How to tell if you have true product-market fit—& what to do if you don't. | Matt Watson, Host of Product Driven

One of the most common questions I get is 'How do I know if I have product market fit?" Especially when you're in that gray zone where things are kind of working but they're not really taking off yet, how do you know if you have product-market fit or not?

That's exactly what we dive into here. 

Why you should listen:

• Why demo to close is an excellent leading indicator of PMF.
• Why NPS is not as good as Sean Ellis test to measure product-market fit.
• Why retention is the best long-term metric, but takes long.
• What qualitative signals you'll feel when you have true PMF.
• What to do if you realize you don't have real product-market fit.

This podcast originally aired on Matt's podcast called Product Driven, because the topics were so relevant, I figured I'd post it here too.

Timestamps
(00:00:00) Intro
(00:00:55) How do you know if you have PMF
(00:06:33) Why some problems are good
(00:11:24) Solve a True Top of Mind Pain
(00:15:54) Why timing matters
(00:21:30) How to Know When to Pivot
(00:25:00) Asking the Right Questions to Customers

Chapters

• 0:55 How do you know if you have PMF
• 6:33 Why some problems are good
• 11:24 Solve a True Top of Mind Pain
• 15:54 Why timing matters
• 21:30 How to Know When to Pivot
• 25:00 Asking the Right Questions to Customers

Transcript

Pablo Srugo (00:00):

So I recorded this episode with Matt on his podcast called Product Driven. We spoke about what exactly product market fit is and more importantly, how you can measure it to understand whether you have product market fit. In the very early stages, what are some of the best leading indicators and later on when you actually have customers and you actually have growth. And if you don't have product market fit, we also spoke about what you should do.

Previous Guests (00:21):

That's product market fit, product market fit, product market fit. I call that the product market fit question, product market fit, product market fit product market fit product market fit. I mean the name of the show is product market fit.

Pablo Srugo (00:33):

Listen, if you don't want the show to move up the rankings, you don't want it to get better guests. I totally get it. You know what? Don't leave a review, just don't do it, would you? But if you want to help out, if you want better and better guests, if you want to help the show move up the rankings, then take literally five seconds and hit five stars. Thank you.

Matt Watson (00:50):

I guess the first question is: what in the world does product market fit even mean?

Pablo Srugo (00:55):

Yeah, so I mean product market fit, it's funny, I've now done 150 interviews with founders on the product market fit show and I ask every single one, when was the moment that you found true product market fit? And I have 150 different answers. So I think the most common thing people go to is product market fit is like when you see it, which to somebody that has found product market fit is clear and to somebody that hasn't found product market fit is exceptionally not useful. But in broad strokes, product market fit is the end of zero to one and it's a spectrum because you always have to be reinventing. The market is constantly changing so your product is constantly changing so that product market fit is not that you're done with it and you move on, but there is certainly a zero to one event where you don't have product market fit and then you do have product market fit. Product market fit fundamentally is when your product, the value that you are delivering is exactly what the market and specifically the market you're delivering into. So your ICP, your ideal customer profile at that time, is exactly what they want. You start seeing exceptional pull, clear demand. All of a sudden your problems are less about how do I add more customers next month and they're more all the other things that happen as a result of having so much demand.

Matt Watson (02:26):

How do I keep up with this thing?

Pablo Srugo (02:28):

How do I keep up. Exactly. That ends up being more of your problems, but it's vague. It's nebulous. Yeah. because it depends on so many different things, but at a high level that's what it's,

Matt Watson (02:40):

Well and for some people it can happen on a very small scale. I built this thing and people like it, but not a lot of people know about it, but at least the people that do know about it, they're really excited about it and they really like it. But that doesn't mean we're on the front page of TechCrunch or anything. It doesn't mean things have gone crazy. It just means that for our niche of who we talk to, we get amazing feedback and they really love it and they're raving fans, but that's different from these at mega scale VC companies.

