Market-Product fit vs Product-Market fit

Marc Andreessen originally coined the phrase product/market fit in the statement: “Product/market fit means being in a good market with a product that can satisfy that market.”

Since then, many prominent entrepreneurs and investors have built up process and theory around this idea to formalize its definition and generalize how to find it. The gist of it is that a startup should quickly build a minimum viable product (MVP) and have some measurable way to measure it’s fit to the market. If the fit isn’t quite there, change and iterate on the product until it is. Sean Ellis proposed that the measure of product/market fit is that at least 40% of users would be “very disappointed” to no longer have access to the product (known as the 40% rule).

Pretty much everyone agrees on the importance of product market fit, and most people agree at a high level on how to evaluate whether a product has market fit, but what about the notion of minimum viable product? The commonly held ideal path is to select a huge market, find a need within that market, develop a product quickly and change the product until it serves that need well. But there is an underlying assumption in that path.

Cost to Explore vs Cost to Position

To dig into that further, let’s introduce a couple of terms.

Cost to Explore

The cost to explore is the cost in time, opportunity and capital to make a unit change in a product. For a webapp this may be relatively small, for a container ship manufacturer, this may be pretty high.

Cost to Position

The cost to position is the cost in time, opportunity and capital to make a unit change in market. For a social network, this is relatively high, but for a commodity like a steel producer this is relatively low.

Product/Market vs. Market/Product

Startups and recent tech companies tend to be in spaces where cost to position dominates the cost to explore. This is because software is relatively cheap to produce, while marketing, sales and messaging remain expensive.

Many large industrial companies are in just the opposite scenario: the cost to re-tool and change a product is extremely high compared to the cost of selling an existing product into a new market. One industry where this is particularly evident is Pharma, where new drug development is massively expensive, making getting an existing drug approved for new uses particularly appealing.

So this notion of MVP and product iteration to get to product/market fit is not a universal process, it is specific to the cases where cost to explore dominates cost to position. I’m left wondering where this balance tilts. Surely for many software companies, it is cheaper to iterate a product than a market, and surely iterating both simultaneously would be a nightmare for a company of any size, but for extremely technical or science heavy startups, does the notion of MVP break down?

Strategic Considerations

There is a critical strategic step that must be taken in the early stages of a startup if management expects to manage effectively at scale. The company must determine whether they are dominated by this cost to position or cost to explore. To determine that, the CEO should ask his or herself:

  1. How long is my product development lifecycle? Weeks? Months? Years?
  2. How long is my sales cycle?
  3. Will my product be vertical or horizontally positioned?

A vertically positioned product with long sales cycles and short development cycles is a classic product/market case. It will likely be much cheaper to change the product than market. Conversely, a product with long development cycles, horizontal positioning and short sales cycles can be quickly re-sold into different markets, making it a market/product case. Shades of grey are in between.

Organizational Impact

Once this is determined a few things fall out. For the product/market company:

  1. Product management becomes the most critical role in leadership (other than CEO)
  2. Engineering management and organization must adapt to quickly changing requirements
  3. As-A-Service business models tend to work best, to allow for continuous product change
  4. Sales takes a consultative/sales engineering slant due to tight integration with product management

For the market/product company:

  1. CTO or Head of Research becomes the most critical role in leadership (other than CEO)
  2. Product management role becomes more strategic, focused on positioning and sales
  3. Engineering takes a longer term vision, more focused on defensible IP and technology
  4. Sales takes an implementation services/application engineering slant due to market iteration

These tendencies effect how and who to hire, how to organize the company hierarchy, how to respond to inevitable challenges and failures, and many other aspects a young company. Without a good understanding of why the MVP route to product/market fit is often best for startups, an entrepreneur is left vulnerable to being caught in the case where it isn’t. So sit down, think strategically, and decide whether to chase a minimum viable product or a minimum viable market.