The 5 Steps To Product Market Fit

Attaining product-market fit is essential for business success, signifying both market demand for your product and people’s willingness to pay for it due to its superiority over alternatives.

In this article, I’m going explain exactly what product market fit is, and how you can achieve it by giving examples from my own businesses.

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If you’re more of a watcher than a reader, I’d recommend watching this excellent podcast episode by Y-Combinator.

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What is Product-Market Fit?

Product-market fit is when a product aligns well with a market’s needs. In other words, a product with a high market fit meets the needs of its customers and is in high demand from them.

To gauge product-market fit I generally consider the following 3 questions:

1. Does the product generate organic growth?
2. Are people naturally talking about it?
3. Do people find it worthwhile to spend money on your product?

The Market Fit Hypothesis

The market fit hypothesis is a statement or assumption made by a business about the potential fit between its product and the needs of a specific target market.

It typically outlines the expected demand, customer acceptance, and overall viability of the product within a particular market. The hypothesis is usually tested and validated through market research, customer feedback, and actual market performance to determine if the product indeed meets the needs of the intended audience.

How Do I Know If I’ve Got Product-Market Fit?

From my experience, there are a handful of indicators that your product has market fit.

While seeing increased user growth and engagement with your product is an obvious sign, I’ve also found that retention of users during problems with your product is a certain sign that you’ve achieved product market fit. When users persist with a flawed product, it shows their commitment to your business despite any imperfections.

Why is Product Market Fit Important?

From my experience, achieving product market fit allows you to:

1. Increase Your Company Growth
2. Reduce Customer Acquisition Costs
3. Improve Customer Loyalty
4. Quickly Scale Your Business

The Product Market Fit Pyramid

The Product-Market Fit Pyramid is a helpful tool to achieve a good match between your product and the market. It consists of five layers, each building on the one below:

1. Know Your Customers: At the base, understand your target customers—the specific people you want your product to help. Learn about their needs and preferences to tailor your product to them.
2. Address Unmet Needs: The second layer involves identifying what needs are not being met for your target customers. Find the challenges or desires that your product can solve, positioning it as a valuable solution.
3. Offer Value: The core is your value proposition, which is the unique value and benefits your product provides. Clearly communicate why customers should choose your solution over others.
4. Define Features: Above the value proposition, define the specific features of your product that align with the identified needs. These features make your product stand out in the market.
5. Optimize User Experience: At the top is the user experience (UX), representing how users feel when interacting with your product. Designing a positive and intuitive UX enhances customer engagement, loyalty, and satisfaction.

By understanding and improving each layer, you can ensure your product meets the market’s needs and provides a great experience for users.

How is Product-Market Fit Measured?

Determining when a business has achieved product-market fit cannot be solely based on a single set of metrics. However, venture capitalist Andrew Chen offers several signals that indicate a company is heading in the right direction with its offering. These signals include:

• Impact: Evaluate the potential positive effect of the idea on your key metrics.
• Confidence: Determine the level of certainty you have regarding the expected impact and ease of implementation.
• Ease: Assess the ease of implementing the idea.

By using the ICE score system, you can quickly identify and prioritise the ideas that have the highest potential impact and feasibility. This approach allows you to focus on the one thing that will bring the most value to your product and customers.

While working on implementing these ideas, remember to continue focusing on customer acquisition in parallel. Keep exploring ways to optimise your channels and ensure that these ideas are incorporated into your plans for future growth and development.

Common Product Market Fit Mistakes

According to Andy Rachleff, there are four common mistakes related to product/market fit:

1. Targeting Well-Known Customers First: It’s not wise to focus only on big markets initially. Instead, founders should consider serving underserved and desperate customers who urgently need their product.
2. Changing the Product Instead of the Target Customer: When a product doesn’t connect with its audience, founders often think about changing the product itself. Rachleff suggests focusing on identifying the right target customer and aligning the product with their needs.
3. Prioritizing Growth over Value: Many founders want rapid growth through advertising early on. However, pushing growth without genuine product/market fit can lead to false assumptions and hinder long-term success.
4. Neglecting Continuous Innovation: Product/market fit is an ongoing process. It’s crucial to keep reassessing and adapting to changing markets, customers, and competitors by staying innovative.

