Product-market fit is the level at which the product meets the demand in the market. For the perfect product-market fit, customers understand its use and its value. When they value the product, they will be happy customers. That translates to repeat customers who will market to other customers.
“Product-market fit is the moment when a startup finally finds a widespread set of customers that resonate with its product.”Eric Ries, Lean Startup
Micheal Siebel from Y Combinator defines product-market fit as a stage where users are consuming your product as fast as you are creating it.
As much as most companies create products to meet demand, the market does not need all those products. Some products are useful, but customers do not derive much value from them. When it comes to new technologies, you may find that customers do not understand the value of the product.
Every company needs product-market fit to thrive as it impacts growth and profitability. That is why many venture capitalists demand evidence of product-market fit. Product-market fit shields a company from cash-flow problems.
There are only one in twelve businesses that survive to the end of the road. A need for the product defines its success. According to CB Insights, up to 42% of startups fail because of a lack of a product-market fit. This is a situation where customers do not feel they need the product. That means that before developing a product, you should ensure there is a need for it, i.e, product-market fit.
According to lean startup method, product-market fit is based on three concepts:
- A product that solves a problem.
- A customer who has an urgency of solving the problem and is willing to pay for that product.
- A ready market to allow the entry and growth of your product.
Finding the perfect product-market fit takes time, making it costly as it will need 6-12 months. Through our service, we can do it 70% faster, which will help startups save money. Both time and money are important factors if you want to be the next unicorn or you want scalable products. Many startups do not address this early enough or realize it when it’s too late. This brings expansion problems, thus it is better to address it in the early stages like creating an MVP.
Product market-fit EXAMPLE
One of our customers has a solution to assign software to clients. His challenge was a low success rate of 1-8% from IT Prospects. We did an analysis where we discovered their reach in contacting HR departments was too wide.
Their main selling point was delivering software to assign developers to projects. (the software analyses skills and assigns). Even though it is a problem, it is not an urgent one for HR departments. The main pain point for HR departments is lack of enough skilled personnel for the projects.
To provide a market fit for them, we changed the focus to a skill gap analysis on recruitment vacancies. We highlighted how the HR department can enjoy the solution and optimize skills by 10%. This will help cut down their recruitment costs by 10%, solving their main challenge. Understanding the customers helped in increasing the success rate. There was proper segmentation and right messaging.
Can product-market fit influence the success of your business?
As mentioned before, it is hard for your product to make it if it is not aligned with the customer persona. It is crucial to keep in mind that you may need different personas for different markets. You must understand your customers, their situation, and buying intentions. Customer satisfaction is the end goal and thus it is the holy grail for a successful company.
Some of how a product-market fit will influence the success of your business include:
Product-market fit will impact the success of your marketing efforts or advertising. Without a product-market fit, one tends to focus on the wrong target group. It means that you do not understand your buyers well as your product does not resonate with their needs. This may lead to burning money from wrong targeting, high churn rates and low retention.
Upon understanding your buyers pain points, you will deliver the right value proposition.
When a company has a product-market fit, customers will be happy with the product and tell others about it. The best type of marketing is word-of-mouth, as most prospects prefer recommendations.
Low customer acquisition costs
With a perfect product-market fit, customers will see value. This may lead to freebies such as free media coverage and word-of-mouth advertising. They will drive up your sales at no extra cost. When you spend your marketing budget well, you will have an upper hand when you need to talk to investors. Investors demand organic growth as a sign of true product market fit.
How your company will grow will depend on your product-market fit. If correct, you will achieve efficient growth with proper resources and positioning.
When you have low churn rates, it is a sign that you have the right product-market fit and vice versa. Clients will be happy with the product, which begins with having the right buyer persona.
How do you know you have the right product-market fit?
According to Michael Siebel of Y Combinator, you can tell if you have a product-market fit if your product consumption is as fast as its production. In his opinion, the true market fit is when the demand is higher than the supply.
There are three main things that show you have a great connection between product and market. They are:
- Unique value proposition – Your product stands out and customers can choose you over competition
- Monetization – Customers are willing to pay for your product
- Low CAC – Customers can be able to get your products at a low cost
Getting a product-market fit is a journey as the market’s needs change with time.
It is rather clear to know if a startup has a product-market fit. Some of the tell-tale signs include:
When you have a product-market fit, you will grow fast as customers will see value from your product. Happy customers will be repeat customers and spread the word through word of mouth.
Low churn rates
When you have a high churn rate, you will notice that you do not get any repeat customers or a low subscription rate. That is because customers are unable to derive value from your services. When you have a product-market fit, customers will be happy with the product, so there will be a low churn rate.
When you have a product-market fit, the LTV:CAC ratio is low. That means that the lifetime value of your customer should be higher than your customer acquisition cost. In this situation, customers are willing to tell others about your product and you spend less on customer acquisition. In an ideal product-market fit situation, the LTV:CAC ratio should be higher than 3.