Pablo Srugo (03:10):

Yeah, of course. I mean I think you can definitely look at some select KPIs that start to get a sense besides the qualitative piece, besides the feeling that you have market pull, the earliest one that I like to look at is, and this makes more sense in a B2B setting than B2C, but demo to close what is your demo to close ratio? It's such an early indicator of product market fit. If your demo to close is above 40%, that means that almost one in two demos you do close. And this is where again, it depends on so many factors because if you're selling to enterprise, that's just not going to happen. If you're selling B2C, there are no demos. So if you're selling product-led growth, there's no demo, so we're talking about a subset. But if you're selling B2B SaaS in kind of the normal, let's say normal price points, your ACVs or anything between 1,000 and 20,000 thousand just to put a number on it, if your demo to close is above 40%, then it's pretty clear that the thing that at least you're pitching is resonating. You don't have to do it 10 times over just to get one sale. You do two of them and they're like, oh my god, where do I sign? So that's one indicator. Another indicator is time to close, which obviously is related to that, but I've heard of founders that have closed like 10, 20 K on a call. They get one demo, 30 minutes, call ends, they sign, they wire. Again, that is a signal of product market fit. That's probably the earliest one.

Matt Watson (04:45):

I think that's a good metric. The 40%. I think back to my Stackify days, we were selling an application performance monitoring tool to other software developers similar to New Relic and Datadog and this kind of stuff. And at that time our demo to close rate was about 30%. I would say we never actually found true product market fit where we had a massive pull from the market. We were always pushing, it was always a fight, but we were successful, we were growing, but we never found that true true product market fit. We were lost somewhere in this valley. Do you see that a lot as well? A lot of companies, maybe they're successful but they just never quite hit product market fit.

Pablo Srugo (05:29):

a hundred percent. You can get pretty far without product market fit. And so then you might wonder “why do you need product market fit?” But product market fit is the thing that's going to give you the venture type growth, the truly exponential, hard to control growth

Matt Watson (05:47):

Yeah

Pablo Srugo (05:47):

It puts you on a path to a hundred million plus in revenue. If you want to build a five to 10 million business, you don't need that level of true product market fit. And by the way, that 30% number you mentioned is interesting. I think it's pretty common. 25 to 35% is where many solid startups live. And because you can go very far on that, I think if you're sub 20, certainly sub 15%, it's just going to take way too much work and your metrics all across are just going to stop making sense because the amount of marketing you're going to have to do, the amount of money- 

Matt Watson (06:19):

The cost is just too high.

Pablo Srugo (06:20):

Exactly. It's just not going to work

Matt Watson (06:21):

Churn is probably too high. 

Pablo Srugo (06:22):

That's right. But the 25 to 35%, you can create a real business on that. It's just going to be hard to have the insane explosive growth that you get if you hit above 40%.

Matt Watson (06:33):

Well, and then my first company was a company called VIN Solutions. We were selling a CRM software to car dealers and I don't know what our demo to close ratio was for that, but I guarantee it was over 40% and we were growing faster than we could keep up with it. I mean we had that pool, we were doubling in revenue every year, rapidly growing. We couldn't keep up with the growth and we definitely had product market fit. Now at that point in time, I don't know if that terminology existed then this was over 15 years ago now, but we had that pull, we knew we had product market fit and we could not keep up with the growth. We tried to raise VC money, we tried to do all that kind of stuff, but it was during the recession and General Motors and Chrysler went bankrupt and we were in that era. We were one of the early SaaS companies today. It would've been a different world. But so I definitely lived through that and that was wild times. We could not install customers fast enough. People talk about wanting to have that problem of having more customers than you know what to do with. But it was terrible because I had 50 salespeople that were trying to sell our product and were very good at sales. But now what were those salespeople doing? They were getting cancellation calls because we couldn't install our software fast enough. So now I get a bunch of salespeople that are angry because it's cutting into their commissions and all they're dealing with is mad customers. We couldn't deliver the product fast enough. I lived through that. It was not a fun time.

Pablo Srugo (08:07):

But again, there's problems. You are going to have problems regardless, but there's the problems you don't want and the problems you do want.

Matt Watson (08:12):

It was a good problem, but-

Pablo Srugo (08:13):

It was a problem. Exactly, exactly. It was a problem, but it was a good problem. The problem you don't want as an early stage founder is almost like where I was talking to, I forget which founder I know. It was like I just always feel like there's so much more to do than I can do. There's so many fires to put out, I can't get on even footing. And that's a good place to be because if you're an early stage founder and you feel like you've got things under control and you've got time, then you probably don't have the pull that you really need to truly take off. If you have that pull, it's exactly what you just mentioned. Onboarding goes like crazy. Customer success goes crazy, product goes crazy. There's fires in so many other places

Matt Watson (08:53):

You're holding onto the rocket. I think it's important to note, you mentioned this earlier, there are a lot of very successful companies, let's call them-. A lot of them are bootstrapped companies that have demo to  close rates that are lower. Maybe they don't have quite that same market pool, but they're still wildly successful, but they're probably not a great candidate, maybe even for you guys or typical VC, right?

