How to find product market fit (and how to know you’ve found it)
- •What is product market fit?
- •Who is responsible for product market fit?
- •How do you measure product market fit?
- •How do I find product market fit?
- •How do I know whether I’ve found product market fit?
- •What if I don’t have product market fit?
- •Airwallex provides financial infrastructure for fast-growing eCommerce businesses
Product market fit (also referred to as PMF) is a scenario in which a business’s customers purchase, use and share information about its products.
But here’s the catch — it has to happen on a wide enough scale to sustain that business’s profitability and growth.
Marc Andreesen — who most marketers credit with creating the product market fit concept — says it’s about finding a good, stable market and selling a product capable of satisfying that particular market.
Let’s dig into how to find product market fit as well as how to know you’ve found the right product market fit framework.
What is product market fit?
First, what’s the product market fit definition?
It’s the degree to which a particular product satisfies a strong market demand. Marketers typically identify it as the first step in building a successful business venture.
Thanks to early product adopters, a business can gather feedback to gauge overall interest in a product. Teams can then make improvements based on that feedback.
A simpler product market definition is that the cost of acquiring a customer is less than the lifetime value of each customer (i.e. what a customer is spending on your products over a lifetime). This means you can effectively bring in customers and induce cost-efficient growth.
Let’s take a look at why product market fit is important.
According to Facebook’s Vice President of Growth Alex Schultz, the biggest dilemma that companies face is when they think they have product market fit but actually don’t.
It’s important to have product market fit because venture capitalists and angel investors typically want evidence of it before investing in a company. However, you should consider two key areas with product market fit:
Before product market fit (BPMF)
After product market fit (APMF)
In other words, you must examine pre and post-product market fit.
Before you develop your product, you must confirm people are willing to pay for it. This is vital because if people don’t buy it, your business won’t have the funds to focus on other objectives, such as growth and upselling.
So, if your product doesn’t have a large enough market with people interested and willing to buy the product, spending money on other goals can be counterproductive. Ideally, your product should earn enough to sustain itself while generating enough profit to fund other initiatives.
Let’s explore who’s responsible for product market fit.
Who is responsible for product market fit?
People generally associate product market fit with product management and marketing. That makes the most sense, right?
However, achieving product market fit is the whole business’s responsibility. This includes departments such as finance, sales, business development, customer support and more.
Sharing this responsibility gives companies a greater chance of reaching the PMF milestone.
How do you measure product market fit?
Naturally, your business should pay attention to many key business metrics.
However, no single set allows you to know whether you’ve achieved product market fit. The metrics you choose (and should use) are specific to your business.
Compared to those of your competitors, your products are unique (although similar). As a result, your target market may be different.
So, the metrics your competitors look at to know whether they’ve achieved PMF shouldn't inherently mirror yours. If they do, that’s fine. But each case differs.
To know whether your business is headed in the right direction when finding product market fit, you can look for certain signs:
Is there something specific that stands out about a potential customer swapping a competitor's product with yours? You can send out surveys and/or ask leads to test products to find the answer.
Are potential customers categorising your product accurately compared to similar products from competitors?
Why are customers willing to try your product and rejecting similar ones on the market? Do they see a unique value proposition?
If you have metrics similar to those of your competitors, how do they measure up? Think about your user retention rate.
These signs are a mix of quantitative and qualitative metrics. Next, we’ll outline what they represent in greater detail.
Here are some examples of quantitative metrics.
Net promoter score (NPS)
Here are some examples of qualitative metrics.
Word of mouth (WOM)
Increased media coverage and industry analyst interest
The process of gaining and reviewing customer feedback is another way to measure your product market fit. Input from your target audience — or at least a target demographic — will give you a better perspective of how your product performs as well as its market need.
So, whatever signs you choose to look for (perhaps from the above list or perhaps others you’ve brainstormed) should prompt four actions:
Reflect your progress.
Induce organic growth.
Achieve product market fit.
Help you measure product market fit effectively.
How do I find product market fit?
Now, let’s explore how to find product market fit.
As we explained earlier, no single path lets you achieve or measure PMF. But according to Dan Olsen, author of The Lean Product Playbook, one high-level method can get that process underway for your business.
He lays out the method in six steps:
1. Determine your target customer (i.e. target audience, target market).
2. Identify that target customer’s underserved or unmet needs.
3. Define your value proposition. This is the full range of value and benefits that your product delivers to its market (i.e. existing and future customers).
4. Specify your minimum viable product (MVP) feature set.
5. Develop your MVP.
6. Test your MVP with current customers.
Using tests and a product market fit survey will help you find input on the above method steps. Then, you can measure that input (e.g. answers, results) using the metrics we suggested earlier.
