The Illusion of Product/Market Fit for SaaS Companies

“We have product/market fit.”

“We are searching for product/market fit.”

“We are raising this financing to find product/market fit.”

“Our customer traction demonstrates product/market fit.”

Product/market fit. It’s a wonderful phrase, thanks to Marc Andreessen, Sean Ellis, Steve Blank, and Eric Ries. But it also one of the most overused, and inappropriately used, phrases that I hear with SaaS companies on a daily basis.

I was in a meeting a month ago with a company I’m on the board of where product/market fit was asserted. I sat quietly for a moment and then stated as clearly as I could that the company didn’t have product/market fit, they had the illusion of product/market fit. A long conversation ensued which resulted in me pondering this illusion and trying to put some parameters around it.

But first, some history.

There’s a fun post from Ben Horowitz in 2010 titled The Revenge of the Fat Guy that weaves in comments from Fred Wilson about product/market fit where Fred argues in his post Being Fat Is Not HealthyWhile ostensibly it’s a post about lean vs. fat startups, it really is about discovering product/market fit and it gives a good history lesson on the thinking circa 2010 on this issue. Ben eventually states, and then explains, four product/market fit myths.

  • Myth #1: Product market fit is always a discrete, big bang event
  • Myth #2: It’s patently obvious when you have product market fit
  • Myth #3: Once you achieve product market fit, you can’t lose it.
  • Myth #4: Once you have product-market fit, you don’t have to sweat the competition.

As I rolled this around in my head, I started to realize that part of the illusion of product/market fit is that there’s a belief that once you have it, you never lose it (myth #3). There’s also the belief that there’s a magic moment where you have it and declare it (myth #1). Worse, there’s the belief that it’s obvious when you have it (myth #2). And tragically, a lot of companies believe when they have it, they don’t have to worry about anyone else because they’ve won (myth #4).

I’ve experienced the downside of each of these myths many times. I’ve seen companies have to rediscover product/market fit after getting to a $500k MRR (monthly recurring revenue). I’ve been involved in companies that thought they owned the market at a $2m MRR only to have a new competitor come out of no where and beat the crap out of them. I watched companies at a $4m MRR enter new markets and struggle mightily to discover product/market fit for these new markets. Or worse, I’ve seen a new product release that was late completely toast product/market fit and force a company to hang on to customers any way possible while rushing to fix what was broken.

The illusion of product/market fit pops up at multiple points in time. So I started thinking about heuristics for these points in time and came up with MRR as a parameter to explore. Suddenly, the illusion problem came into focus for me based on MRR, with clear transitions happening up to a $1m MRR. While I’m going to keep exploring this, I have a hypothesis now about the dynamics around product/market fit in SaaS companies that I’m playing around with. Feel free to tear it apart.

When you have $0 of MRR, you have no product/market fit. Ok – that was easy. You are working on a product and searching for your first customer.

From $1 to $10k MRR, you have the illusion of product/market fit. You finally found someone to pay you for your shitty MVP, but you’ve got a long way to go before you truly have product/market fit. Do not pour on the gas at this point. Stay calm and keep doing what you are doing.

$10k to $100k MRR is a super exciting time. You’ve got a semblance of product/market fit. You are starting to learn what your customers will pay you for. You feel like things are actually cranking. You probably have one or two salespeople and one of your founders – maybe your CEO – is still the head of sales. If you try to raise a Series A, the process is straightforward. It’s easy to believe you’ve got it figured it out here. This is the point at which myth’s #1 and #2 usually kick you in the ass. If you aren’t growing a compounded 10% each month, you don’t have product market/fit yet. If you are growing faster than that, you have found something.

Going from $100k to $500k MRR is a product/market fit sweet spot. You are starting to build a sales organization, have visibility in the market in your segment, and might even have customers coming to you on a regular basis. This is where myth #3 bops you on the head. You think you’ve got it and it’ll keep scaling, but you hire the wrong VP Sales, you focus on the wrong metrics, or you end up struggling to renew your customers when the first annual renewal cycle hits. You get confused about negative churn and conflate upsells with growth with churn. Lots of companies stall here – some due to self-inflicted pain; others due to the illusion of product/market fit.

If you can blast through the $500k MRR mark and march to $1m MRR, you’ve found product/market fit. You are now at the magical point some people call “Initial Scale.” Cool – you’ve got a business.