Pablo Srugo (09:18):

I think that's part of it. I think then you also have to look at the other side because  demo to close if you want to be pedantic is less a measure of product market fit and a message more a signal of message market fit. You're saying something that people are like, oh my god, where do I sign? Then they actually get the product and they use the product and then you've got to look at other things. And if you would just want to go through this kind of cycle of, okay, what sort of things can I look at to measure this? The Sean Ellis test is another classic where you go and you ask your users, retention will be the last one we'll talk about, but you go and you ask your users, how would you feel if this product no longer existed? And it's “very disappointed”,  “Disappointed”, “I wouldn't care” And you want, again, 40% of your users- 40% of your users to say they're very disappointed. And that's another signal. And this is actually true product market fit because at this point they're actually using your product. and demo to close. You could be a really good salesperson, you could promise the moon, and then you might have a really high demo to close. You could use a bunch of different sales tactics to just make sure people close quickly and then they get the product. Now, once they have the product and they're using the product, that's a different story. If they start churning like crazy, they're not happy, then obviously you don't have a product with fit. If on the other hand, you ask 'em this question and almost half of them hopefully more, but almost half of them are like, I'd be very disappointed if I lost this product. Then that's a very good signal that they truly need it. And that's the sort of thing you want. That's the sort of thing that indicates product market fit

Matt Watson (10:51):

Well. So we've talked about some ways to know that you have maybe obtained product market fit, and I think a lot of things in life you don't necessarily understand them until all of a sudden you're there just like you don't know if you like the artwork until you see the artwork and you're like, oh my God, I love this one. I mean, to some degree I think when you're there, you're there. So then I think my question would be from your perspective and dealing with all of your portfolio companies, how do you help them get there when you're like, okay, we don't think we're there. How do we get there? What do we need to do?

Pablo Srugo (11:24):

Yeah, I mean there's a lot. I think it really starts with understanding your ICP exceptionally well because a lot of this stuff is really in the subtleties. It's in the day-to-day things that your customers do, and the entire objective of that is solving truly a top of mind problem. 

G(11:47)

Pain. 

P(11:47)

Exactly. Really a true pain. So I'll give you an example from my experience, personally. My last company was called Gym Track. We had a first version of the product that we ultimately had to pivot away from. And when we went to the second version of the product, we hired a new CEO, this guy Rob Woodbridge, great guy, I worked with him for a few years. We started to think about our customers or customers at that time were gym operators. And one of the things we kind of realised was, it's interesting, you walk into these gyms, you see dozens and dozens of treadmills of bikes, of equipment, and yet if you talk to the gym operators about how they're making these equipment purchase decisions, which by the way, an average treadmill at gym is like $15,000. So if you have, you're talking about millions of dollars of equipment spent per location, and many of these are chains. They have dozens if not hundreds of locations and they're recycling this every five to seven years. Now you ask them, Hey, how did you decide to get 30 treadmills? Maybe you could have bought 25 and saved a hundred thousand dollars on that decision. And they're like, yeah, I have no idea. I just thought 30 was a good number.

Matt Watson (12:56):

We just fill up the room.

Pablo Srugo (12:57):

We just fill up the room, whatever. But even deciding, okay, you could fill up the room with more ellipticals. How do you know you didn't need more ellipticals? You know what I mean? There's all this kind of makeup of the gym space that is completely just manual and just best guess and yet it's real dollars. So our thinking was, man, look, if we could put these sensors on these pieces of gym equipment, we could track the usage in a gym, we could create dashboards and then especially for chains that have many locations, they could really understand what they should buy, what they shouldn't buy based on their demographic, based on all these sort of things. And honestly, it makes tons of logical sense. And we tested it. We were smart, let's say at that point in the sense that we'd been through it for three plus years with the other kind of version of Gym Track.

