Product/Market Fit — the Definition, Measurement, and Implementation
As entrepreneur Marc Andreesen explained, product/market fit means “being in a good market with a product that can satisfy that market.” However, as his definition might be the most accurate, the person behind the idea is Andy Rachleff, co-founder of Benchmark Capital.
Of course, other people define product/market fit differently, but let’s leave that aside. Here, we’ll focus on the process itself.
If you want your startup and its products/services to succeed, there are some steps to consider even before developing the product/service. They are crucial as they reduce the chance of wasting money on an unsuccessful product without a customer base needed to scale up.
It goes without saying that every company wants to avoid mistakes that would eventually lead to losing money or worse. That’s where a product/market fit comes in handy, as one of the fundamental processes in growth and scaling the company. Here, we’ll talk more about it.
What is Product/Market Fit?
A product/market fit is a scenario in which the company’s target customers are involved with the product in various ways. They are buying, using the product, and recommending it to the other potential users in numbers that can sustain the product growth and profitability.
In other words, product/market fit is a process of finding a perfect market for a product and offering it a product that is capable of satisfying the needs which that market has.
This approach is innovative, but unfortunately, many companies do the opposite. They build everything around an idea, which sometimes isn’t what the market needs. And often, they stick to it, without the flexibility to change for the user’s sake.
Why is Product/Market Fit Important?
Often, companies that try to implement those strategies fail. It’s because they sometimes think they have a product/market fit when, in reality, they don’t. That mistake can lead to devastating negative outcomes and a huge money-loss.
Many investors demand to see the successful product/market fit evidence before signing up for a deal. The reason behind it is simple. Nobody wants to invest in a project that will eventually fail. However, with a good strategy, the chances for that are slim.
To put it simply, your team can’t focus on strategic growth and upselling before you develop a product that will have enough customers on the market willing to pay for it. Basically, you can have an innovative idea, but without customers needing the solution you provided, your idea, and thus the project, will fail. You have to recognize what your customers want, so you can develop the solution that will sell your product.
Perhaps the best example of product/market fit and its importance is the invention of a hairdryer. When you think about it, people mostly wash their hair before any social occasion. Drying your hair with a towel takes time, while the hair dryer will do the work in just a few minutes. So, there was an obvious problem that needed the solution, and there was a huge market ready to accept that solution. Inevitably, the development of the product was successful.
Measuring the Product/Market Fit
Measuring the product/market fit is no easy task, as it needs multiple metrics to make an educated decision. However, it can show if the company is on the right path with their product when done right.
Let’s see some of the indicators that you should integrate into the process:
– Are there any indications that potential customers testing your product are willing to switch to it?
– Did you find users that have rejected similar products before but are willing to test yours? And why?
– When users are testing your product, do they group it accurately with the right competitive offerings?
– Do your users understand the product differentiators and its unique value?
– How do your metrics, such as retention rate, compare with your competitors?
According to Andrew Chen, a venture capitalist, you should include both qualitative and quantitative metrics to measure success. For example:
– Churn rate
– Growth rate
– Market share
– NPS score
– Referrals and word of mouth. It’s important to determine if your customers are acting as your product’s sales representatives.
– Media inquiries or coverage of your product in the public
How to Implement Product/Market Fit?
The process itself is demanding, and it takes time. It requires collaboration between sales, business development, support, finance, and other departments. However, the results will lead you to growth and scaling if you know what to do with them. Without further ado, let’s get started:
– Determine your target audience
– Identify the needs that your product will cover
– Determine your value proposition
– Set your minimum viable product (MVP) features
– Develop MVP
– Test your MVP with real customers
Based on the information gathered in this step and Andrew’s Chen metrics we mentioned above, you will be able to determine where you’re headed and what needs to be improved.
A Final Word
A product/market fit is a necessary approach for every company that places its product on the market. And especially if you’re a startup yet to conquer the market, as you can start fresh.
People often make mistakes in the first step when the idea is born. Even though the idea itself might seem perfect for you, it doesn’t necessarily need to be that brilliant for others. However, it can be a great starting point if you know what to do with it and how to tailor it to the demands market and users set. Flexibility and market research are crucial here, as you’re going to make a solution to a customer’s problem.
The best way to invest the money in developing your product is by investing it in researching your customers’ needs. That way, you can’t go wrong, and in the end, it will be worth it.