Now, your value is going to be determined by your growth rate. At any point in time, if you are growing > 100% year-over-year you will be highly valued – think at least 10x revenue, but I won’t tell you whether it’s trailing or forward, as that’ll shift around based on the public markets. And, the faster you are growing, the more discontinuous (e.g. higher multiple, but not linear) your valuation will be.

If your growth rate is between 50% and 100% and holding steady, that’s good and you’ll see a nice, big, healthy valuation. But if it’s declining, watch out for that magic 50% year-over-year mark. It’s like a trip wire that will send off all kinds of weird alarm bells. Once you decline below 20%, you better make sure your existing investors are going to be ready to step up to finance you, or else start the rapid march to profitability, which likely generates even slower growth.

Myth #3 and myth #4 show up all the time at MRR’s > $1m. You disrupted someone a few years ago which is what caused you to discover product/market fit. Don’t be confused about the world – someone else is gunning for you now that you are the big player in whatever segment you are in.

Every time you work on something new, whether it’s a new feature, a new product, or a new product line, recognize that you are searching for incremental product/market fit. The search is a continuous and never ending quest. Don’t confuse illusion with reality.

  • I had a recent, somewhat painful, reminder that early sales based on prior relationships do not validate product/market fit. These deals made the metrics look good, but organic deals have been much harder to come by.

    • Well said – I missed that point. Selling to people you know is nice, but it isn’t evidence of product/market fit. Lots of VCs get confused by this when their portfolio companies have early sales success, but 100% of the customers are from their portfolio.

  • Hi Brad, would assumptions for (1) price point/price range and (2) number of customers influence the MRR ranges provided? If my SaaS is $5K/month then myth related signaling might happen differently than if my SaaS is only $99/month.

    • Not really. I find price points and number of customers to be a secondary indicator. It matters at very low MRRs, but once you get above $100k MRR the dynamics are similar.

  • Brilliant post Brad. Kept nodding.
    In those hicups you describe, I think the underlying cause is often that the value proposition for that given phase starts to get weakened, either because the company starts to tinker with product features in the wrong direction or you’re targeting a new set of prospects that isn’t seeing the value that others saw (either it was a smaller market, or you’re not finding the sweet spot target market).

    So, I think that a continuous alignment and check on the value proposition is part of this equation. The value prop lets you deliver on your business model, and that’s the locomotion of growth, (assuming you can figure out the mechanics of selling). I’ve written about that, and called it “Product-Value Alignment”, and am interested in your thoughts. I think it complements what you have written here.

    • I remember that post – it’s a good one and it’s definitely complementary.

  • Ironically, I think the same can be said for big corporate products too. Does 3M always have command of product/market fit even though they may dominate a product category? If they don’t keep iterating, and listening to customers, they lose it.

  • Rick

    When using acronyms or abbreviations you should define them when first introducing them. This lets every reader quickly and easily get on the same page.
    Can you really judge product/market fit by dollar amounts alone?

    • I just added the full phrase (monthly recurring revenue) and a link to the explanation. Thanks for suggesting this.

      I’ve found revenue and growth rate to be strong correlated with product/market fit.

  • ktinboulder

    This is thinking that I will use for a meeting at 9a this morning. Thank you for reading my mind and giving me answers 😉

  • iteration.

  • Tom Flaherty

    Great post with insights at every stage. Exploding, reexamining and refactoring myths is crucial for clear thinking.

  • DaveJ

    Your elaboration reminds me of the concept of “Flow.” There is a sweet spot range, where you are in flow or product market fit. If you are “below” it, you are “bored” (have not found product/market fit). If you are “above” it, you are “stressed” (either you are screwing things up or growing so fast competitors are coming after you). I am not positive about the axes but it seems like MRR as the vertical and “execution” as the horizontal is a decent map. Thoughts?

    • Chris Heivly

      if you have not read The Rise of Superman and a long treatise about “Flow”, you should. It is very good.

    • Excellent. Yes – it fits nicely with Flow (Mihaly Csikszentmihalyi) as a metaphor. For those who don’t know this, check to Csikszentmihalyi’s TED Talk.

  • Chris Heivly

    vigorously nodding along as well. whether everyone agrees or not – this is another perspective on the only thing that matters in our collective startup world

  • Rosey

    Nodding (agreement) all the way, also.

  • You could also substitute number of customers for MRR (in reality they are the same but number of customers is the underlying reason)

    Its (relatively) easy to get one customer. Its also relatively easy to keep that one customer happy.