Examples of Product Market Fit

Netflix

In the early 2000s, Netflix became popular by solving a common problem—late fees from DVD rental stores. They introduced a subscription model, delivering DVDs by mail with no late fees. Instead of sticking to DVDs, Netflix adapted to changing trends, offering a more convenient and affordable option compared to traditional rentals and TV.

This success teaches businesses to be flexible and adapt to changing markets. It’s vital to watch for future trends and adjust products or services to meet evolving customer needs. Embracing change and responding to market shifts helps companies stay successful.

Slack

Originally, Slack started as a tool for internal communication among the founders working on a video game. Realizing the saturated market for video games, they pivoted to focus on improving Slack.

Now with 10 million users, Slack’s success highlights the importance of adjusting your focus for a better fit with the market. It shows that being open to change and pursuing better opportunities can lead to significant success. When you find a more promising direction that meets market demand, don’t hesitate to shift away from your original idea and pursue a better opportunity.

What Should I Do After I’ve Got Product Market Fit?

After achieving a good match between your product and the market, it’s important to look at your marketing data and customer feedback. I’ve found that these insights can help shape your marketing strategies, enabling you to increase sales and revenue effectively.

The metrics that I typically look at are:

1. Customer Retention:
   • Focus on keeping existing customers by encouraging them to make repeat purchases and upgrades
2. Growth Rate:
   • After achieving product-market fit, focus on scaling up sales while maintaining profitability.
3. Customer Feedback and Engagement:
   • Actively seek qualitative feedback to complement analytics and gain deeper insights into customer needs.
4. Moving From Early Adopters to the Rest of the Market:
   • Recognize that initial customers who contributed to product-market fit are early adopters and develop marketing strategies that provide compelling reasons for a wider audience to try your product.

Resources

The Free Product Market Fit Survey

Sean Ellis, an entrepreneur and startup advisor, uncovered a significant indicator of product-market fit.

By simply asking users how they would feel if they could no longer use the product, and measuring the percentage of those who respond with “very disappointed,” valuable insights can be obtained.

This approach serves as a powerful tool in gauging the level of customer satisfaction and attachment to the product. To explore this concept further, you can access the tool through the following link – HERE.

Product Market Fit Template

Utilize the Product/Market Fit Survey Template to assess market demand and ensure that your product offering aligns with customer needs.

This valuable tool enables you to gain deeper insights into your prospective customers, understanding their preferences, desires, and the obstacles they face.

By leveraging this information, you can effectively tailor your product to address their specific challenges and provide meaningful solutions.

The Product/Market Fit Survey Template serves as a valuable resource in enhancing your understanding of the market and refining your product to meet customer expectations.

You can access the Miro product market fit template here.

FAQ

What is Product/Market Matching?

Product-market fit is the alignment between a company’s product and the needs of its target market to the extent that widespread customer adoption and satisfaction are achieved.

It signifies that the product resonates with customers, leading to sustainable growth and market success.

What is the First Step in Forming a Product/Market Fit Hypothesis?

The initial step involves effectively communicating the value your product offers to the target market. It is essential to clearly define the problem you are solving, the intended beneficiaries, and how your product addresses their needs.

Utilizing frameworks like the Lean Canvas or the Value Proposition Canvas can be helpful in mapping out your value proposition and identifying the key assumptions underlying your business model. These frameworks provide a structured approach to articulate and visualise your value proposition, facilitating a deeper understanding of your product-market fit and aiding in the validation of your assumptions.

What Is Profit Market Fit?

“Profit-market fit” is not a widely recognized term in business terminology. The more commonly used concept is “product-market fit,” which refers to the alignment between a company’s product and the needs of its target market, leading to widespread customer adoption and satisfaction.

How Do You Know If a Company Has Product Market Fit?

When evaluating product-market fit for enterprise businesses, one effective approach is to assess the contribution margin generated by the sales team, divided by the total cost associated with fielding the sales team.

Typically, the cost of maintaining a sales team can range from $500k to $600k. By analysing the sales yield and achieving a value greater than 1.0, it becomes evident that product-market fit has been attained. This metric indicates that the revenue generated by the sales team exceeds the total cost, confirming a positive return on investment and indicating a successful alignment between the product and the market.

Overview

Now that we’ve explored the concept of Product Market Fit, have a look at our tips to find your Minimum Viable Audience (MVA) or delve deeper into the concept of the Value Proposition Canvas.