(13:37):

So we kind of knew the startup one oh ones. So we went to this conference, we sat down with 20 different gym operators and we showed them what the dashboard could look like. We told 'em about the product and they loved it. They absolutely loved it. They're like, this is amazing. Oh my God, I wish I had this data when I just opened my last club. This could totally change everything. The second day we're hearing people tell each other, yeah, did you talk to the GymTrack guys? Wow, their idea is so cool. So it makes total sense. 

Matt Watson (14:09):

You were getting some pull!

Pablo Srugo (14:09):

We felt some real pull. And so then we go out of there, we're so psyched up, we're like, man, this is insane. We finally got it. We're going to close so many of these customers. We start calling, emailing, doing everything you need to do to actually turn those conversations into real sales. Dude, we made zero sales. Zero. Zero, zero. And so big story,

Matt Watson (14:32):

That's not how I thought this story was going to end

Pablo Srugo (14:34):

Zero sales,

Matt Watson (14:35):

But this is how the story usually does end.

Pablo Srugo (14:37):

This is how the story many times ends. Because if you go to the subtleties, which was what I was mentioning, I mean first of all, we're showing a product, asking for feedback, telling them of a problem and asking if they have it. What you're going to get from there usually is first of all, most people won't tell you you're an idiot. They won't tell you no. So most likely than not, you're going to get smiles and nods. Now, in our case, a bit more than that, it was actually like they clearly resonated with it. Actually, they liked the idea. What they liked though was the idea. They liked that it was innovative. They liked that it was new. They liked that it could do something different for them, but what you're actually searching for in that phase is not whether they could like this idea, what's top of mind, what are they actually struggling with because those are the things they're going to try to solve. Those are the things that they’re going to try to solve 

G(15:25) 

The pain that needs to die today. 

P(15:27)

Exactly. And that's what they're going to pay for. And if I had asked them, Hey, what's your biggest problem right now? They probably wouldn't have said figuring out what equipment to buy from my club. They would've said, I've got too many clubs opening next month. I don't have enough members. My churn is too high. Those are the big things. And so we ended up spending a year plus trying to. because we had this kind of false sense of validation

Matt Watson (15:48):

Yeah 

Pablo Srugo (15:48):

Trying to sell this product that was not top of mind. You're never going to get product market fit if you're not solving a top pain point.

Matt Watson (15:54):

Well, and so much of it is timing, right? Whether you started that company five years earlier or later changes the timing of sensors and that being a top of mind thing. Or maybe that's when there was a lot of roll-ups going on in the space there or people opening a lot of gyms or the timing of all of it. And for my first company, we had originally built one of the best ways to take pictures of cars and upload them to the internet to cars.com and Autotrader and stuff, which didn't make any sense when most people bought cars by getting the Autotrader magazine at the grocery store, it wasn't as big of a thing. But then 2008 and 2009 happened and we had the recession. All the car dealers stopped spending money on radio, TV, magazine, all stuff. It was expensive and everything went to e-commerce. So we were there at the right place at the right time. So it's like we had a little bit of pull, but then all of a sudden we have more pull than we could keep up with. And so for us it was timing. We had laid the seeds. I think that's what we're seeing with a lot of AI stuff. It's like, oh, they had the idea of using some AI three years ago, and then when chatGPT came out, it really propelled them. So I guess to finish your story, how did you guys figure this out?

Pablo Srugo (17:05):

Yeah, a hundred percent. Well, and let me just touch on that because first of all, I dunno how many people have told me. Oh man, I actually had the idea for Uber before Uber, you needed the smartphone to be, they needed GPS and needed all these things who I recently spoke with Noah Glass, who's the founder, and CEO of Olo, which is a 20-year-old company now public company, I think the value about one and a half billion dollars doing 300 million revenue. They took seven years to get to a million in ARR So their product, the original product is around pick-up. basically classic UberEats. Now you can pre-order something and pick it up, but they were doing this, they started doing this in the early two thousands. And so people had flip phones and they had blackberries, and they finally moved to smartphones and he told me they had started, we had traction for a while.

