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.
Defining product-market fit
"Product-market fit," writes startup coach and investor Marc Andreessen, "means being in a good market with a product that can satisfy that market." When an entrepreneur identifies a need in the market and builds a solution that customers want to buy, that's product-market fit.
This concept might seem obvious, but it’s important to make sure there are enough people who want what your business offers and to define your value proposition accordingly. Product-market fit can matter more to the future of your business than creative ideas, masterful teams, or any other factor, and is critical to take into consideration when you build the product. For any business to survive, there must be people who will buy what it sells.
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.
How to measure product-market fit
Measuring product-market fit isn’t an exact science, but there are ways to assess whether or not you’re on track:
How quickly do customers make up their minds about a purchase?
Are reviewers mentioning your product to family, friends, or social media connections?
What is your customer retention rate?
Are customers interacting with your marketing efforts?
How many customers have unsubscribed or stopped using your product?
All of these are useful, data-based indicators of how well your product is finding its way into the marketplace. You can use this information to improve, adapt, and market your products.
Whether you achieve product-market fit or find that you need to rethink your current offerings, ongoing research is essential. As your business grows and shifts, be sure to continually take a look at what the market demands so you can create the right fit.
Examples of product-market fit
Some companies have done such an exemplary job creating a product to fit the market that their successes can serve as models before you launch your product, within your product process or customer development efforts.
Netflix
The entertainment media company first gained traction in the early 2000s. Movie watchers were starting to get tired of paying late fees from brick-and-mortar DVD rental stores. So Netflix sent them DVDs by mail as part of a subscription service, letting people keep a disc as long as they wanted.
But if Netflix had remained a DVD-by-mail operation, it would have faded out when DVD players did. Instead, Netflix positioned itself as the easier, cheaper alternative to whatever currently dominates the entertainment market: brick-and-mortar rentals, DVDs, or traditional television. Netflix alters its product every time the market need changes, maintaining its fit.
Netflix’s success is a great reminder to stay flexible in changing markets and keep an eye on the future.
In the early days, Google competed with lots of other search engines for market share. Like the other players in its market, they made money by offering ad spots next to search results. But in 2003, they jumped ahead of the competition when they introduced a new concept, AdSense.
Google’s leaders realized that businesses would pay to display their ads beyond the search page, and they developed AdSense to meet that demand. AdSense used new technology to scan webpages and automatically display relevant ads. For example, if you had a business that sold suitcases, you could pay for AdSense to automatically display your ads on travel websites.
By 2017, AdSense's 11 million users were paying Google $95 billion a year. Google identified a need no other search engine was meeting, and then met it.
You can apply Google’s AdSense approach to your business, too. To set yourself apart from competitors, take the time to find things that your competitors aren’t doing and adapt to fill unmet needs.
Slack
Slack, an instant messaging platform often used for workplace communication, started out as a completely different business idea. The founders were in the process of developing a role-playing video game, and Slack was something they had quickly hacked together as an internal communication tool for the team.
The team soon realized that the market had plenty of role-playing games, but there was nothing out there quite like Slack. So, they pivoted away from game creation. Today, 10 million people use the product.
Slack’s quick turnaround proves that changing your focus towards a better product-market fit can be worth your time. Don’t be afraid to move away from your original idea when you see a better opportunity.