Product-market fit is often a critical milestone when launching new products or services. But what exactly is it? Why does it matter? And how do you achieve it?
Let’s explore.
What is product-market fit?
Product-market fit refers to having a product or service that satisfies your target customers’ needs in a viable market large enough to support your revenue and growth objectives.
In startups, it means you have market traction and can start scaling your business. It may open the door for additional investment or signal that you’re ready to hire more people.
In a more established business, validating product-market fit may be required as real-world evidence to convince leadership to invest more resources—accelerating the opportunity.
It boils down to being a customer-validated gate for additional investment in time and money.
While problem-solution fit is assessed before launching a product to see if a solution solves the problem of a handful of early adopter customers, product-market fit is evaluated after the product or service is launched into the broader market.
Why should you care?
Strong product-market fit is critical in determining a product or service’s long-term success and viability. This matters to founders, investors, employees, and customers.
Successful venture capitalist, Marc Andreessen, states that finding product-market fit is the only thing that matters for a new startup.
Companies with strong product-market fit are more likely to:
Generate more revenue and profits;
Retain customers to generate repeat business;
Stand out and differentiate themselves in the market;
Allocate their resources more effectively to high-demand products; and
Make better decisions about their product, go-to-market strategy, and overall business model.
Andy Rachleff, co-founder of one of Silicon Valley’s most successful investment firms and credited with naming the product-market fit concept, advises that…
First to market seldom matters. Rather, first to product-market fit is almost always the long-term winner.
There are many examples of this: Apple didn’t get to market with the first digital music player, smartphone, tablet or smartwatch. But they did provide a better user experience to achieve a stronger product-market fit that fuelled their profitable growth.
What are you assessing?
When determining if you have product-market fit, you are assessing if:
There is an attractive market for your product or service—one with many potential customers with underserved needs who are ready and willing to buy; and
Your product or service can win in the market. You ensure customers want what you offer—satisfying their needs and solving their pain points—instead of choosing alternatives.
Andy Rachleff argues that, ultimately, the market matters most…
If you address a market that really wants your product—if the dogs are eating the dog food—then you can screw up almost everything in the company, and you will succeed.
Put another way, a great team with a great product will fail in a lousy market.
Be holistic in your view of your product or service in customers’ minds. It’s the entire customer experience, including payment, delivery, installation, onboarding, support, and renewal, as well as APIs and third-party integrations—not just your product’s feature set and user experience, which tech companies often focus on. You may find these other elements need refining to strengthen your product-market fit.
Analyzing the competitive landscape and assessing your differentiated value as part of your positioning relative to competitors is also essential to your evaluation. Remember that you need to satisfy the needs of your target market better than competing alternatives.
How do you find product-market fit?
Many articles discuss the product-market fit process as finding your target market, studying the market, defining your value proposition, building a minimum viable product (MVP), launching, and then analyzing your product or service.
However, everything before the launch phase, including developing an MVP, should be validated for problem-solution fit before assessing product-market fit, as explained in the article, Why problem-solution fit matters and how to achieve it.
The Refine-Measure-Decide process can be used to find product-market fit.
Essentially, you refine your product or service in an iterative and continuous process, gather and measure quantitative and qualitative data from which you can analyze and learn, and then decide what to do next.
Refine
An MVP is a basic version of the product to validate that you can solve the problem that early adopters have. Now you’ll need to evolve it into a minimum marketable product (MMP) with the minimum features and functionality that appeal to a larger market.
You’ll likely need to iterate multiple times to get to an MMP. As you work through the rounds of iterations, you’ll gain an understanding of which features need to be part of your core solution, which ones could be offered as add-ons (for an additional cost), and which features are opportunities you may decide to provide as custom services (this is primarily applicable if you are selling to enterprises).
You are better off initially focusing on the core solution to validate product-market fit. The other features can be considered for inclusion on your roadmap later.
Measure
It’s essential to gather and analyze quantitative and qualitative data to assess the strength of your product-market fit. The specific things you will measure depend on your product or service and the market. Here are some of the typical things to measure:
Customer feedback: Customer interviews provide deep insight into product-market fit. Complement this with surveys to reach more customers. If you are in the B2B software space, comb through reviews on websites such as G2, Capterra and TrustRadius.
Metrics: Tracking key metrics such as customer acquisition cost compared to lifetime value, retention, churn, and satisfaction can provide a quantitative measure of product-market fit. Measure the metrics that make sense for your business and ideally benchmark against comparable products.
User engagement: Tracking how much time is spent using your product and the number of daily or monthly active users can help provide insight into the level of fit between your product and the market. If you end a free trial and customers are upset, that’s a good sign that they see the value.
