Product-market fit is an ever-moving target for product managers. From personal experience, finding product-market fit can easily eat up an enormous amount of time and money without a solid methodology. If you’re looking for tried-and-true suggestions for facilitating this process as swiftly and inexpensively as possible, this guide is for you.
What is Product-Market Fit?
Product-market fit is the moment when you have identified your target customer and are serving them with a product that is not only relevant to them and solves the customer needs, but also provides them with a strong value proposition. In the startup world, the term is typically used to describe the moment when a product has gained enough traction to be worth investing in.
For example, when you have found your target customers or buyer personas and can serve them with a product that resonates with their needs, you have reached a level of product-market fit. The process of finding product-market fit ensures that a product or feature is being tested in the right market with the right target audience. It's akin to finding the needle in a haystack by knowing who your audience is and how to speak their language.
How To Find Product-Market Fit
How to find product market fit is an art, not a science. It's about finding the right balance between what you have and what your customers desire. Companies put a lot of time and effort into finding this balance—but with the noise of internal politics, stakeholder trade-offs, substitute products, and competitors, it's a difficult task.
This article will talk about how to remedy that. I’ll explain how to find product market fit, measure it, and show how it's possible to achieve it.
Generally the task of finding product-market fit will be on the shoulders of your product development department, product managers, or founders, but anyone at the company should understand these concepts.
The Product Market Fit Pyramid
The product market fit pyramid by Dan Olsen is a way to understand the different stages of a company's development. It helps in understanding the different phases of growth and how to plan for them. The pyramid can help you understand what kind of market you're going after, what your target audience is, and how to get there.
When working with this pyramid, start from the base of the product and move your way up the pyramid.
1. Identify your target customer
The first step involves identifying who your target customer is. You have to find out what they are looking for and what type of product they want. The target customer can be a person or a company.
2. Determine your target customer's needs
Identify the needs and unaddressed desires of your ideal customer and what your product is meant to do for them. Your product must solve their problems and fulfill their desires.
3. Define your value proposition
Value proposition is the sum total of a customer's perceived benefits from the product. It is important to find out what the benefits of your product are and how that can benefit your customers to be able to determine whether your value proposition will resonate with them.
4. Specify the MVP feature set of your product
The concept of Minimum Viable Product refers to "just enough features" that you can test the market and get a sense of what will work. It is critical to start with just enough features so that you can build a product that the market wants and not one that requires too much development time. Here’s a great write-up on the 7 stages of product development.
5. Build your first MVP prototype feature set
Prototyping is a great way to test your ideas with a new product. You can use your Minimum Viable Product to create a prototype. This will help you test and validate the market demand without a significant investment.
Related read: 10 Best Rapid Prototyping Tools
6. Test your prototype with your customers.
Start with the most basic set of MVP prototype features to get feedback from customers, then keep more features or functionality. You can also build an MVP prototype with three to five features and get feedback from customers on what they love, what they don't like, and how they view your product overall.
Finding a product-market fit is an important milestone in the life of any business. Once you're able to recognize where your product or service overlaps with your target market, then it's time to scale up and have a larger customer base. This may require constant customer feedback and extensive interviews within your target market, but this will also help you gain a deeper understanding of what motivates them. The process requires a lot of effort, time, and money, but it is the best way to find a product-market fit. As you launch your prototype, you’ll want to approach your product launch strategically for the best odds at success.
Examples of Product-Market Fit
Understanding the pulse of the market is key to achieving an excellent product-market fit. To succeed in the market, it is essential to understand how your ideal customer feels. This is especially true when you are considering bringing a new product or launching a new service.
Some companies have created a product that fits their market perfectly and has gone on to be a phenomenal success. These examples of product-market fit show how to create something that will resonate with the customer base, how best to incorporate feedback from customers, as well as what are the most efficient ways that a new product can be created and marketed.
Google achieved a product-market fit by focusing on their target audience, the power of user experience, and the importance of strong brand identity. Google's product-market fit is largely due to their effective use of UX and branding. Google Analytics and YouTube are great examples of this.
They have a strong brand identity that makes them different from other search engines. Google has also focused on their target audience by providing an exceptional user experience for their needs. They achieved a product-market fit by primarily focusing on three things:
- Creating a website that would be easy to use.
- Offering a search engine and understanding how it would provide value to their customers.
- Leveraging the power of AdWords to bring even more value to their existing customers.
Netflix employed a unique combination of methods to achieve a product-market fit. They started with the idea of providing unlimited movies and TV shows to their subscribers, but they soon realized that this wasn't enough to make them stand out from the competition. They also needed to offer their customers an exceptional customer experience, which was something that Netflix had never done before.
- Netflix first introduced tiered pricing, creating a "premium" plan for customers who wanted more content and better streaming quality.
- They created an excellent customer experience for those who subscribed to their premium plan.