Product-market fit framework
If you feel your startup does not have a product-market fit, do not worry about it, as you can fix that. You can take steps to discover and create your product-market fit. They include:
Fill a need
Most of the time, a product creation is to fulfil a need. It is your responsibility as an entrepreneur to maximize that. You can take the step of doing iterations of the minimal viable product (MVP). If you do not see the need or feel that the market’s priorities have changed, then you have to customize or make changes to suit the market. With proper research, it will be possible to unveil urgent needs in the market.
To ensure you fill the needs of the market, you need to define:
- Your target market
- channels you will use to reach them
- how committed they are to the problem,
- how unique your solution is in comparison to the alternatives in the market.
It is also good to confirm if the customers will be willing to pay for the solution. You might have to do many experiments to know that.
Since you are making products for customers, you are better off with a market-first approach. This is by asking validating questions like:
- If they care about the problem they are solving?
- Is it possible to reach target customers in a cheaper way?
- Will the target customers be willing to pay for the product?
The main reason startups fail is assuming there is a need for a product while there is none.
“Don’t find customers for your product, find products for your customers”Seth Godin
To be able to confirm the market, you will need to do experiments. Many take the approach of an MVP. Through an MVP, you will know how potential customers engage with your product. Some of the famous top companies that started off as MVPs include Airbnb, Groupon, and Uber.
The best way to understand your customers is by talking to them. It is only through that that you will know their pain points, and how it is urgent to them. It will help you know how much they are willing to pay for the product.
Another approach is doing an MVP then interviewing customers who engage with your products. You can ask them how they found the product, why they love the product and how much they will be willing to pay for it.
According to Rahul Vohra, the founder and CEO of Super Human, the easiest way to get a product market fit is to find out what customers love the most about your product and make it even better. This can only be possible by interviews, to understand what customers love most about your product.
Once you have an idea of your customers’ pain and the commitment they have in solving the problem, now it is time to build the product. Instead of doing the whole vision, it is better to start off with one segment of the product to see how it performs.
According to the KISS principle, most systems work best when they are simple as opposed to when they are complicated. If you simplify the processes, it is easy to create the “aha” moment. Once you produce that, inform customers who indicated interest in your product.
It does not end at customer acquisition, you have to be strategic in distribution.
“Product is important but having great product distribution is more important”Reid Hoffman
In most cases, you will have to do many channel tests to identify the most cost-effective channel for getting customers.
It is through analytics that you will know how customers use your product. The data you gather can help shape your decision making and know areas that need improvement.
The main pointers to focus on when it comes to analytics include:
- customer experience,
- Customer retention rate,
- Product expenditure
- Customer referrals
When you measure your growth rate, you can tell if you are on track or not.
How to measure product-market fit
Even though you might have created the perfect product-market fit, it does not end there. You need to keep track to measure its performance to know if any adjustments you need to make.
Some of the metrics to track to measure the performance include:
- Total Addressable market(TAM)
These are the total number of people who your product benefits. You can find the TAM by multiplying the total number of potential customers in the market by average revenue per user. With the TAM, you can know what percentage of the population are your customers.
- Product validation
This is whereby you do interviews with customers to know if your product is desirable. It can be through interviews or surveys.
According to Sean Ellis of Growth Hacker, one of the common tactics used is asking users how they would feel if they could no longer use the product. The answers can be in options ie No longer use the product, Not disappointed, somewhat disappointed, and Very disappointed. From the survey, those who answer very disappointed should be more than 40% . That shows you have a product-market fit. If you are around 25% then you have chances to tweak the product to meet market fit.
Mistakes to avoid when creating a product-market fit
Even though you may have a product-market fit, you should strive to balance pricing. The price has a significant influence on the performance of the company. It should be a reflection of the product value. It should not be too cheap or too expensive.
Lack of flexibility
When creating a product-market fit, nothing is a straight line. That means you should be willing to make changes to get to your target. You should be ready to change your messaging, pricing, and value proposition from time to time.
Treating product-market fit as the end goal and not a process
Many companies fail to know that product-market fit is a continuous process. That means you should treat it as an end goal rather than a process. You should also not be complacent once you achieve it but be willing to roll up your sleeves when required.
Not measuring well
You should avoid getting opinions from the wrong places to find product-market fit. It would help if you targeted views from your perfect buyer persona. When it comes to analytics, make sure that you track the right metrics.
As we know by now, product-market fit is paramount for the survival of any company. At Sulma & Sulma, we help companies understand their customers and find the perfect fit in a short time.
We have a platform where customers can define their ideal customer profile, buyer persona, and customer journey. This can help address the gaps and adapt to the needs of the market. We have a commitment to provide paying customers and help companies remain profitable.
We adapt the experience we have across industries to help you find a unique selling point. We have many happy customers, and you can join the band and become one of them.