    Then you have a handful of customers. Its much harder keeping all of those balls in the air. It feels good but you still don’t know if you have fit, you can still survive by catering to each one.

    To blast through to the final level, you can’t cater to any one customer, your product has to be such that it will fit a new customer out of the box. It has to be repeatable and scaleable otherwise you won’t have the growth rates you describe.

    You are right, between the last two stages somebody will see you have a market and try and pick you off. Frankly, I don’t believe in no competition, so it will be somebody you are competing with, will look at you and try to replicate.

    • My struggle with using customers as a leading metric is that many of the SaaS companies I invest in have multiple MRR / customer prices. I’ve seen very wide ranges – sometimes based on usage, number of seats, features, or magic pixie dust. So while the number of customers is a useful second metric, I still find MRR to be the better leading metric.

      • I don’t disagree with what you measure. (I am sitting here literally with a chart of our MRR open because I am explaining the metric to some non-software execs)

        I am trying to describe the underlying reason.

        BTW: your patience shows, I was tempted to say if don’t know what MRR is you shouldn’t be reading the post.

  • Henry Wilson

    Monthly Recurring Revenue. Just say it once so people don’t have to Google it.

    • Done – and linked to a definition.

  • Thanks for the great though provoking post – love how you correlated those 4 myths with growth and MRR.

    MRR growth is what’s it’s all about – no doubt. But what about the churn rate correlating with product market fit?

    My perspective is starting a SaaS product in a bit of a niche market so I’m trying to correlate your perspective with mine (because I doubt I’ll see those numbers with this particular product). And while MRR growth is what’s it’s all about for any SaaS company, I see churn as my biggest indicator of product market fit.

    Regardless of how huge the market is, how fast MRR is growing, if the product is losing more customers than it should (for reasons that can be fixed with customer and product development) then how can it be product market fit? The the lower the churn rate is, the higher the lifetime value is, and the better return on investment you will get on increasing the sales funnel.

    Ignoring sales and MRR growth for a moment, are many SaaS startups using sales to make up for unnecessary churn, and thus not true product market fit?

    • Churn matters a lot at different levels, but there are lots of ways to measure it. For example, I know a lot of people (entrepreneurs and VCs) who don’t understand 30 day trials or 90 day cancellation outs and how they impact churn, or, more importantly, how they should be measured.

      Your approach to selling matters a lot here and is probably a much different / longer post…

      • Would love to hear more about your thoughts on 30 day trials and their impact on churn, etc. My quick google search came up empty.

  • Next time an early stage startup comes in looking for advice and claiming product-market fit, I’m going to point them to this excellent article! Couldn’t agree more that startups require constant iteration to get and keep pmf. I think an interesting point is that iteration gets harder when there is an existing customer base (mrr > $100k for example), or in my work, when there is a large company trying out new products. The common question I get is when do I have enough info to really launch this new product line out of our “testing” phase (ie: do I have product-market fit!?)

  • Brad, this is a super helpful post. Thank you for educating the masses! I get really excited about the search for 10x improvements. This definitely helps us get there. *High five*

  • Tim Wolters

    Great article Brad. Have been on a few “market fit” missions and I think you nailed it. The only adjustment I would make is the series A at $20K floor instead of $10K. I think you can get one or two customers in very early who will get you to that $10K MRR stage and you’re actually not in that market-fit semblance stage yet. Of course, depends on your price points which is probably worthy of an entire post of its own. Cheers!

    • Completely true – price point matters a lot and if you are at a $10k MRR per customer, you will have a lot less than if you are at a $1k MRR. I personally prefer to start out at much lower price points and get a lot more early customers during the product/market fit search.

      • Yep. Completely agree there Brad. High price points early on does not typically end well for customer or vendor. I’ve been at companies where we’ve been pushed around on functionality due to price and software was gestated with a bias; sort of customer induced fetal alcohol syndrome.

  • Guy Turner

    Brad, is 100% YoY MRR growth really the trip line for companies at only a few $M in ARR? Feels like it’s 200%+ in the early stages where investors get excited. Curious what you’re seeing.

    • My experience is that at low ARR levels you want to see at least 10% monthly compounded (I say that in the 10k – 100k MRR section). On an annual basis, 10% compounded monthly is a little over 200% growth rate. So – that’s consistent.

      The trip wire I refer to is at larger sizes. Once you hit $1m MRR, if your annual growth rate slows below 50%, massive consternation appears at the board and investor level. Beware.