- They made sure that they had a competitive advantage over other streaming services before entering the market with their product; this includes having a great library of content, exclusive content, etc.
- Cross-selling tactics further allowed Netflix to increase customer retention, loyalty, and customer satisfaction.
All of these factors have led to Netflix's famously high lifetime value!
Slack is one of the most popular productivity apps in the world and has been able to achieve a product-market fit by getting creative with their methods. It's an app with a large network effect - the more people use Slack, the more value it gives them because they can share their work and ideas with others in the community.
- The company conducted user research to understand what their customers needed from a work collaboration tool. Using these findings, they created a minimum viable product.
- They created an easily understandable value proposition for their product—communication for teams—and made sure that people could understand how Slack could help them be more productive in their work life.
- They used early adopters of the app to build a brand identity that people could get behind.
- Slack has used feature requests and feedback from the users to improve core user experience and add new features.
Factors That Determine a Product-Market Fit
There are five factors that determine a product-market fit.
1. Customer's needs and wants
Consumer demand drives product-market fit. When there is a high demand for a product, the market is more likely to react and allow the business to take off. The high demand also means a higher chance of success by allowing the company to acquire more customers through marketing. BUT, you must provide the buyer persona with a solution that meets their deepest needs and desires—this is the only way to true product market fit. Customer satisfaction will be a proxy to this.
2. The market size, growth rate, and the customer base
Many companies have seen increased competition over the past few years, which has resulted in a slowdown in growth and higher prices. It's critical to make sure there's not too much competition in this market so you don't get priced out of your market or lose customers to your competitors.
3. Cost of entry for competitors
Cost of entry for competitors also influences whether your product will achieve a good product-market fit. If your product is initially successful, and it requires a low start-up cost, be ready to witness a slew of wannabes and copycats. Beyond finding product market fit, you will need a strong product strategy and unique differentiators (product features) to defend against this.
4. Company resources
Some companies have enough resources to launch into the market, while others do not. The former companies are more likely to get a product-market fit, while the latter ones will have to go back and make changes before they can launch. Remember, for a startup, cash is oxygen.
5. Barriers to entry
A product using a patented invention or a breakthrough technology may leverage these as a barrier to entry against other companies who might want to compete with you. Having a strong barrier to entry nearly ensures that you will find a product-market fit—assuming everything else checks out. Proper user research can identify the minimum set of features (and investment!) required to create the right product.
How to Measure Product-Market Fit
Achieving product-market fit is the holy grail of business. It's what product managers drool over. Once this fit is achieved, it's vital to measure it. Companies need to look at their metrics and user feedback. However, there are no definite metrics to answer the question of when a company's product achieves this status.
Venture capitalist Andrew Chan has a few pointers:
- People (your ideal customer base) are hesitant to switch from their current product to a new one if they feel that the new product is similar enough to the old one that they would not be missing out on anything. For example, if someone already uses a laptop computer, they might be reluctant to switch over to a tablet computer because of how similar the two products are. If you find that a large segment is ready to switch, you are on the right track.
- There is a high chance that people who are familiar with similar products are willing to try yours because you are offering features that your competitors do not. If that's the case, then this bodes well for your product-market fit.
- The unique value proposition of your product must be apparent to every customer every time they interact with your product. They should always be able to identify what makes you different from your competitors. If they are unable to understand your value proposition, consider this an issue you need to fix urgently.
- Metrics such as retention rates and sales growth can paint a vivid picture of how your product is performing. You can also see how these metrics stack up against those of your rival products. A great metric that is a proxy for product-market fit is lifetime value.
Chan further suggests a blend of qualitative and quantitative metrics to gauge the success of your product-market fit.
Net Promoter Score or NPS Score. You have to measure how happy your customers are with your product or service (e.g. customer satisfaction). The Net Promoter Score (NPS) is one of the most effective ways to do this.
Churn Rate. The churn rate refers to how many customers left in a given month as a percentage of all customers who joined in that same month.
Growth Rate. The rate of a value (e.g. user count, downloads, etc.) that measures its change from one period to another (typically weekly, monthly, and quarterly). It’s generally expressed as a percentage. The growth rate will tell you if product-market fit is strong enough for a product to gain traction in the market.
Market share. Defined as the portion of a given market that is controlled by a company, product, or entity. A rising market share typically signals a good product-market fit.
Retention. The number of users who continue using a product or service after their first use.
Customer Referrals. Happy and satisfied customers will recommend your company's products and services to their friends, family members, acquaintances, and colleagues. This metric helps determine how well you're doing at creating word-of-mouth marketing for your company's brand.
Lifetime Value. Lifetime value for your customer base is the total or sum worth of your existing customers during the course of their relationship with your service.
Reviews. Reviews from influencers and consumers can provide insights into what existing customers think about your product or service.