Sales data: Revenue data, the number of units sold, win/loss data, and the sales cycle length (compared to similar solutions in the same market) can provide a quantitative measure.
Net Promoter Score (NPS): NPS is a popular customer satisfaction metric that measures the likelihood that customers will recommend a product or service to others. Delighted customers will recommend your offering, indicating a strong product-market fit. While a score greater than 50 is often cited as an excellent NPS, it can vary greatly, so it’s best to benchmark against industry data. Also, be aware that there is a big difference between relational NPS (feedback on overall customer satisfaction measured periodically) and transactional NPS (ongoing feedback on specific interactions such as customer support).
Market share: Tracking the company’s market share relative to competitors can provide insight into the level of fit between your product and the market, but this is sometimes difficult to obtain.
Word-of-mouth referrals: Delighted customers tell others about your product or service. Ask prospects how they found out about you, and if a high proportion says through word of mouth, then it’s another strong indicator of product-market fit.
Media and analyst opinions: If you get favourable coverage and reviews from the media and industry analysts, you are likelier to have a winning product.
Sean Ellis test: If more than 40% of customers say they would be “very disappointed” if they could no longer use your product or service, you may have product-market fit. Startup advisor, Sean Ellis, came up with this acid test after examining many startups.
Remember that many indicators won’t tell you why customers are delighted or unconvinced about your product or service. Ultimately, talking to customers is the most valuable insight. Just ensure you capture it, analyze it, and share it internally.
Decide
What is the data telling you? What should you tweak or revamp to get a stronger product-market fit? Are there features lacking from your product or service compared to alternatives? Is there a problem with your pricing? Is there a problem with the customer experience?
At this stage, you need to draw insights from your analysis and make a decision:
Continue to iterate the product to achieve stronger product-market fit
Proceed to the scale phase with investment in people and optimized processes
Pivot? Is there a more attractive market to pursue?
Abandon
In most cases, you’ll likely cycle through multiple rounds of the Refine-Measure-Decide process before reaching your conclusion.
How do you know you have product-market fit?
Knowing whether you have achieved product-market fit can be challenging. There isn’t a single, definitive indicator.
Some say you know you have a strong fit when:
Your product or service is flying off the shelf
You can’t add servers fast enough to keep up with usage (think ChatGPT during the initial rollout)
Reporters and analysts are calling you because you’re the ‘hot new thing’
You don’t have to change your sales pitch deck every week
And you know you don’t have it when:
Your sales team struggles to articulate the value your product or service provides to customers, so the sales cycle takes too long, or lots of deals don’t close
Word of mouth isn’t spreading as customers aren’t talking about your product or service to others
Reviews are not very enthusiastic or nonexistent
Usage isn’t growing
There are few returning users, repeat purchases or contract renewals
The key signs to look for include high customer demand, high customer retention, positive customer feedback, low customer churn, high market penetration, repeat business, and sustainable growth.
Practical advice
Since it can be challenging to determine product-market fit precisely, Daniel Elizalde recommends focusing on your first ten customers in the book The B2B Innovator’s Map. Begin by assessing if your product or service delivers value to those first ten customers. You can then decide to continue investing, change the direction or abandon.
Once there is customer-validated proof that you are providing value to the first set of customers, you can set additional milestones such as a hundred customers, then a thousand, etcetera, evaluating if you have traction along the way. The number will depend on what makes sense for your market.
This approach sets clear goals for your team, makes tracking and communicating progress easier, and makes the milestones concrete for go/no-go decisions on further investment, which is the ultimate purpose of assessing product-market fit.
What’s next?
So you’ve found product-market fit. Guess what? Once you’ve found it, it doesn’t end there. As you begin to scale your business by expanding marketing efforts, adding features, and increasing production, you’ll need to validate that you have a scalable sales process, making adjustments as necessary.
You’ll also need to continue monitoring and iterating your product or service and your business model to maintain product-market fit based on ongoing customer feedback. Doing so will ensure your company remains aligned with the market’s needs as competitors and customers evolve—which they will.
Final thoughts
Product-market fit is a critical milestone for any company and the only thing that matters for a new startup. It is essential to understand what product-market fit is, what you are assessing, why it matters, and how you know when you’ve found it.
Testing your product or service in the market, collecting and analyzing data and feedback, and refining through an iterative Refine-Measure-Decide process helps you validate fit.
Achieving and maintaining strong product-market fit is critical to a product or service’s long-term success and viability. A game plan for validating fit will keep you focused and clarify your decision on continued investment.
Drop a comment about your experience with product-market fit. And if you want to chat about this or other business challenges over a coffee (virtual or in real life), give me a shout.
Originally published at https://www.linkedin.com.