What is Product Market Fit (PMF)?
We all use the term, but what do we actually mean? It’s a notoriously squishy term that was popularized in tech with VC’s, so it makes sense that people often cite Marc Andreesen’s definition:
“You can always feel product/market fit when it’s happening. The customers are buying the product just as fast as you can make it… money from customers is piling up in your company checking account… you’re hiring sales and customer support staff as fast as you can.”
While this definition focused on sales momentum is apt for tech start ups, it’s incomplete for brands. In tech, the purpose of Product Market Fit is to indicate to the company and especially investors that the company is ready for its next phase. The company is no longer trying to figure out which problems for which people it is addressing or whether it can provide the product or service to fit that need. Customers have spoken and are clamoring for more.
PMF signals to investors that new investment can be used for scaling, not searching. What’s missing from this signal is pricing and margin. VC’s investing in tech are less concerned (maybe even not at all concerned?) about margin at this stage. They are competing for massive outcomes driven by winner take all or winner take most economics. Margins and profitability come later. Listen to VC podcasts about AI and you hear this refrain repeatedly. You can delay profitability indefinitely when you have hundreds of billions of funding waiting in the wings.
All that is well and fine for tech start ups. But ecomm and CPG have to worry about margin from Day 1. Their outcomes don’t attract the hundreds of billions of loss funding. So profitability must be planned and achievable early.
Product Margin Market Fit (PMMF)
Brand leaders need to understand not only if there are customers for their products, but if they can make money from selling those products.
The margin matters!
Your brand is a machine. You must design the machine to be able to scale profitably and you will be ready to scale when you have PMMF.
Signs You Don’t Have PMMF
Brand leaders set prices that are too low so Contribution Margin is low. OpEx balloons. The amount of Contribution Margin and further upstream the Net Sales, needed to get to profitability explodes. These brand leaders dump money into acquisition trying to make a lousy margin structure work. Sales increase, but the low Contribution Margin isn’t scaling past OpEx. CAC’s are allowed to rise as more money is lit on fire in acquisition. Discounts increase; prices stay flat or decline and Contribution Margins get worse. Then comes the credit card debt plus loading up on MCA debt. These leaders pour more outside capital in, but their machine can’t scale because it wasn’t designed to scale. They have built a machine that turns dollars into 90 cents. Eventually the outside capital dries up, they scramble for a solution and usually things end poorly.
The Signs You Have PMMF
#1 First Purchase Contribution Profit. You are profitable on first purchase. If you have a high repeat purchase product i.e. something that people use frequently or a subscription model, I think Contribution Profitable after purchase 2 is fine. Anything after this requires exceptional stickiness and confidence in your data and ability to maintain CAC’s.
#2 Strong Repeat Purchasing. If people aren’t buying your product again and at better Contribution Margins than first purchase, then all you have proven is you can sell the promise, but you can’t deliver on it. Organic repeat purchasing is the acid test here. I am all for aggressive re-marketing. But if your repeat purchase rate depends on auto subscribing new customers, big re-targeting budgets and constant discounting, you don’t have PMMF.
#3 Sustainable CAC’s. A sign of brand is your organic acquisition. But it also shows up in your CAC’s. As your brand grows with more people, conversion is easier. CAC’s are stable or rising sustainably while you maintain your needed margins. The opposite case where CAC’s are spiking and threatening your business model is an indication you don’t have PMMF.
#4 Sales Momentum. I purposely put this as number four because if you don’t have the first three, sales growth is just hastening your end. Anyone can cut prices, ramp up the discounts, crank up the ad spend, and borrow unwisely to prove they have built a loss machine.
If you are a brand with PMMF and are looking for more capital to grow, reach out. Our funding solutions provide more capital over time than MCA’s or ABL’s and allow you to grow sustainably and faster.