Product-market fit (PMF) may very well be one of the most important terms to understand when marketing a product, and yet, we’ve noticed that not a lot of time is spent thinking or talking about it. This lack of consideration is surprising because PMF is a great lens to consider copy, pricing, market segmentation and product development.
PFM is simply the amount that a given product satisfies a segment’s demand. The term was coined by Marc Andreessen, the heralded entrepreneur who co-founded the first web browser, Net Scape Communication Corporation and Opsware (sold to Hewlett-Packard for $1.5 billion.) In his first blog post on the topic, Andreessen states that PFM is the most important concept to a startup.
Andreessen shrewdly states that independent of all other variables the market will determine the success of a company. This means that regardless of great features or brilliant management teams, the only thing that matters is the number of people that will pay for your product or service and how much they’re willing to pay for it. A slightly arbitrary measure of this consumer sentiment is whether or not over 40% of your consumers would be “very disappointed” without your product or service.
It’s important to note here, as Clayton Christensen, Scott Cook and Taddy Hall do in their outstanding Harvard Business Review article : “People don’t want to buy a quarter-inch drill. They want a quarter-inch hole!” So, when considering PFM, we must first consider the actual need that we are trying to satisfy, how many people have it and finally how well we can satisfy it.
Once you know the answers to the those questions, it’s easy to find your elevator pitch, price point, future vertices and necessary additional features because each business element stems from PMF. For instance, an elevator pitch is often just an explanation of PMF: problem statement, how we solve it, and why we are better at it than our competitors.
To understand how this can all fit together we dissected the ideal PMF of the Bloomberg Terminal in the early 1980s below:
1. Product-Market Fit starts with Timing
In 1981, a young Michael Bloomberg was laid off from Phibro Corporation, after they acquired Salomon Brothers, where he was a general partner and head of systems development. Bloomberg was given a $10 million severance package, at what turned out to be the ideal time to innovate in the financial industry. His many years in the segment had taught him one important thing: financial firms would pay top dollar for up-to-the-minute data.
In that year, IBM released its first PC, the IBM 5150, to compete with the Apple II; the internet was based on the Deparment of Defense’s ARPANET, still two years away from TCP/IP protocols, which formed the backbone of modern internet; and most Wall Street executives weren’t using personal computers. A decade earlier, many people relied on ticker tape to get stock quotes.
Bloomberg set out into the entrepreneurial space just before the personal computer and the internet started to gain major prominence.
2. Product-Market Fit hinges on Stubborn Consumers
In 1982, Bloomberg assembled a group of computer engineers to develop the first product for his new company: Innovative Marketing Systems (IMS). The goal was to build a complete solution that would provide up to the minute financial data, analytics and graphics in as many formats as possible.
The problem with developing a machine for financial executives was that many of them had never used a computer before and consumers are often slow to accept major paradigm shifts in the way they work. The early IMS engineers and Bloomberg needed to develop a trading-friendly system that any Wall Street analyst could pick up and use easily.
The group came up with a new color coded keyboard that changed the Enter key to a green Go and the Escape key to a red cancel. The F-series keys were also replaced with categories like “corporate debt” and “equity shares,” so that within just three keystrokes traders could find an exact quote and corresponding analytics for any financial product in the world.
This user friendly design made changing to the Bloomberg Terminal more feasible for the computer illiterate Wall Street executives.
Consumer Stubbornness: Present but circumvented
3. Advantages over the Competition is Key
In 1983, Bloomberg and his team took their prototype to Merrill Lynch, who were so impressed that they bought 20 machines. However, their purchase came with a catch: Bloomberg couldn’t market the machines to any of Merrill Lynch’s competitors for five years.
After realizing just how powerful the terminals were, Merrill Lynch decided to invest an additional $30 million into the company in return for 30% equity stake. With the additional capital, the IMS team was able to concentrate on product development and expand the functionality of the terminals.
Understanding how their product served their market, the team set out to build additional features. Most important of the upgrades was the addition of digitized financial data that had previously only been paper-based.
By 1984, the team was growing anxious about selling the product to a larger market than Merrill Lynch and its clients. So, they approached the firm and Merrill Lynch agreed to let IMS expand their sales efforts because it would benefit Merrill Lynch’s 30% stake in the company.
At the time, though, there were nearly 20 different companies offering financial computers to various firms. However, IMS’s machines were more powerful, more user friendly and they had the major differentiator of digitized paper documents. IMS better served the market’s need and had a better PMF than their competitors.
Competition and competitive advantage: Highly competitive but with clear differentiation
4. An Established PMF enables Scaling
In 1986, IMS changes its name to Bloomberg L.P. Soon after, the firm began selling their product to the entire financial industry, instead of concentrating on buy-side firms. They opened an office in London; then, four months later opened one in Tokyo. Within a year they had installed their 5000th terminal.
Subsequently, they acquired Sinkers Inc, a research company, that became the backbone of Bloomberg Princeton a 900 person research and data entry team that funneled even more information into Bloomberg terminals. The company was refocusing on their PMF. They knew that firms wanted more data and they were growing to further supply that simple need.
Bloomberg’s trajectory into other verticals like TV and journalism can be attributed to the same demand of more data and analysis. And that sort of concentration on the true need of a market led to a company that last year had almost $8 billion in revenue and has over 350,000 terminals installed around the world.
5. What to learn from Bloomberg
The moral of the Bloomberg story is that the best way to grow a company is to concentrate on the true demand of the segment. In 2015, you might assume that Bloomberg set out to make the best financial computer, but if you examine the whole story, you realize that IMS was providing a data service. Their terminal was just the conduit through which the data came.
Once you understand that Bloomberg’s PMF is about an industry that has an insatiable appetite for data and a product that supplies the most data, you can easily figure out how to manage that product. Elevator pitch: “Wall Street firms need high quality data quickly to perform at their best. Bloomberg terminals are a user friendly solution that can provide data and analytics on any financial product within three keystrokes. Moreover, our 900 person data team inputs more information into our subscription service than any of our competitors.”
The elevator pitch doesn’t even have to mention that its a computer, because at the end of the day, Wall Street Firms would have paid for a person to sit on their desk and tell them the information if that was the most efficient way to get it. Pricing, too, isn’t based on the computer. It’s based on the value of the data in the right hands. Today that’s worth about $20,000 a year per terminal. Bloomberg’s future verticals as mentioned above were mostly in journalism because it furthered Bloomberg’s ability to deliver data and analysis.
As marketers, then, we need to remember that everything stems from PMF. We need to consider timing, the stubbornness of the consumer and competitive advantages. And we need to ask ourselves: “are we the best way to make a quarter inch hole?”