PMF in the business lingo is used as an acronym for ‘Product-Market Fit’. Typically this is the early stage of a business as at this stage the founders try to establish that there exists a market for their product/service offerings.
This is most frequently used in the start-up space as the business ideas here are led by innovation. Many times there is no predecessor available to actually understand if the product would even have a market acceptance or not.
For instance: Food Delivery, On-Demand Cab Service, E-Commerce — Today they seem basic requirements but before the launch, people were accustomed to alternate habits and shifting may or may not have been possible, thus PMF.
PMF is achieved once the business validates that their product has market acceptance and is ready to scale.
What is PMF++ ?????
Many investors and entrepreneurs believe that achieving PMF is enough validation to fire the growth engine, but is it really enough???
There is another component which is usually not considered — that is an another ‘P’
Price!!!
At the launch of any new product/service, usually people are encouraged to try. These encouragements in today’s VC backed environment are through various types of discounts and cashbacks.
Having used these lucrative techniques a minimum critical mass to achieve a PMF is attained but here comes two things
- Can the business sustain at the effective net price??
- Will the user/consumer be willing to pay the full price as these sales promotions are rolled back??
In the shorter period PMF is achieved but the same is not sustainable. Thus, the birth of businesses which burn enormous sums of money even to grow marginally.
Outcome
The business with the right PMF but suboptimal PMPF (Product-Market-Price Fit) find it difficult to scale in the longer run.
As the business scales it either burns more money at the Contribution Margin (CM1) level or as it tries to increase the price, it loses customers.
In both the scenarios, business growth and sustainability is hampered.
Approach
One of the crucial matrices, we at Auxano track to identify PMPF is Dollars spent for every Dollar earned.
This matrix at different levels of contribution margins help the company and investors understand a lot more on business efficiencies and the gap that is required to be bridged as to scale the business in an effective and efficient manner.
Businesses are to create value for customers, team and investors and good entrepreneurs are the folks who create this value creation engine in a way that is sustainable.
While many of the entrepreneurs create short term value by burning through the VC capital for:
- Customers by the way of good/convenient product
- Team by paying above market standards salaries, bonuses and other perks and privileges
But only few create value for the investor and even fewer are able to create these engines which can continue to generate wealth.
Need of the hour: The need of the hour is to return to basics where businesses exist to make profits and not lose money for eternity or at worst make people dream of making profits some day.
We need entrepreneurs to make Apples and Microsofts of the world, which ‘make quality products, improving the lives of their users and society while making enough returns for the investors and yet continue to grow.’
In the next blog we will debunk Venture Capitalist V/S Venture Socialist.
Author:
Karan Gupta