(17:53):

We actually started selling B2B SaaS to restaurants to enable them to take orders. They started with the marketplace, all these sorts of things. But you know what, the big moment for them since we’re talking about timing, was there's a bunch of things happening in the background. So smartphone adoption is growing. That's a trend. Pizza places like Domino's are starting to leverage more and more internet ordering. So that's a trend. But he said, you know what the event was? The event was the day that Starbucks launched an app. He said, when Starbucks launched an app and they went all out on this kind of pre-ordering, mobile ordering, everyone else was like, oh my God, this is actually happening. It's happening not just for pizza, it's happening for coffee. It's going to happen for every restaurant. And I don't have a dev team. I can't go out and just build an app. So what do I do? Oh, here's Olo with this tool. So seven years to hit a million ARR. Now they do like a million a day, right? Yeah, they were ready. That's crazy. No product market fit,to crazy product market fit. But yeah, they were ready with it. And then when the market kind of changed a little bit, the product market fit was effectively instant

Matt Watson (18:55):

To that point. They probably had product market fit the whole time. There just wasn't enough demand.

Pablo Srugo (19:00):

Correct? Yeah, they had a little bit, that's right.

Matt Watson (19:02):

It’s its own problem. It's like, Hey, we build something, people like this thing, but there's just not enough demand for it or I don't know how to reach enough customers.

Pablo Srugo (19:09):

Well, it was kind of this, we talk about the early majority, late majority, this sort of thing. They were probably stuck in that innovators part of the market. The people who could see the future and could see, yeah, mobile ordering could be a really big thing. This is a perfect product for that. But I think until Starbucks came out the early and certainly the late majority, but even the early majority probably wasn't fully bought in, in terms of that priority, that pain point. But all of a sudden it was like, wow, okay, yeah, we got to do it now.

Matt Watson (19:36):

Well, how did you guys figure it out with GymTrack?

Pablo Srugo (19:39):

I mean, ultimately we didn't figure it out. So after that, we tried- The challenge is, with the first product, which was much cooler, it was around you go to the gym, everything you do is tracked. We had wearables, sensors, all this sort of thing. And in the 2013 era before the Apple Watch, before this was mainstream and we raised 6 million in venture, but then we spent 6 million. We had all these engineers who went through near acquisition, it failed. That's when Rob came into the picture as a professional CEO moved into GymtrackV2, which is the analytics product I mentioned. Now we're four years into the journey, five years into the journey, I’m certainly, I'm pretty tired. My other co-founder had already left and this thing got some traction, but again, was never solving a top pain point. So never truly took off.

(20:30):

And then it was just like you're stuck with this. You've raised at that point, we've raised probably 8 million or so in total. So there's a pref stack we got to think about. We're already this venture type startup, so we can't just create this lifestyle profitable business and we don't have true, we certainly don't have true product market fit. We're not solving a top of mind problem. So you need to maybe kind of re-pivot, but now you start running out of money. So for me, at some point, I just decided that it was time for me to leave because I wasn't going to change the outcome of the business. Rob tried to sell the business. It wasn't really a great space in terms of the number of acquirers. So ultimately it was a wind down. We thought we were part of the 1% that actually exited when that acquisition almost happened, we turned out we're part of the 99% that failed.

Matt Watson (21:16):

Well, looking back. Advice for other people, at what point do you realise, hey, maybe we've tried everything we can try or we haven't received a validation, we should fail fast. How do you think about that now?

Pablo Srugo (21:29):

Well, I think here's the thing. If your product really isn't working at all, you have no traction, you're probably, if you're a decent founder, you're going to keep iterating. You're going to keep trying new ideas, you're going to keep switching it up. If your product's totally ticking off, great, totally ticking off your post product market fit. You've got other things to worry about. The challenge I find is that grey area is where you have some pull, you have some traction, but you don't have true product market fit. And I think the biggest issue, and in terms of lessons or whatever things that I see is I've yet to meet a founder that says to me, man, I wish I hadn't pivoted that fast. Most of them are like, I wish I pivoted sooner. And that's because there's so much sunk cost. There's so much investment founders already made in their current product. The last thing they want to do is start over. But I've seen many founders who were just ballsy enough or whatever words you want to use, just courageous enough to just say, you know what? This thing isn't the thing. I'm actually better off effectively starting over, one of the latest ones I had, he's from this guy actually, his name is also Pablo. Funny enough, I reached out to him. I was like, dude, your name's Pablo. Mine is Pablo, you got to come on my podcast. So he did. But anyways, he's the founder of Happy Robot. And when he started, he went through YC. He had this product, they were doing like 70 KARR. They had some traction in YC land. That's actually a decent amount of ARRs more than many others had. But he just realised there was something wrong. He just didn't feel like he had the pull that founders who would come in and talk about the pull that they had.

