Josh Porter of Rocket Insights says product-market fit is when “your customers become your salespeople.” He calls it the magical moment when three things happen:

  • Existing users recognize your product’s value.
  • They tell others about their great experience with the product.
  • Your company replicates the excellent experience for the new users.

This is likely every business’ end goal — to provide enough value to customers that they become your advocates and help you grow your customer base.

Given this, every business should care about understanding, and achieving, product-market fit. In this post, learn what product-market fit is and understand how to measure it for your own business.

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A simplified definition is in the name: your product fits into the market, is where it is supposed to be, and you grow your business because of it.

Daniel Ek, CEO of Spotify, recognized that many of the necessary pieces for product-market fit were already in place when music-sharing platform Napster collapsed in 2001, following allegations of copyright infringement.

The content already existed, mobile devices stood poised to distribute the music, and Napster had amassed a sizable market of users. Ek banked on the possibility that this market of users would pay a small fee for legal access to the music, and he was right.

As of Q4 2020, Spotify has 155 million paid subscribers.

How To Measure Product-Market Fit

Forbes Magazine characterizes product-market fit as a hair-on-fire problem that an identifiable group of people have. It’s a scenario in which a product satisfies customer needs in a way that alternative products do not.

Marc Andreesen, who coined the term in 2007, believes companies who have achieved this ideal state can feel it because money is piling up, and investment bankers are staking out the company. On the other hand, companies who haven’t achieved product-market fit can feel it because word of mouth isn’t spreading, deals aren’t closing, and press reviews are flat.

Aside from just being able to feel it, the most tangible way to assess your product-market fit and understand how consumers view your products is by sending them surveys. The questions in these surveys are pointed, and ask customers if they think your product is a must-have and if they would miss it if it were gone.

Product Market Fit Questions

When you design your surveys, you want to ensure that all questions will give you the answers you want. Here are some examples, along with designated answer choices to be included.

1. How would you feel if you could no longer use this product?

A. Very disappointed

B. Somewhat disappointed

C. Not disappointed (it really isn't that useful)

D. N/A — I no longer use [your product name]

A follow-up question to this is “Please help us understand why you selected that answer,” where customers can input their responses in a text box. Their responses will give a more in-depth understanding of why your product means so much to them or why it is not a must-have.

2. What would you use as an alternative if [your product or service name] was not available?

A. I probably wouldn't use an alternative

B. I would use (empty text box for answer input)

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.

3. What is the main benefit that you get from using [your product name]?

4. What type of person do you think would benefit most from [your product name]?

5. How can we improve [your product name] to best meet your needs?

6. What motivated you to use our product?

7. Why are you using our product as opposed to other solutions?

8. What makes our product a must-have product?

The 40% rule is a popular metric for understanding product-market fit survey results. It states that if at least 40% of customers say they would be “very disappointed” if they no longer have access to your product or service or consider it a “must-have” (wouldn’t use an alternative), you’ve created a product that fits into the market.

Product-Market Fit Goals for Startups

Many startups fail because they waste money on products that no one wants to buy. Startups should prioritize product-market fit above all other goals because those that find it will dramatically increase their odds of success.

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, which we’ll discuss below.

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, and develop buyer personas 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:

  1. Analyzing your product or service
  2. Familiarizing yourself with your competition
  3. Choosing segment criteria
  4. 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 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 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 percentage of your TAM are current 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 to continue meeting those needs.

Product-Market Fit Examples

Wonder: Are You a Painkiller or a Vitamin?

Your customer relationships will drive your quest for product-market fit, from searching to find it to the battle to maintain it.

Guy Cohen, chief revenue officer at Wonder, points to his company’s drive to be a painkiller rather than a vitamin. “Vitamins are nice-to-haves, but people can’t live without painkillers.”

In its development, the company recognized that it had endless verticals to pursue, but it also understood the need for laser focus. The company developed a list of 15 verticals it believed it could help and then cold-called countless companies within those verticals to ask a barrage of questions.

Wonder chose its first vertical by determining which one felt the most pain and would therefore be willing to pay for a solution.

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 93 million riders, and the company recorded 4.98 billion rides in 2020 alone.

In most cases, product-market fit doesn’t happen on the first try. You’ll likely test and adjust your product or service several 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 significant 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.

 Product Marketing Kit

Product Marketing Kit

Originally published Jun 16, 2021 1:00:00 PM, updated June 16 2021

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Entrepreneurship