What is Product-Market Fit, and how do you make sure your startup has it? In this article, we’ll take a look at finding product-market fit as well as how determining the right metrics for product-market fit.
Got an idea for a business? Are you sure it will work? Are you really sure?
One way to increase the chances of your startup being successful is to ensure you’ve got an excellent Product-Market Fit in place.
With 35% of new businesses failing because there was no market need, Product-Market fit can make the difference between going the distance and going back to the drawing board.
If product market fit (PMF) is a new concept to you, you might have a lot of questions. What is Product-Market fit? How do you measure it? And most importantly, how do you know that you’ve achieved it?
We’ve put together this introduction to Product-Market Fit to give you some help. Take a read, and you’ll be one step closer to using PMF to validate your startup idea.
And remember, if you need a little extra support determining the right Product-Market Fit strategy, we’re here to help.
- What is product-market fit?
- How do you know if you have a good PMF?
- The Sean Ellis test
- Do I need an MVP to know if I have a good product-market fit?
- The best metrics for product-market fit
- In summary: Don’t disregard the importance of PMF
What is Product-Market Fit?
Product market fit is when you identify a target customer and provide them with a product that fits their needs
Basically, it means you’ve found a market that will buy your product, and a product that makes your market happy. It’s a win-win situation for your business!
It’s hard to get a Product-Market fit right on the first attempt. You’ll likely spend a substantial amount of time trying to understand what your customers want and making changes to your product to achieve this.
For an example of a company that had to make changes to find the right product fit, take PayPal. At the turn of the century, PayPal was designed for people to exchange money through Palm Pilots and pagers. However, research showed that not enough people had Palm Pilots and pagers to take advantage of the service. If PayPal didn’t do something, there was a risk that the business would fail.
The company carried out extensive market research and decided to pivot by letting people send money by email instead. PayPal found its PMF and as a result, is still with us to this day.
How do you know if you have a good Product-Market Fit?
‘If you have to ask whether you have PMF the answer is simple. You don’t.’ Eric Ries, founder of the Lean Startup method
Many startups think they have product market fit when they don’t. This can cause major problems as they get excited and start to grow their company when they don’t have the PMF to justify spending.
If you don’t have PMF in place, scaling your business becomes a significant risk.
With this in mind, how do you know if your product and market fit are well-aligned? It’s a tricky question and there are several potential answers.
YCombinator refers to ‘explosive’ usage – when you’re so busy keeping your product up and running that you don’t have time to make any major changes. So if you can’t keep up with demand… it’s a good sign!
Here are just some of the ways you can see if you have a startup PMF. We’ll go into some of the specific metrics you can use later on.
Some Specific Metrics
- Users want to pay for your product. Let’s say you offer a free or freemium product. If customers are more than happy to pay for it, it’s a promising sign that you have a PMF. Similarly, if you have a waiting list and people want to pay before they can access your product, it means your product has a lot of value
- People use your product even if it’s not working. If customers still use your product even when it is buggy or frequently breaks, that means you have a good PMF. Take Twitter in its early days. Even though the social media platform frequently went down, people still wanted to use it
- You have a unique product or service. Think about if your product can be easily replicated by other competitors. If it can’t, you may have PMF by default. Bear in mind though that if this is the case, you will have to frequently review PMF in case of competitors replicate your idea
Remember that you don’t need to launch your product to see if you have PMF – we’ll talk about this in more detail later on in this article.
The Sean Ellis test
There is one other way you can test for product market fit – the Sean Ellis test.
The test is named after Sean Ellis, an entrepreneur and founder of GrowthHackers. Sean said you can see if you’ve achieved PMF by asking one simple question: ‘how would you feel if you could no longer use this product?’
If over 40% of people say they’d be ‘very disappointed` if they couldn’t use your product anymore, you’re on the right track. This means you have a dedicated set of target users who would do anything to use your product.
Do I need an MVP to know if I have a good product market fit?
You might be wondering if you need an MVP in place to determine product market fit. While an MVP can help you see if the market is there for your product and get that all-important customer feedback, the truth is, you don’t definitely need one.
Any idea you have can be validated without even a single line of code. This means you can see if you have a product market fit in place early in your startup life cycle. And the earlier you can identify PMF, the matter.
How can you do this without resorting to an MVP? There are lots of different ways, and the method that’s right for you will depend on your business and the product you have created.
For example, you could create a website describing your idea and see how many people express an interest. That’s what Buffer did. Alternatively, you could create a quiz in Typeform to see how many people want to use your product.
This works in the physical world too. Uber started off by offering free rides to tech events in San Francisco and monitoring how many people took advantage of the service.
Creating a prototype can be a good way to test your product with a select group of people and see if the product market fit is there. You can find out more about building a solid prototype here.
In summary: if you are ready to launch your MVP and are willing to make changes to it to determine if the product market fit is there, go for it! However, remember that it’s not a mandatory requirement.
As it’s better to determine PMF as soon as possible, you might want to focus on getting PMF right before putting time and resources aside for creating your MVP.
The best metrics for product market fit
How do you measure product market fit? The metric you choose to determine PMF depends on your product and the method you use to measure customer interest.
While we talked about the Sean Ellis test earlier on, here are some of the other metrics that will help you see if product market fit is there.
- Churn and retention rate. While it’s great if a lot of customers have downloaded your app, you want to keep an eye on the number of people that continue to use it after the first try. Monitoring churn and retention rate lets you see what drives customers away, and what encourages them to keep using your product
- Referrals. It’s great if a customer uses your product, but it’s even better if they recommend your product to someone else! A high referral rate means your customers like your product so much, that they’d tell a close friend or family member to use it too
- Lead conversion rate. How many prospects like your product so much, that they agree to become a customer? A high conversion rate is a positive sign that you’re making the right decisions
- Net promoter score (NPS). NPS is a good metric as it monitors customer satisfaction. You can see how many people like your product a little and how many like your product a lot
- Customer lifetime value (CLV). By CLV, we mean the average profit you get from each customer that uses your product. The more money that users invest, the more your product market fit is validated
And the last now
- Customer acquisition cost (CAC). CAC is the amount it costs to bring a new customer on board. If you see that this number is dropping over time, it’s a good sign. If you’re spending less to acquire more users, it indicates that your product is offering a lot of value
Don’t forget qualitative data can be just as valuable as quantitative data. Feedback and comments from your customers will help you see if you’re on the right track, especially in the early stages of building your product.
Remember to keep tracking PMF metrics throughout the lifespan of your product. Many startups think that once they’ve got product market fit, they’re immune to failure and can spend money on whatever they want.
However, the market can quickly change. Case in point, Skype. The video communication software company became complacent and lost significant ground to newcomers like Zoom during the pandemic. When you hit PMF, it’s important to invest in sales and marketing to make even more people aware of your product; otherwise, you may lose out like Skype did.
In summary: Don’t disregard the importance of Product-Market Fit
‘The only thing that matters is getting to product market fit’ – Marc Andreessen
If you don’t have a PMF already, it’s important to do what you can to achieve it. When you do, your chances of long-term success increase dramatically.
So make product development a priority, don’t be afraid to pivot your product, and you’ll be one step closer to being able to scale your business with confidence.
And of course, if you need a little extra help determining when your startup will have product market fit, we’re here to help.
How You are launched can help you find the right Product-Market Fit
We’ve been working with startups since 2014, helping them to work through their ideas and launch high-quality products that their target audience love.
Product-Market Fit is at the heart of what we do, and we want to make that all-important PMF is there for all businesses we work with.
Contact us today and see how we can help you with your audience targeting