Thread by @arindam___paul

What does Product Market Fit( PMF) mean and look like for consumer brands ? What are the metrics to understand status of PMF?

I have been asked this question frequently by both founders & VCs

Here is how I think about PMF & 10 metrics to measure PMF for consumer brands👇👇

First things first, the definition of PMF itself needs to be slightly changed for a country like India.

There are 3 big differences when you think of India compared to any other country

a) India is predominantly a poor country with high internet penetration, a sizeable number of rich people & increasing income inequality.

There are 800 million internet users in India. But there are only 8 million households that earn greater than 20 LPA.

And another 20 million households that earn between 10-20 LPA.

So, basically you just have about 30 million households(out of the total approximately 300 million households) who earn more than 10 LPA. And this is Household income(not per person).

While 30 million households is in itself a large number, it is only 10% of the population.

So, price points( or value) becomes an extremely important factor for scale.

There is a reason the Cokes and Parle Gs of the world still have a Rs 5/10 price point product

b) India is still largely a General Trade( Unorganized offline retail) Driven market in most categories.

In most categories, this is the split I have observed between the 3 channels of Ecom, General Trade( GT) and Modern Trade(MT)

Ecom- 10-15%

MT- 5-15%

GT-70%-90%

While Ecom and MT are growing channels, but I don’t see the skew changing significantly in the immediate future.

And the channel dynamics( margin structure, ways to drive sellout, price points) vary.

And it is not always necessary that digital first consumer brands who do well in Ecom will find the same success in GT/MT as well.

So, cracking multiple channels also become extremely important for scale

c) India is not a homogeneous country.

The culture and preferences of a Tamil guy living in Madurai is very different to an Assamese woman living in Guwahati is very different to a Gujarati guy living in Bhavnagar.

So, what works in one state need not( & in many cases will not) work in another state

You cannot extrapolate what works in Bangalore/Mumbai/Delhi to what will work in Kerala or Assam or Gujarat or any other state

Cracking multiple markets is again extremely important for scale

So, what would be PMF in the Western World would possibly be PPCMF( Product Price Channel Market Fit).

And it is because of this, for consumer brands, PMF isn’t a achieve & forget it thing and it cannot be extrapolated.

PMF for top 1% India is very different to PMF for top 10% India. PMF in Mumbai is very different to PMF in Guwahati.

PMF in Ecom is very different to PMF in GT. You need to achieve some variation of the PPCMF every year while you scale.

And this is also the reason why there will be many brands who will cross 100 cr, but very few brands which will cross 1000 cr because of price/channel/regional market nuances which reduces their TAM compared to what they would show in their fundraising decks ;)

And PPCMF cannot be solved by increasing marketing budgets.

So, what are the metrics to measure to understand PPCMF?

I usually recommend tracking 10 metrics across 3 channels( Amazon, D2C and GT) which is enough to identify whether you have PPCMF/will hit a ceiling soon

Amazon Metrics

In all of these metrics, trends are more important than the absolute numbers

1. Ratings and Reviews:

2-5% of the purchasers drop reviews on Amazon. If the product is good, you will have good ratings and reviews. Anything above 4.3 is considered excellent.

2. Conversion Rates:

With time, the conversion rates should improve and at scale should not drop. Anything above the category conversion rate is good. Anything above 1.5x is excellent

3. Ad Efficiency:

As the conversion rates improve, the same number of clicks will generate higher sales improving the ad efficiency. Having a 1-1.5x ad efficiency of category average is excellent.

4. Dependency on ads:

The organic discoverability should increase with time( word of mouth, brand searches etc). With time, the % of orders driven by ads should keep coming down

You may start with 80% orders coming from ads, but if it keeps coming down MOM, strong sign of PPCMF

D2C Metrics

5. Customer Retention Cohorts:

Track the M1, M3 and M6 retention numbers. If these numbers keep improving month on month, and not drop at scale, that means the kind of customers you are attracting is still high quality and a good sign of PPCMF

6. Discounts:

This should keep coming down or stay constant at scale. On month 1, the average discount from the MOP( market operating price) might be 15%, but this should keep coming down with time

GT Metrics

7. Retailer Churn:

Just like you track consumer churn, have cohorts of retailers and track M1, M3 and M6 retention. If these numbers improve with time, sign of strong PPCMF

8. Speed of Opening New Counters:

It is difficult to start new counters in a new city. But if there is PPCMF, it gets easier with time. If the top 10% counters accept the brand, it becomes easier to onboard the others in a much lesser timeframe

9. Retailer Throughput:

Retailers take time to build confidence in the product/brand. An increasing throughput from the same stores is the strongest signal of PPCMF for GT

10. Margin Reduction:

On day 1, margins will be high for new brands. But if there is pull for the brand( biggest sign of PPCMF), you should be able to rationalize margins and bring it to parity within 1-2 years of launch in a geography.

So, in a nutshell, if your ads keep getting more efficient and you keep becoming less reliant on ads, you keep getting good ratings and conversions improve, you have PPCMF on Amazon

If your D2C customer cohort quality keeps improving and discounts keep reducing, you have PPCMF on D2C

If your retailer churns keep reducing, throughput keeps improving, speed of opening new retailers start increasing and you are also able to reduce margins while doing so, you have PPCMF on GT

When these metrics move in the right direction for the first time, it is the first sign of PPCMF.

But unlike consumer tech/SAAS products( where you scale rapidly post PMF), in consumer brands you need to keep revisiting PPCMF at every stage of the business on a quarterly basis

And because this is PMF( not Brand Market Fit), you will need to find PPCMF in every category, sub-category and product that you launch.

These metrics should also be the guiding principles to objectively decide when to scale/kill a product or even a category.

Now, sometimes when these metrics don’t move in the right direction, it could also be because of execution inefficiency/external reasons.

Eg- Your Amazon ads might show inefficiency for a quarter if there is irrational competition driving up CPC

Or one of the Geographies might show low throughput/high churn because of a wrong sales leader.

At any organization at scale, these things happen and are usually not a concern.

But if all metrics for a channel show stagnation/degrowth at the same time, it often means that the brand has hit a PPCMF ceiling and future growth will be difficult/more expensive in that channel/geography and you need to go back and work on product for future growth

If you found this useful, consider RTing the first tweet so that it reaches more folks( founders, investors, operators) thinking about measuring PMF for their products across categories

https://twitter.com/arindam___paul/status/1682741869661528064