The outcome of your metrics will indicate whether you’re headed in the right direction.
How do I know whether I’ve found product market fit?
The task of finding product market fit is one thing, but how do you know for certain when you’ve found it?
Well, for starters, you’ve found it when your business consistently acquires customers for a lower cost than what they’re worth to it. A low customer acquisition cost (CAC) leads to cost-efficient growth.
What’s more, you should look at a few more aspects pre and post-product market fit.
Pre-product market fit
Let’s explore pre-product market fit factors to watch.
Excitement and delight
First, look at how customers react to your product or service. Are they excited when they use it?
It’s not too difficult to tell when someone (or even a small group of people) is pleased with a product and excited to use it.
Then, consider your customer feedback. Is it positive?
How do customers write about your product or service? Reviews are a powerful tool. If you consistently receive validation via positive reviews, you know you’re doing something right.
Customer payments come early
Another pre-product market fit factor to consider is whether people are willing to pay for your product! You can find out by simply asking them directly.
Plus, you can try to get current and potential customers to pay you early, before you release a product. The advantage they gain is getting early access to that product.
Having customers willing to pay before you even have the product on hand is a huge sign of interest. It reflects your product’s value and the value it creates in people’s lives.
And that’s your value proposition!
Post-product market fit
Now, let’s explore what to look for in post-product market fit.
First, do customers stick around?
This represents loyalty and the fact that customers enjoy the products or services they buy — and want to continue using them.
To visualise your customer retention rate, plot your percentage of active customers using a specific product over a period of time. Then, conduct a cohort analysis on that product’s use later (e.g. one year later).
This will give you a retention curve that hopefully should flatten at some point. If it does, this means you’ve likely found your product market fit for a particular target audience.
In summary, acquiring customers with less money than the amount you make from the retention curve represents true product market fit. The goal is to reduce your CAC because your product (and its use in a target market) is thriving.
Additionally, different product types will have different points that reflect product market fit.
With that in mind, finding the right benchmark means reviewing the retention rate of similar products that currently excel. So, when determining whether you’ve found PMF, look at long-term cohort retention — it’s one of the best metrics to rely on.
Surveys are another way to know whether you’ve found product market fit.
In your product market fit survey, consider asking customers how they’d feel if they no longer had access to or could no longer use your product. A potential answer could be “very disappointed.”
If more than 40% of survey takers select that answer, then you’ve achieved PMF.
Exponential organic growth
A valuable product will induce organic growth. The more valuable your product is to its customer base, the more exponential growth you’ll experience.
Product use will be incredibly high, even explosive, because you’ve built something that customers truly want.
Word-of-mouth marketing especially drives this. Customers will be so excited about your product that they tell others about it and likely recommend it as well. People won’t share or rave about your product with others if they don’t sincerely enjoy it.
In turn, this boosts traffic and thus organic growth. Ideally, over half of your new customer accounts should come from organic (or direct) traffic.
Compared to net burn, burn multiple is a better indicator of how your products and business perform.
Burn multiple shows how effectively and efficiently your business generates revenue (i.e. annual recurring revenue or ARR) based on the capital it spends.
Here’s the burn multiple formula:
Burn multiple = Net burn ÷ Net new ARR
The higher your burn multiple is, the more capital your business “burns” (i.e. spends) to achieve each unit of growth.
The lower your burn multiple is, the better your business performs. This reflects efficiency.
CAC being less than LCV
Another way to know whether you’ve found product market fit is when you acquire customers for a lower cost than their value (i.e. what they’re worth to you).
As we discussed earlier, the lower your CAC, the better.
CLV is certainly important, too. You benefit from the value of each customer (your CLV), so bringing in new ones is less taxing on your business. As a result, your CAC is low. And a low CAC means there are enough customers available to bring in efficiently.
Loyal customers despite product problems
Product devotion is another key indicator of PMF. If customers continue to use your product despite defects or problems, there’s a high chance you’ve achieved product market fit.
Consider whether your business is experiencing poor product execution or questionable management. You might rethink your business model and/or pricing and examine your pain points.
What if I don’t have product market fit?
If you currently don’t have product market fit, then you should strive to find it.
Start looking a little closer at your target market and target audience. Are you pushing the wrong product types on your target customers? Is your messaging appropriate?
Review the demographic variables and other factors within your target market. Then, you can develop a product that reflects what that audience wants and needs.
But perhaps more importantly, you can create a product they’ll genuinely enjoy.
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