What is Product-Market Fit?

Lack of capital is the number one reason startups fail; lack of product-market fit is the second. CB Insights found that 35% of startups fail because they tackle problems that are interesting to solve rather than those that serve a market need.

Failing to create products that people want and need is a greater contributing factor to failure than threats from the competition or a poor product, the company found.

What is product-market fit?

According to entrepreneur and investor, Marc Andreesen, “Product-market fit means being in a good market with a product that can satisfy that market.”

It simply means that there’s market demand for your product and consumers are willing to pay for it because it does what they need it to do. You know that you have reached product-market fit when customers are buying the product as fast as you can produce it, or the usage of your service is increasing. You’ve hit the jackpot if you find yourself hiring more staff to cope with customers. In short, when you have a product that serves the market, it’s very obvious from the market response.

Why product-market fit is important?

So important is product-market fit that Marc Andreessen says: “I think the life of any startup can be divided into two parts: before Product/Market Fit (let’s call it “BPMF”) and after Product/Market Fit (“APMF”).

Without product-market fit, any time and money spent on developing the product or service are wasted and most venture capitalists won’t show any interest in the venture. Until there is evidence that the market wants what you have to offer, any marketing and upscaling initiatives are counterproductive. You can’t grow your market if you don’t have a market.

How to develop product-market fit

Dan Olsen, Lean Startup consultant and author of The Lean Product Playbook, developed the Product-Market Fit Pyramid, which guides startups through each layer of the pyramid from the bottom to the top. The steps are as follows.

Step 1: Determine your target customer

You need to determine who are likely to use and buy your product. Use market segments to define your ideal customer, and develop buyer personas for those customers. Personas help everyone on the team understand for whom they are developing and building the product or service.

To define your buyer personas, you need to conduct market research. Personas are fictional versions of the real people who will be your target customers.

Step 2: Identify underserved customer needs

Now that you have identified your target customers, you need to determine their needs and pain points. If you can identify and verify a specific need you have found a good market opportunity. Talk to your audience about the pain points of existing solutions so you can improve on them. Alternatively, find out if your innovative solution can solve a gap in the market.

Step 3: Define your value proposition

Your value proposition answers the question why customers should buy from you. What makes your product outstanding? What makes it better than its competitors? How are you going to differentiate your product from competitive products? Will it have unique features, or is it going to be something completely new? Exactly how will it delight your customers?

Step 4: Specify your MVP feature set

Prepare your audience for your MVP by stating the features that they can expect and clarifying that it’s not the final product. This approach allows you to build only what is needed so customers can judge whether you’re onto something.

The purpose of the MVP is to test it, get feedback and iterate until you have a prototype that customers agree could become a viable product.

Step 5: Create your MVP prototype

Building an MVP prototype gives customers an opportunity to test your offering. A prototype is a representation of your product, not the actual product.

A prototype gives form to your product idea; it’s something tangible that customers can interact with. A prototype can be as simple as a sketch on paper or it might be something more functional that customers can interact with. 

Step 6: Test your MVP

The next step is to get feedback from your target audience. You don’t want feedback from just anybody, as that can point you in the wrong direction. Use a survey to confirm that those you solicit feedback from have the attributes of your target customer.

Get feedback during one-on-one interviews. Don’t just depend on your list of questions and their answers. Be on high alert for how they use your product and their comments while they use it – therein lies your gems.

The type of questions you ask is important. Avoid leading questions like “That works well, doesn’t it?” Also, avoid asking closed questions like, “Do you like this feature?” Rather focus on open-ended questions like, “What do you like about this feature?” Non-leading, open-ended questions provide you with more information.

Lastly, analyze the feedback you received, noticing if there are patterns of similar feedback on issues that you need to address.

Iterate to reach product-market fit

After analyzing the customer feedback you will know to which step you need to return to make the improvements. For instance, if you misjudged your target audience, you’ll need to go back to that step and think again about your target audience and redevelop your customer personas.  Or if you find that your product doesn’t solve any real pain points, you need to fine-tune your market research.

Of course, this means you will also need to develop a new MVP prototype that also needs to be tested. You may need to go through many iterations before you arrive at a product that elicits predominantly positive responses. What you want at the end of the process is an MVP that your target audience loves and wants. This is the point where you can go ahead and build your product.

This process has been shown to result in products that consumers welcome and are prepared to pay for.

