market fit is a shifting phenomenon: it shouldn’t be thought of as fixed for the life of the business.

Action for founders: Stamp out language that implies product-market fit is a binary outcome. Be very precise in your definition of segments and markets, and do not treat product-market fit as something that is fixed through time.

Axiom 5: Product-market fit is tightly bound to common customer and market characteristics

Market definitions are really tough to get right, but the degree to which you achieve product-market fit depends heavily upon it. Defining the market too broadly can give a false sense of scale, implying fit where it does not exist. Product-market fit is tightly bound to markets/segments, believing you have a high degree of fit in one market/segment does not mean you will achieve the same degree of fit in another market, which one could think of as different customer verticals, geographies etc. Sounds obvious, and it is, but it still catches investors and founders out.

Think of it as absorbing barriers between markets (a point you reach beyond which you cannot continue), you cannot necessarily extend fit from one market to the next without changing the product. For example, in the diagram below, investing in go-to-market motions in market one based on the success you have in market two could be an extremely costly mistake, a mistake we’ve seen many times. 

Action for founders: Segment the market based on true differences in customer needs, which reflect different degrees of product-market fit. Evaluate product-market fit in different segments to help determine go-to-market sequencing and ensure you are not over-investing in growth where you lack product-market fit.

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