Product Frameworks: Product/Market Fit
“Product/market fit means being in a good market with a product that can satisfy that market.”
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Let’s get into it:
What is Product-Market Fit?
Product Market Fit is a magnetic force that attracts and binds customers to products. The better the fit, the higher the market share, the more loyal customers tend to be, and the more difficult it is for a competitor to lure customers away.
High fit means low customer acquisition cost, high loyalty, and high lifetime customer value.
Low fit means high customer churn, high customer acquisition costs, and low loyalty. It really is like a magnet: in one polarity it attracts customers, and in the other, it repels them.
Product-Market Fit Goals for Products
Startups should prioritize product-market fit above all other goals, because those that find it will dramatically increase their odds of success. Conversely, many startups fail because they waste money on products that no one wants to buy.
To avoid this fate, make sure you understand the pain points your product solves as well as the challenges your customers are seeking to solve. You can do this by focusing on six primary areas:
1. Determine your target customer
Work to identify the target customer who represents the users that will most likely benefit from your product. Use market segments to define your ideal customer. Develop “archetypes” for those customers so your team will clearly understand who it is building toward.
TechStars’ Entrepreneur in Residence Sean Higgins defines this process in four steps:
Analyzing your product or service
Familiarizing yourself with your competition
Choosing segment criteria
Performing research
The research phase itself is carefully crafted around defining your buyer persona, identifying which part of that persona you’ll target, conducting market research with prepared research questions, and summarizing your findings into digestible takeaways to share with your individual contributors, executives, and board.
2. Gather intelligence
Talk to your customers to determine their pain points and how much they would consider paying for a solution to those challenges. Seek insights from your sales and marketing teams to identify recurring customer complaints.
Collect a large enough data sample to provide meaningful feedback. Consider, too, that face-to-face conversations will often generate feedback that online surveys will not.
3. Focus on a single vertical
Startups have notoriously small budgets, which means that trying to sell your products to everyone will likely result in disaster. Begin with a narrow focus and dive deep into that industry. Establish yourself as the industry expert in a single domain with a goal to stimulate a viral spread.
For example, Spotify saw that people were ready to pay a small fee for unlimited access to music, legally. They didn’t go into the market trying to take on existing music streaming services like the discovery centered on Pandora or the more traditional, pay-per-album structure of iTunes.
They created a platform for people who wanted to listen to any album, any time by only paying one fee. They identified a gap in the market and targeted the people in that gap.
4. Specify your value proposition
Determine which customer needs you can best address with your product or service. Figure out how you can outperform your competitors and surprise your customers. Don’t lose sight of your product roadmap when determining which challenges you’ll address. Not every problem will fit into yours.
For example, Spotify’s value proposition positions the streaming service as offering access over ownership, providing data-driven personalization, and the opportunity for content unbundling.
5. Measure your product-market fit
You must measure your performance in order to manage your success. Identify key data points that will help you track performance. Start by identifying your total addressable market (TAM) otherwise known as the total number of people who can benefit from your product/service (i.e., If everyone who could use your product/service started using it).
TAM is calculated by multiplying your average revenue per user (ARPU) by the total potential customers in the market. Once you have your TAM, determine what percent what percentage of your TAM are currently customers.
6. Avoid complacency
If you manage to achieve product-market fit, don’t assume you’ll always have it. Your customers’ needs will change over time, and you must constantly re-evaluate market conditions in order to continue meeting those needs.
This could look like sending out a simple survey that asks customers, “How would you feel if you could no longer use [product]?”
Product-Market Fit Examples
Uber: The Free Ride
Uber captured product-market fit by initially offering free rides between regional tech events in San Francisco. Uber’s co-founders recognized that the taxi system was prohibitively expensive and outdated, and few people used it. Once the Uber app gained steam, Uber offered 50% discounts to first-time users.
Experts point to Uber’s ability to solve a problem and create a need at the same time. Consumers weren’t demanding better taxi service, but once a more convenient, simpler option emerged, users began to rely on the concept. The network effect kicked in and users began sharing their experiences on social media, providing social proof for the startup.
To date, Uber has about 75 million riders, and the company recorded 5 billion rides in 2017 alone.
In most cases, product-market fit doesn’t happen on the first try. You’ll likely test and adjust your product or service a number of times before you find the perfect combination of value proposition, customer base, and distribution.
Continually experiment based upon the feedback from your audience. Tweak your concept if your data indicates it and be prepared to pivot if necessary.
When you achieve product-market fit, your job will become much easier, because your customers and other interested parties will become a major part of your marketing effort. They’ll share their own stories with others so you can focus on the work of creating the same great experience for everyone who interacts with your company.
Popular metrics
The 40% rule
One metric for product/market fit is if at least 40% percent of surveyed customers indicate that they would be "very disappointed" if they no longer have access to a particular product or service. Alternatively, it could be measured by having at least 40% of surveyed customers considering the product or service as "must have". Sean Ellis is noted for popularizing this heuristic after examining many startups.
Rahul Vohra of Superhuman has developed a survey-based model based on the 40% Rule to help post-launch startups test and optimize for this metric!
Analytics metrics
There are five metrics any online business can measure to empirically verify if they achieved Product / Market fit. They are
Bounce Rate.
Time on Site.
Pages per Visit.
Returning Visitors.
Customer Lifetime Value.
Low bounce rates mean a visitor's expectation is being met. High Time on Site and Pages per Visit indicate that the experience of the user is satisfied. High Returning Visitor reflects the lasting impact a product has on their customers, causing them to come back, and Customer Lifetime Value measures the profitability each customer brings to the company. If these 5 metrics are above average and your 40% rule is met, you'll know you have a Product / Market Fit company
Common mistakes
It is important to differentiate between product/market fit and problem/solution fit when measuring a company's customer base. More specifically, when gauging a customer's desire, companies need to be sure they are measuring desire for the product or service—not just for a solution. Misinterpreting customers' desire for a solution as desire for a company's product or service will end up being a false positive for product/market fit.
Product/market fit is not binary. For a fledgling startup, a minimum degree of product/market fit will not be adequate in order to achieve market traction and success. Rather, what is actually required is a high degree of product/market fit, or extreme product/market fit.
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