The 40% metric. If 40% of customers classify your product as a "must have", it's a good indication that they are satisfied with your product.
The term "qualitative metrics" refers to a set of tools that can measure word-of-mouth and media coverage that a company receives. It is not always possible to track "hard numbers" related to sales, but qualitative metrics are often used as a proxy for quantitative data. A good word of mouth, positive publicity, and increased exposure from industry experts are considered reliable indicators of good product-market fit.
How Long Should It Take to Find a Product-Market Fit?
Product-market fit is the time when a product or service has achieved the level of market acceptance (or satisfied market demand) that it can be sustained on its own merits. The time required to find a product-market fit is different for every company. Some companies find their product-market fit within months, while others take years to find success. The key to finding product-market fit is a heavy amount of user research and market research, listening to customer needs, and incorporating customer feedback each step of the way. Remember, market research is king!
Companies typically need a lot of time and capital to reach product-market fit. That's why you have to be lean and aware of every option you have to speed up product-market validation.
Product-market fit requires more than just a product. It requires a compelling story, an engaged community and a team of dedicated founders and staff—including a strong product development practice and competent product manager. These factors can increase the time it takes to reach product-market fit by 20 times, but nevertheless, companies should aim to reach product-market fit within 2 years. It takes companies an average of 18-24 months to ascertain if they have achieved a good product-market fit. Again, finding product market fit can be accelerated by hiring the right product manager, following customer feedback to find the right product, and of course, ensuring you have a lean product process to ensure customer success is your North Star.
Consultants And Finding Product-Market Fit
Product-market fit is a difficult concept to define, as it requires knowing who you are solving for and what problem you're solving. There are many different types of consultants that can help you figure out your product-market fit. Although not all consultants are created equally, some of the best ones have a good understanding of the business and product.
These consultants have been in the industry for years and have experience in figuring out what works and what doesn't work. They can help determine whether there is an industry need for your product, identify the right target market, and help you define your company's value proposition.
Platforms such as GrowthMentor can help determine your level of product-market fit, speed up the process, and shorten the time you achieve it. It requires significant effort to develop a successful startup. With so many moving parts, it can be difficult to accurately assess progress and know what you are doing right. Another avenue is to contact ex-founders or executives in the space you're targeting, and ask them to work with your startup on a consultative basis.
There are many factors to consider when looking for gaps in product-market fit in the early stages. One factor, in particular, is the way a company can understand its customer's needs and identify what its target market wants.
Start-ups also often need to gather both qualitative and quantitative data to determine if a product will have the desired effect before going into the market, but it can take months for that kind of research. There is no way for start-ups to truly understand your buyer persona's pain points until they have been able to see how the customer reacts to using a product.
GrowthMentor helps startups figure out their product-market fit by providing an actionable, detailed process for testing and validating ideas.
Is It Possible to Find Product-Market Fit Before Development?
It's not possible to fully find product-market fit before development. Unless you identify the pain points of your audience, understand their needs, and incorporate those needs into your product strategy, you will be fumbling in the dark. The ultimate validation is often if a customer will pay again to use your real product.
However, you can measure product-market fit by using proxies. A proxy in this case is a piece of content that covers the product and tells others who are interested in the product. These proxies can be a landing page encouraging you to sign up, tools such as product-market fit canvas template, or high-fidelity prototypes which the customers can explore.
How Do Product Teams Use Interviews to Help Find Product-Market Fit?
As your product team is trying to find the best fit for their product, interviews are a great way of gathering valuable insights from potential customers.
They are also excellent in determining whether your product is solving a problem or not.
One of the most important things that you need to keep in mind while conducting interviews is to be honest and transparent with your potential customers. This will help you build trust and credibility. Here’s a sound methodology to try:
- Find the right person to interview
- Start with a general question
- Don't ask them to make a purchase decision right away
- Ask open-ended questions
- Ask about the benefits and drawbacks of their current solution
- Ask them how they would use the product if it were already available
- Keep asking questions until you find some common ground
- Let the customer talk, and don't interrupt them
- Record audio, then transcribe it into text
Use the 40% rule
Growth leader Sean Ellis offers a simple test. He suggests asking customers how disappointed they would be if your product were to disappear, and provide the customers with three options:
- Very disappointed
- Somewhat disappointed
- Not disappointed
If 40% of the customers say they would be very disappointed, you have found a tight product-market fit for your product. Incorporating other risk-of-failure questions will also arm you with a credible idea of what your product is doing on the product-market scale.
The timeless question of "how to find product market fit" is a difficult one for businesses. It requires a lot of time, resources, and effort to find what works for your industry. It's hard to know when you've found it because the exact formula might elude you. However, with technology evolving at a rapid pace, there are now more options than ever for finding that perfect product-market fit and experiencing the phenomenal ripple effect of a successful product.