If a startup is a ‘unicorn’, we know it’s a privately held startup with a value of over $1 billion. There is one metric, it is easy to measure so it’s clear to us when a startup has hit unicorn status.

The term ‘Product-Market Fit’ is more complex and confusing. It requires a startup to hit a range of unagreed on metrics, each metric coming with a subset of complications. Even Marc Andreesen, the brain behind the term, acknowledged that many founders think they've found it when, in reality, they haven't.

So, what is Product-Market Fit? Let’s start with an all too simplified definition and we’ll break it down from there.

Product-Market Fit is when users are joining, using, paying for and spreading the word about your product at a scale which showcases there is market demand for it.

But wait, what about Snapchat users sharing 400 million snaps a day before they monetised? Does that mean they hadn't achieved Product-Market Fit then? And what about Palantir, at a point they had one customer, albeit a billion-dollar contract with the US defense force—does that count?

This highlights the impossible challenge of finding a perfect formula for calculating PMF. But fear not, let's break it down using some heuristics to give us the best shot at accurately measuring Product-Market Fit.

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Users are joining and spreading the word about your app at scale

As a KPI-driven operator, I understand the desire to strive for a target user base count. But, as the Palantir example showed, it's not that simple. Each product has a vastly different user base count when they hit PMF. The key lies in the method in which you acquire users and the rate at which your user base grows. If 90% of of your user acquisition relies on paid ads and product giveaways, you have not achieved PMF. A significant portion of your acquisition should come from word of mouth, indicating genuine user appreciation for your product. When word of mouth starts happening at scale is generally when startups hit an inflection point in user growth and the hockey stick curve starts to take shape. This is a strong indication of Product-Market Fit. If your CAC is higher than your LTV, you have not achieved Product-market fit.

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Users are staying on your app and using it for it’s intended purpose:

User growth is one thing, but you must prove they're actively using your app. Check your app retention rate (rate of usage after install); it should align with or be better than industry standards (30-day retention rates are usually between within 27% to 43%).

Users should also be consistently taking key actions on your app, a key action for Instagram is posting a photo, for Uber it’s booking a ride. Work out what are the key actions are for your product and measure how often your users are doing it.

In September 2021, El Salvador became the first country to recognise bitcoin as a currency and rolled out a digital wallet, called Chivo. President, Nayib Bukele gambled over $375 million on the platform including offering a $30 sign up bonus to incentivise citizens to start using the digital wallet. It flopped. Almost all Chivo users signed up, withdrew their money and deleted the app. This demonstrates how sign ups do not prove Product-Market Fit and the importance to prove retention and app usage.

Good app usage is also supported by metrics such as a low bounce rate and a high average session time.

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Users are paying for your app:

To ensure sustainability, you need to know if the market is willing to pay for your product. While a large engaged user base is great, it doesn't prove a sustainable revenue generating business. If you can’t get users to pay for your app, you may need to iterate your product to a point when they see so much value in which they are willing to pay. Another common heuristic used to measure PMF is the 40% rule. At least 40% percent of surveyed customers should indicate that they would be "very disappointed" if they no longer have access to your product. If your user base sees that much value in your product, they would be willing to pay for it. At immense scale, there may be exceptions to this rule, Snapchat's knew that when they wanted to monetise their hundreds millions of users, they could.

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Summary

Let’s bring back our all too simplified definition; Product-Market Fit is when users are joining, using, paying for and spreading the word about your product at a scale which showcases there is market demand for it.

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‍If you can get these three stars align and you reach Product-Market Fit, the gravity starts to shift. Your product team often is scrambling to accommodate the overwhelming growth (server overload issues!), the sales and marketing team feels the shift from push to pull and suddenly investors are knocking on your door and not the other way round. This is because investors know that with a lower CAC than LTV and an engaged paying user base, their money can be used to scale a proven model (this is what is often referred to as growth capital). All that being said, it’s easier said than done… good luck out there!