      • Guy Turner

        Thanks, Brad. Lines up well.

  • Nick Devane

    This post is fire.

    Only the Borg would claim PMF

  • Awesome post Brad. I 100% agree that product/market fit is a journey not a destination. One of the hardest things I’ve found about PMF over the years is figuring out how to measure/track it at an operational level.

    An approach I’ve found very helpful is to calculate PMF by tracking the percentage of sales opportunities in the pipeline that are specifically “blocked” by the lack of a feature(s)/capabilities.

    It takes some training and good sales ops processes to surface/track/code these in your CRM but it enables you to quantify PMF friction that sales efforts are facing at any point in time.

    • I’ve never tried this is a systematic way but it’s a logical analysis. I’ll try it – especially at lower MRR levels (< $100k).

  • Thanks Brad. Will be sharing this post with pretty much anyone that tells me “we’ve hit Product/Market fit!”

    • Cool! Hope you are doing well. I still think of Dogster fondly whenever I make a booking on

  • information is very good and it gives me the most interesting comments

  • Brad – great post. I’ve seen Myth #3 manifest in a slightly different form in some Cos as a VC. Cos believe past two quarters of growing MRR is product/market fit. Reliability of next two quarters of growth projection is a better assessment of product/market fit since this shows how well mgmt team estimates churn, upsell, competition

    • Yup – good point. I’ve seen a lot of justification based on looking backward only to get slapped in the face when things stall going forward!

  • Stretching the lesson a bit – trying to apply it to boot strapped SaaS startups. Targeting niche/small markets with the goal of total domination. I assume your hypothesis and inflection points still hold true while the actual numbers change based on the total available market. Yes?

  • panterosa,

    This looks like the intersection of two favorite words – jugaad and kaizen – as tools to keep on track for MRR.

  • I really appreciated the breakdown based on MRR.

    Having actual numbers (subjective, I know, but highly educated subjective thinking) to associate with different stages/perceptions of fit makes this post truly useful to the people who would learn from it (like me).

    So thanks. Well done.

  • In other words product/market fit is a journey not a destination.

  • dankhan

    Good post Brad, I file this as part of the entrepreneur’s reality distortion field – so many startups I speak to who here in NZ claim product-market fit when they are sub even $10K MRR just because they have 10-30% MoM growth over a small sample size – the Illusion of PMF is a great way of summing it up.

    It’s good to get a more experienced and international perspective with some data around what this really means to help educate our startups here.


  • Very nice post Brad! To your opinion, what you describe is valid for both B2C and B2B companies?

  • Rick

    “Being Fat Is Not Healthy”
    It’s not Fat vs. Lean. It’s actually Phat vs Lean. Forget the whole ‘We have no money and have to do everything half-assed approach.’ That’s just good for an adrenaline rush. Treat your biz right and get it the funding it needs!!! Preferably right from the start when planning and foundation building is so critical.





    • True, but I guess I’m operating under the assumption that the company in question is going after a suitably large market. At least that’s the spirit in which I wrote the post.







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  • Jim B.

    Let’s connect on Linkedin…I’m just sayin’ James Bailey in Cleveland, Ohio

  • Jim B.

    Oh, good stuff Brad, you have some insight…I’m just sayin’

  • Fascinating.

    How does this work when you’re actually creating a new market?

    Should we then think of product/market fit as always being 100%, except that the market is zero or tiny?

  • This makes me think of the issue documented in “Crossing the Chasm”… product/market fit for early adopters is fundamentally different than product/market fit for the early majority. What attracts early adopters can actually be a little off-putting to the early majority customers. So you can find yourself with what seems to be a successful product within a niche, but have a hard time pushing out to what seems like a natural market expansion.

    • Yes! Product/market fit is incremental, but we shouldn’t expect that to be a straight line for every segment.

  • 110% agree.

  • ray

    ignoring the market share, high CAGR does fit. Also, never detach CEO from sale; $10k or $10M. And keep your AEs in line with a commission plan to keep them humble

  • Thanks Brad. These types of posts with learnings pegged to MRR are incredibly valuable to those of us building rather than investing. Thanks for sharing this insight.

  • Great article Brad. Thanks for sharing your thoughts.

    What do you think about the link between PMF & Marketing? Some companies think they have the PMF and therefore boost their spending over Marketing. Others, think they shouldn’t invest in Marketing before they notice something special.

