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Just one year after Uber was launched, it had experienced so much growth that it was hiring one new driver for every seven rides – without needing to spend anything on marketing.
Social media leader, Instagram, enjoyed 25,000 signups on its launch date. File-sharing site, Dropbox, went from 5,000 to more than 75,000 signups for its waitlist after it successfully launched a beta video.
These are three examples of companies who nailed product market fit from day one. There was pent up demand for their product before it was even launched. Achieving a product-market fit is one of the most crucial goals that a startup needs to achieve in order to scale – but it is also the least understood concept.
According to an analysis of 3,200 companies published by the Startup Genome Report, “90% of startups fail due to premature scaling.” The report added, “70% of startups scaled before they were ready and, the founders substantially underestimated the length to confirm their market.”
What is product-market fit?
Product-market fit is the point where brands have identified and validated the demand for their product or service with their target buyers and have validated the use case for their products or services. Silicon Valley venture capitalist Andreessen Horowitz, coined this term in 2007 is quoted as saying “Product/Market Fit means being in a good market with a product that can satisfy that market.”
Product-market fit helps startups to assess the viability of their product or service being able to sustain it’s self and helps businesses evaluate how well their product or service will meet the needs of the market.
The Lean Product Playbook author, Dan Olsen, further defined product-market fit as, “When a brand’s product meets real customer needs and does so in a way that is better than other alternatives.”
Why is product market fit so important?
Product-market fit helps a brand understand how it can drive rapid and sustainable growth. Retention is an excellent indicator that a brand has a product-market fit. If a brand is able to retain its early-adopter customers, it has likely found a positive product-market-fit. Real-engagement metrics from retained customers will tell brands how their customers use their product or service and how the product or service can be optimised to better meet customer’s needs.
Identifying product-market fit
To identify product-market fit, brands need to do in-depth market research by talking to potential customers. Some of the distinct phases in searching for a good product-market fit include:
- Build a comprehensive understanding of the market landscape and fully understand the pain points that the target customers face – which the product or service aims to solve.
- Study the different industries, customer segments and use cases for the product or service – and validate the demand wherever possible with customer surveys, interviews and usability studies.
- Bring the product to market to validate these hypotheses. During the initial phase, a company will need to experiment and optimise it’s offering for a variety of target clients, cases, messaging and price points. This will help the brand to establish a robust market strategy which enables it to scale.
- Acquire the initial customers and develop insights about how the business can scale by modelling out marketing econometrics and conversion funnel metrics.
- Collect data on user behaviour such as the level of product engagement, utilisation rates, and customer churn.
- Use marketing and business performance data to build out solid processes which are repeatable and scalable in a larger market. This includes optimising the hiring process, training, customer onboarding and sales-to-operations handoff.
- Confirming the brand’s ability to scale, is profitable and optimising the product to maximise customer retention.
When businesses do not achieve product-market fit
When a brand is striving to solve problems that are not validated, it is highly likely that the business will not be sustainable and will eventually fail. According to startup expert and entrepreneur, Paul Graham, the most common mistake that startups make is trying to solve non-existent problems. When companies do not find a product-market fit they will likely encounter problems such as:
- Customers don’t understand the value of their product or service
- Insufficient number of sales
- No repeat sales
- Long sales cycles
- No word of mouth advertising
- Difficulty attracting media attention
Understanding consumer insight
The first step in finding product-market fit is to develop a bank of robust customer and market insights. Developing insight should ideally be done by analysing existing market research, the competitive landscape, consulting with regulatory bodies, benchmarking the performance of similar businesses and, approximating the total size of the market among other things.
Insight from social networking platforms like Facebook, Instagram and Twitter can help businesses understand the need for a product, service or even sometimes surface insight on the problem that the business’s product is trying to solve. Analysing social media insight can empower businesses to know the exact approach required to launch into the market.
There is a multitude of sources from which businesses can develop this insight including forums and review sites. When brands understand what their target customers expect and how consumers want the product to work, they can make key decisions which can provide better product-market fit.
Steps to achieving product market fit
Step 1: Initial product concept
A product-market fit pyramid is divided into two main levels. The first level is the market and the second is the product. In the pyramid, the second layer is the area where brands have the most control.
Define the value proposition – This refers to the value that a brand promises to deliver to consumers if they purchase their goods. It should ideally be presented in a single sentence – a single-minded customer proposition which summarises the benefits the customer will enjoy when buying the product or service.
Feature set – This is a collection of functionalities and features that a product’s minimum viable product needs to have when it launches, in order to deliver what was promised in the value proposition. A minimum viable product can be developed and tested through prototypes. Prototypes can be demonstrated to customers who represent a brand’s target audiences in order to understand how these prototypes can be tweaked and optimised to better meet customer needs.
UX design – The design of the product, the moment when a product or service comes alive.
Step 2: Validate the target customers and find a problem-solution fit
Moving from concept into the market, the business now needs to validate the product with prospective customers. This is broken down into four steps:
- Confirm your MVP (minimum viable product) – There are many ways to confirm the MVP such as social media monitoring, talking to customers, attending meetups or exchanging ideas with customers.
- Determine who your perfect customer is – By engaging with a variety of potential customers, the business can zone in on the exact customers that have the greatest desire for solving the problem that the business offers to fix with its product.
- Come to a problem-solution fit – Once identified, the business can tailor the MVP, design and functionality to best meet the needs of their perfect customer – and then launch it to the market.
- Pivot or Persevere – From the market feedback, the brand should consider whether it will persevere (if the strategy is working) or pivot (if there is no progress towards finding a product-market fit).
Step 3: Refine the value proposition with a repeatable and scalable sales process
Once brands have a clear view of their ideal customers – and have a core group of satisfied customers who will be happy to refer the brand to friends, the final step is to refine the proposition and build scale. Some of the things that a brand must prepare in this phase are:
- Success metrics – To help brands monitor their progress and stay on track, they should measure customer retention and customer acquisition cost (CAC).
- Customer feedback loop – The business should build customer feedback loops into the business from day one in order to understand customer issues and refine the product on a progressive basis.
- Focus and win in one market at a time – The business will want to scale fast but the danger here is losing focus. The simple rule of thumb is to choose one new market and to win. Win in that one new market first, before moving on to another new market. A new market could be a different type of customer, geography or vertical (use case).
Step 4: Product-market fit
When a brand has replicated its success across several markets and is experiencing consistently high demand and high customer retention rates, it is ready to scale substantially – and it has achieved product-market-fit.