Platform Innovation // Blog

What is Product Market Fit?

Product/market fit was a term coined by Marc Andreessen, “Product/market fit means being in a good market with a product that can satisfy that market.”

For platform businesses, product/market fit more succinctly means being in an ecosystem with a product that can achieve critical mass. We define critical mass as the point when a platform overcomes the chicken and egg problem so that the value a new user gets from joining the platform exceeds the cost of participation. At the point of critical mass, network effects start working for your business (positive network effects) as opposed to against your business.

A platform MVP (minimum viable product) doesn’t necessarily have to be able to achieve product/market fit. It may take a few iterations and releases beyond your MVP to build enough consumers & producers in your market to achieve critical mass. Even Slack, which by today’s standards, has been growing like a rocketship, took multiple years before its network effects starting working for the business so it could grow “virally.”

Laying out a Plan of Attack

The first step to achieving product/market fit as a platform is to determine your strategy for overcoming the chicken & egg problem.

Platforms will launch an MVP and usually hold one side of the ecosystem fixed and/or subsidized. A couple examples would be when we initially launched Glamsquad with a few hair stylists (producers) on staff and ready to field requests from consumers. Or, when the Xbox first launched, it guaranteed minimum sales volume (consumption) to initial video game developers to incentivize them to develop games for the platform by creating some sort of guarantee.

Conversely, a maker platform could launch its MVP without even trying to be a platform at launch. The platform could start out as a linear product seeking to gain one type of user group. When Instagram first launched it provided utility to users with cool filters for photos, instead of focusing on letting their users share photos within a social network. The sharing element came later and that’s when Instagram actually became a platform. The same was true for the iPhone as Apple initially didn’t have an app store or the support of the developer community. It’s a lot harder for exchange platforms to use this strategy because they are primarily focused on making 1:1 exchanges. It’s quite hard to build a sizeable user base if the platform has to rely on a static supply to scale (and it defeats the purpose of the platform business model!)

These can all be summed up as different strategies for solving the chicken & egg problem. For more on this topic, read here.

Build & Launch

As your MVP is built, it will become clear which features will actually be in the first version of your product. Not everything you had planned to be included will make it into the first release. This is just how software development goes. With the finalized spec in hand, you can finalize your launch plans and which chicken & egg strategies you will focus on. Each of these strategies will be closely tied to the four core functions of your platform business (matchmaking, audience building, rules & standards, and tools & services). For example, if you plan on subsidizing the initial cost of use for your consumers through a promotion code, your app has to be able to accept promo codes. Or, if using a marquee strategy, your app & backend infrastructure needs to let you set limits on which users can gain access to your platform at launch and which users are presented with a waitlist or relevant alternative.

Key to your launch plan are how you plan on allocated a marketing/user acquisition budget. What channels are you using to acquire consumers vs. producers? Which are your primary channels like traditional SEO/SEM and social media advertising vs. more exploratory channels like guerilla marketing on street corners, direct mail or subway ads. On the producer side of user acquisition, your marketing channels will be very unique to the industry you are working in. It will require your understanding of your ecosystem to help inform which are the best tactics to acquire your producer base.

Lift-Off!

Your app is live! Did you post it on Product Hunt? You’ll need to find someone in the Product Hunt community who can post it on your behalf if you haven’t been an active member. So, if you are still a few months away from launch, start engaging asap. Other sites you should definitely post on are Reddit and Ycombinator’s Hacker Feed.

As you acquire users, don’t shy away from using manual labor to fill the gaps in your platform’s core transaction. A lot of platforms rely on manual labor long after product/market fit. The key point is to make sure that your consumers & producers have a delightful experience when first interacting with your platform. If that means you have to get on the phone with them, then so be it.

Rinse & Repeat

Why do you need your users to have an initial delightful experience? Because you need them to come back again, and again, and again. Otherwise, your business will never succeed. A couple KPI’s to look at beyond Daily Active Users or MAU’s (monthly) is your cohort analysis showing you repeat users and their frequency as well as your average user lifecycle (aka churn). The company Zirtual had a grandiose failure in 2015 when it unexpectedly shut its doors with only a day’s notice to its hundreds of employees. The company began as a platform and failed as a linear business. They made the shift from platform to linear because they wanted to hire their producers as full-time employees with the assumption they could provide better service to their customers. Their issue was that they only had a few month customer lifespan. This is pretty huge churn so they decided to move to a linear model. Unfortunately, it didn’t improve very much and only got up to about 4-5 months into that strategy before they collapsed. And, instead, they took on massive payroll liabilities which ultimately put the nail in the coffin. However, it wasn’t the payroll that killed the business…it was really their customer churn.

This is the magic balancing act. And, why it’s so damn hard to build platforms (yet, also so rewarding). Not only does your business have to hold onto its existing users long enough while continuing to add new users, but it has to do this with two user bases, consumers and producers.

If you can hunker down and execute well enough on the above to achieve some sense of balance which keeps your platform’s core transaction growing, then sooner or later you will find the holy grail: product/market fit, critical mass and plenty of investor capital 🙂 So, keep chugging and hang in there!

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