A joint measurement is presented of the branching fractions $B^0_s\to\mu^+\mu^-$ and $B^0\to\mu^+\mu^-$ in proton-proton collisions at the LHC by the CMS and LHCb experiments. The data samples were collected in 2011 at a centre-of-mass energy of 7 TeV, and in 2012 at 8 TeV. The combined analysis produces the first observation of the $B^0_s\to\mu^+\mu^-$ decay, with a statistical significance exceeding six standard deviations, and the best measurement of its branching fraction so far. Furthermore, evidence for the $B^0\to\mu^+\mu^-$ decay is obtained with a statistical significance of three standard deviations. The branching fraction measurements are statistically compatible with SM predictions and impose stringent constraints on several theories beyond the SM.