(23:04):

He's like, he didn't have that. So he actually called his customers and said, guys, we're abandoned. The product said This is done. I'm sorry. I'll try and help you out. So you are not kind of lost without it, because maybe you needed this, but we're not going to keep selling this. We're not really going to keep servicing. It went back to square one, completely, totally different space and ended up building an AI agents in the logistics space that answer calls from freight- Basically, if you have a truck and you're trying to pick up loads, you call. But instead of a human answering, now it's their AI agent that answers, and they went from zero to 2 million in a year. And he's like, his biggest lesson was, if you don't have that kind of pull, if people aren't pissed every single time your product doesn't work, then you're better off continuing to look for something. The way I summed it up is, an ounce of prevention is worth a pound of cure, an ounce of research is worth a pound of marketing or sales or whatever. Investing that time up front is so hard, especially when you have something that's kind working, but it's totally worth it every time.

Matt Watson (24:13):

Well, and if you're a good entrepreneur, there's an opportunity cost there, right? It's like I'm sinking more and more time into this thing that isn't working where I could be sinking this time into something else

Pablo Srugo (24:21):

A hundred percent.

Matt Watson (24:22):

But that sort of sunk cost fallacy and entrepreneurs being very kind of hardheaded, they don't want to stop, right? We're going to go down with the ship. We're going to keep trying and trying and trying, but there's an opportunity cost. We could go do something else, but you gotta stop doing what you're doing now. But it's hard to get us to do it,

Pablo Srugo (24:40):

Especially when you're the one that actually builds product and you kind of get some sense. You're like, oh, maybe this new feature, maybe this new thing. If I just add this one more thing, it's going to be the thing that takes off. And honestly, it rarely ever is, and it usually comes down to the fact that you still haven't found that one thing that customers really care about.That customers really need.

Matt Watson (25:00):

Well, and the only way to find that out is to really talk to the customers and understand the market, not sitting in the basement building new product features that don't really matter. And that's something we talk a lot about on this podcast. Just talking to customers, understanding what the customers need is important. I love, we talked about earlier, product market fit, getting the pool, we talked about demo to close at 40% churn. I like the asking people, what would you do if I took this away from you? I think that's a great way to understand how much people really liked your product.

Pablo Srugo (25:33):

Well, because one of the things there, because I spoke to Sean Ellis who created that test and talked about NPS, right? NPS is the other thing, net promoter score that people a lot of times think about when they think about, do people really love my product? Which is from one to 10, how likely are you to recommend this to others? And if you have a good ratio of nine and tens versus one to fours, then people love your product. And he had a great point I thought, which was that NPS score, oftentimes you think you're measuring how much people love your product, but you're equally, if not more, you're measuring how much people like your customer success, your customer service. Because if people are treated in a really good way, they'll have great things to say about your company, even if maybe your product is not that needed.

(26:13):

And so you might have these kind of- and the opposite is true as well, but more so that you might have false positives with you. And you know what? I've noticed this, which is big, big companies like Net Promoter Score, whatever it is, it's not that High startups net promoter score is very often very, very high. And I always wondered why. And it's because the founders front and centre servicing customers, and you could believe that they're going way out of the normal. I've heard founders say that they were the ones answering 1-800-NUMBERS. They'll answer at 2:00 AM and they'll treat you like you're a star. And so obviously if you ask that person, Hey, would you be likely to recommend this company to a friend? They're like, yeah, of course they treat me so well. They're so awesome. That doesn't necessarily say that your product is an absolute must.

(26:56):

Whereas the other question, would you be disappointed if I pulled this product really has nothing to do with referring to other friends, which doesn't kind of tie into how they treat me. It's just strictly about how much do I really need this product? And so it gets a lot more precise into the product market fit question. 

Wow, what an episode. You're probably in awe. You're in absolute shock. You're like, that helped me so much. So guess what? Now it's your turn to help someone else. Share the episode in the WhatsApp group you have with founders. Share it on that Slack channel. Send it to your founder friends, and help them out. Trust me, they will love you for it.