In my last post, I discussed solving a customer’s need or providing value as the one of the key determining factors in the success or failure of a business. In this post, I will delve deeper into how to determine if your product or service is actually solving your customers’ needs. This is generally known in most circles as “product-market fit”.

What is “Product-Market Fit”?

I would define “product-market fit” as “the minimum viable product (or “MVP”) that addresses and solves a problem or need that exists in a market”. Again, it all comes back to “solving a problem or need that exists in a market.” Now, generally speaking, if that minimum viable product is to be successful (and continue being successful), it will be necessary for the product to evolve to fit the needs of the market. And those market needs may evolve over time as well, forcing a company to be nimble in their product development, or risk losing market share. Rarely does a minimum viable product nail the product-market fit on its first try, or iteration. However, there have been some very successful examples of this, such as Dropbox, Airbnb, Zappos, Twitter, Groupon, Buffer, Zynga, Foursquare, Spotify, Pebble, Yelp, and others.

Another thing to understand is not only must you be dialed in on your customers’ current needs, but their future needs as well. Learning those needs can take time, experience, and patience. However, that topic is something that requires an entire blog post in itself, and I will discuss in a future post.

How do you know if you have Product-Market Fit?

An excellent way to determine if you have true product-market fit, is (with minimal explanation or demonstration) to give your customer your product/service, and if they can explain the exact value proposition back to you, then you likely have true product-market fit. Again, it comes full circle, as the value proposition is not what the product/service does, but what need or problem does it solve?

Therefore, successful product-market fit is achieved when your value proposition is instantly understood by your target market (sometimes after a necessary brief demonstration or explanation). The quicker your customer can understand the value to them, the stronger your product-market fit.

However, gauging product-market fit is not necessarily easily, even if this goal is achieved. Learning how to gauge product-market fit can take time, experience, and patience. Gathering feedback in the form of customer surveys, interviews, focus groups, and other methods, can also be useful in this regard.

Another important thing to keep in mind is that the next step to achieve growth should not be attempted before the product-market fit is absolutely nailed down. Many times, entrepreneurs and founders attempt to grow the company with a less-than-ideal product-market fit, and their future success suffers as a result.

The 40% Rule

One arbitrary rule that I like to use in determining product-market fit is “The 40% Rule”. This rule states that if 40% or more of your existing customers/users say that “they would be disappointed if they could no longer use your product/service”, then you have achieved product-market fit. This rule was popularized by Sean Ellis, a well-known marketer in the field. And, a good tool to use in asking this question is Survey.io.

Engagement/Retention Metrics

The more scientific way to determine if product-market fit has been achieved is through engagement and retention metrics. For an online produce/service, there are five empirical metrics to measure product-market fit; time on site, bounce rate, pages per visit, returning visitors, and customer lifetime value (sometimes known as “CLV”, “LTV”, “LCV”, or “CLTV”).

Qualitative Methods

However, keep in mind that both of these quantitative methods are not foolproof measuring sticks for determining product-market fit . Rather they should be used as one of many tools in an entire toolbox to measure product-market fit. Some qualitative methods to measure product-market fit include asking questions such as:

• Has your product/service grown with little or no marketing? If so, has it been via organic methods, such as “word of mouth”? Or, is it some other method or reason? (Extensive word of mouth with little or no marketing is a strong signal of product-market fit. If it’s some other organic method or reason, evaluate whether the results of that method/reason translate into true “product-market fit”.)
• What does your market feedback from your customers look like? Generally positive? Has that positive market feedback translated into actual sales/adoption? (People vote with their dollars, so strong sales are a good indication of product-market fit. However, for some non-revenue generating products/services, sales are not an applicable indicator. So, while adoption is not as strong an indicator as sales, it can also still be a sign of product-market fit in those situations.)

Common Product-Market Fit Myths

• “First mover advantage is more important than product-market fit.” The first to market is not always the long-term winner: the market entrant with true product-market fit usually is. Typically, this is the second entrant into the market. But, it could even be the third, fourth, or even later entrant. The reasons for this are obvious: the later entrants in the market can avoid the mistakes and pitfalls of the first entrant, and adjust or refine their product/service offering accordingly for the market. The first entrant then has a difficult time dislodging the later entrant who has achieved true product-market fit, even if offering lower prices or a better product.
• “Once you have product-market fit, it is hard to lose”. Actually, it can be very easy to lose product-market fit once achieved. Market conditions can change. Consumer demands can change. Competition can increase. Think of product-market fit as a moving target. Even if you’ve nailed it once, you must be vigilant about adapting to the changing market and conditions to keep your sights fixed on the product-market fit.
• “Our revenue/adoption rate is increasing. We must have product-market fit.” Increasing revenue is one sign of product-market fit. But, it is not the definitive ultimate sign. Too often, the company begins to scale prematurely once they see sales or adoption rate increasing. However, that increasing sales or adoption rate may be due to a subset of early adopters, and not the market as a whole.
• “We can figure out the product-market fit as we go.” Generally, companies tend to vastly underestimate the time necessary to achieve and validate product-market fit. Some of this is borne out of the startup culture itself, and its stress on the aforementioned “first mover advantage”, speed to market, and accompanying pressure from investors. All too often, companies’ early revenue forecasts neglect the customer development process that is an essential component of finding true product-market fit. Thus, they move forward without having nailed product-market fit down. And, this can be a fatal mistake if not quickly corrected.
• “Once you have product-market fit, you will know.” Often times, you may have found product-market fit, but you don’t even know it at the time. The discovery of product-market fit is often derived from a process of experimentation, and not a single “a-ha!” moment.

How to Achieve Product-Market Fit

Iteration is the key. Keep experimenting to see what works. If something works, keep going, and build on that. If it doesn’t, discard or modify, and keep working at it. Being nimble and able to adapt, or even pivot completely, is essential. Having a closed feedback loop is highly beneficial to this process.

Obviously, customer insight is also essential to achieving product-market fit. That insight can be gained through surveys, buyer personas, customer interviews, focus groups, or other methods. When using these methods, just make sure that your methodology is sound.

Sometimes product-market fit can be achieved with a less than stellar product, and a promising market. Conversely, product-market fit can almost never be achieved with a great product and a weak or non-existent market.

I don’t eschew using metrics to achieve product-market fit. But, be careful about becoming over-reliant on the numbers. Some of it is quantitative-based, some of it is gut feel. But, keep in mind, whichever side you lean towards, that the process should be 100% customer/user-centric.

Conclusion

So find a blue ocean market, keep iterating, and keep working at understanding your customer and market. Then, when you find product-market fit and nail it on the head, both the market and venture capital will come find you!

Obviously, there is a lot more that goes into determining and achieving product-market fit, but these are some of the essential basics.

What other things would you add to the product-market fit discussion?

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