    I think this notion is very hard to understand. A company shouldn’t invest in Marketing before the PMF, however, verifying the PMF generally requires to have a “big number” of users.

    I’d love to read your thoughts on this. Thanks!

    • Worthy of a long post at some point because it’s not a simple issue. My simple view is aggressive spend on marketing should lag PMF, but you should always be experimenting with marketing.

  • Gary-Yau Chan

    What is an average time for SaaS product market fit? From idea conception to product sold.

    * Based on your personal conversations with founders you met.

  • Dev

    Great article, very insightful and very well written!

    I would just add one more point–

    Myth #5: The product-market fit that a company achieves for its first product is a poor predictor of its ability to find product market fit for its next product in a new/expanded market.

    A good example would be a company like SeoMoz. SeoMoz completely nailed it as far the product market fit for its first SEO product catering to search engine marketers. However, their product market fit completely fell part once they went after a new/expanded market with the more general Moz offering.

    We see this happen to a lot of VC-funded companies. Once the money is in, VCs relentlessly push the founders to go bigger and expand markets for their products. In doing so, product market fit is often lost and is never regained.


  • Great post. What role has VCs played in enabling some of these startups?

  • What about freemium products? No product/market fit for, for example Trello, before they introduced ‘For business’ and ‘Gold’. No revenue – no p/m fit?

    • Freemium is an interesting case I should explore in another post.

      • That would be truly awesome taking in account we boil in our own freemium pots and you see a variety of them 🙂

        I see two stages:

        1) Back to original article of Marc Andreesen:
        “You can always feel when product/market fit isn’t happening.The customers aren’t quite getting value out of the product, word of mouth isn’t spreading, usage isn’t growing that fast”

        Once you have it – I would say you are 80% product/market fit.

        2) Figure out ‘mium’ part – fpro/premium/business offerings while continuing to evolve (1)

        Will be waiting for freemium product/market fit post

  • Chris Kern

    Things that make you go hmmmm… Great article Brad – thanks!

  • Chad Hoke

    After leading Sales and Marketing for a company that just hit $1M ARR AND had a growth target of over 50% AND committed to achieving profitability in one year – I now realize how incompatible (and impossible) those goals were. Great article. Thanks!

  • Michael Charest

    As EVP of Global Sales and with a company on track to reach MRR above $500K this year, this is good validation we are on the right path. Still a long road ahead. For you other software companies without it, when do you pull the plug?

  • Julian James

    I’m pleased to hear some one say this out loud. There is so much written about the mythical PMF, however, I’ve always suspected that it is a far more ‘permanent’ goal.

    • RogerVaughn

      I like this post… PMF should just be a score – what % of your clients would sorely miss your product, if it were no longer available. All you have to do to test it is take down your server for an hour, and measure the number of customer calls as a percentage of daily active users 😛 – I think Sean Ellis wrote some post that until you have 40%, don’t even think of focusing on anything except PMF.. as it passes, it’s never something that goes away or is ever “reached” – it’s Nirvana, for us to continue pushing toward.

  • In short, a breath of fresh air. Thanks, Brad, for once again taking the minority position, or at least for saying what others aren’t, and for your clear-sighted analysis of yet another ubiquitous buzzword that’s continually ringing out within the echo chamber of the present startup bubble.

    • Thx. Consider me the buzzword underminer .

  • Anna Steffeney

    Such a critical post! Thank you for clearly laying out these dynamics. It helps tremendously.

  • janismachala

    I, too, have seen these exact same challenges with companies I’ve worked with as a mentor, adviser, board member. Product/Market fit should really mean that the Company is customer driven with strong engagement in their initial customer set and the leadership team looks at market dynamics (eg, competitive landscape, viable long term pricing, great productization) without “happy ears” on. This is NO different than enterprise sales where companies can sell 3 customers, then they can sell 6-8 customers, all with the founders selling or a heroic sales type who may or may not be the sales leader but they can’t scale sales effectively. Whether your sales are coming from direct sales, inside sales, marketing funnel conversion MRR can be misleading at the $1M MRR and below. Maybe other KPIs should also be considered to ensure all the pieces of a product/service are there and worthy of budget year #2 money by your customers.

  • Any thoughts on this topic in relation to the profitability line?. Surely that’s a key measure point, so if the MRR is approaching or equal to total company monthly outgoings, is that company more “investable” even if numbers are lower. I’m considering our case of a foreign start-up which has substantially lower cost of operations than a US based company.