How to measure product-market fit

The time to measure product-market fit is when you’ve launched your MVP. There is no concrete and globally accepted metric for measuring product-market fit and it can be difficult and complicated to determine whether you have achieved this objective.

Here are some sources that can help you determine product-market fit.

1. One-on-one customer interviews

There is no better way to measure product-market fit than communicating directly with the people who are using the product. Either speak to them in person or use social media platforms to get feedback. You can also leverage Public Trello Boards which allow companies to post their products and product features and invite comments from users.

2. Social media

Social media surveys are a convenient and inexpensive way to get in touch with customers. Since that is where customers are, it’s the ideal place to get customer feedback. People are very vocal on social media, so you are sure to get honest feedback.

3. Crowdfunding

Crowdfunding websites like IndieGoGo and Kickstarter are ideal product testing platforms for startups. Moreover, you can gather funds on these platforms to support further product iterations.

These platforms allow you to use text, video, and photos to introduce your product and invite comments from backers who can decide to contribute to your funding goal if they believe in your product.

Crowdfunding can be a great way to determine product-market fit. Many startups have used this strategy to test their startup idea or the viability of their MVP. After all, if people are prepared to spend money to support your MVP when it’s just a picture on their screen, there’s a good chance that you’re onto something.

Examples of product-market fit questions to use in surveys and interviews

1. Open-ended questions

The following questions are open-ended and can help you understand how well your product fits into the market based on your consumers’ individual experiences.

• Why would you choose our product rather than an alternative?
• Why did you decide to try our product?
• What specific problem does our product solve for you?
• Which feature would you use most often and why?
• How can we improve our product for you?
• Why is our product a must-have product?

2. Multiple choice questions

Sean Ellis developed a survey to determine whether a product has been successfully introduced to the market. The survey is based on a multiple choice question: What would be your degree of disappointment if this product ceased to exist tomorrow?

The answer choices are:

• Very disappointed
• Somewhat disappointed
• Not at all disappointed (it wasn’t really that useful)
• N/A (I don’t use it anymore)

As a general rule, if at least 40% of customers say they would be “very disappointed” if they no longer have access to a product or service or consider it a “must-have”, product-market fit has been achieved.

3. Net Promoter Score survey

Net Promoter Score is a metric used in customer experience programs. It measures customer loyalty with a single-question survey:

On a scale of 0 to 10 what is the likelihood that you would recommend our product or service to a friend or colleague?

Shortcomings of surveys

Surveys are easy to implement, but they don’t provide in-depth data. They are an indication of what people say they do, not what they do.

Surveys also don’t tell you how big your market is. To gain that information, you need engagement metrics and retention and churn rates.

The ultimate measure – reaction of the market

The abovementioned methods to test product-market fit are unnecessary when the market’s reaction is clear. Product-market fit has been achieved when:

• Growth happens organically as a result of customers spreading the word
• Early adopters are prepared to pay for your product
• People spread the word about how they feel about you and your product
• You can’t keep up with production
• When the press keeps calling
• Orders keep rolling in

Should you act on all the feedback you get?

Startups are often anxious to please early adopters and include features they request in the hope that they will become paying customers and in the belief that their suggestions may result in a more desirable product. This is not necessarily true.

You need to judge the input from whence it comes. Did the feedback come from someone who only used your product once, or did it come from someone who has been using it for a while? Did it come from someone who has never tried this kind of product, or is it someone who has tried many similar products? Be sure to have your target audience test your product, after all, it’s them that you want to serve. Also, consider if the change will affect only a few people, or will it address a pain point for many people.

Examples of product-market fit

1. Slack

Slack is often mentioned as an example of a brand that achieved product-market fit because the founders understood the prevailing market need and gave preference to it rather than their original idea.

Slack started life as an internal communication tool for the role-playing game the founders were developing. However, they soon realized that the market was already saturated with role-playing games but lacked a communication tool like Slack. So they pivoted, abandoned the role-playing game, and focused on the communication tool. Today, Slack has around 10 Million users.

2. Netflix

Netflix stepped in in the early 2000s when people were getting fed up with paying late fees for the DVDs they were renting. Netflix gained a foothold by sending movie watchers DVDs as part of a subscription service and letting them keep a DVD as long as they wanted.

But the media company immediately pivoted when DVDs started to be phased out by offering an affordable and convenient 24/7 streaming service. Today, Netflix has more than 220 million users.