In this guide, we’ll go over the definition of product-market fit, explain why this balance is critical to the long-term viability of your product, and review who is responsible for achieving and managing it.
We’ll also walk you through steps to identify and strive for product-market fit, list some metrics to track in that pursuit, and drive the point home with some real-world examples of both excellent and poor product-market fit.
Table of contents
- What is product-market fit?
- Why is product-market fit important?
- Who is responsible for product-market fit?
- How to achieve product-market fit
- How to measure product-market fit
- Product-market fit examples
- Best practices and key takeaways
What is product-market fit?
Product-market fit describes a product or service that effectively fulfills the underserved needs of the target market in a way that can sustain growth and profitability.
That is, assuming enough people are using your product and it is providing enough value for them to continue to choose it over your competitors. It doesn’t hurt if your users or customers are advocating for your product at a high enough volume to drive continued growth.
The aim is to find the sweet spot where you’re offering just enough value that your customers find the product useable and your business sees it as feasible and viable.
Why is product-market fit important?
Product-market fit is critical if you want to grow your business and effectively scale your product or service. If you’re a start-up, you’ll likely need to demonstrate product-market fit to unlock further funding as investors are keen to know that they are going to see a return on their money.
If you don’t achieve product-market fit before investing further in your technology, sales, and marketing work, you’ll likely find it very challenging to acquire and retain new users or customers.
Who is responsible for product-market fit?
Responsibility is very much shared when it comes to product-market fit. Depending on the size of your company, either the business leaders or the product manager may be responsible for identifying the target market and customer.
A product designer, user researcher, or product manager (or a combination of all three) might contribute to identifying underserved market needs.
The cross-functional product team is responsible for identifying the value and creating the product or service, and sales and marketing id responsible for get the word out and acquiring your first customers.
How to achieve product-market fit
If we break down the components of product-market fit using the model outlined by Dan Olsen, we can see a path to achieving it.
Dan Olsen: “The Playbook for Achieving Product Market Fit”
The market
Looking at the market section first, you need to have a good grasp of who the target customer is for your product. Many companies make the mistake of trying to create something for everybody. But if you don’t know who your product is for, you won’t be able to succeed at creating something people want to buy and use, or create effective marketing.
When thinking about your target customer, it’s important to consider things like demographics (age, location, gender, ethnicity, etc.) and psychographics (behaviors, attitudes, values, etc.). In addition, you need to understand their core needs and problems and how other products on the market are serving those needs today, as well as the potential size of your market.
The goal is to find a gap where the needs of your particular target customer are currently underserved or unmet by existing products. The blue ocean strategy is great framework for identifying gaps in the market. Of course, you will need to do your research and speak to potential customers to understand their needs.
The product
Once you’ve identified your target customer and an underserved need, you’ll need to identify a value proposition that effectively meets that need — the product part of the product-market fit diagram.
In short, what are you going to offer to your target customer that will add significant enough value for them to choose to use those products or services? The Value Proposition Canvas is a great tool for mapping out how you’re going to serve target user or customer needs and the products and services you plan to offer.
Finally, you need to deliver a product that achieves just enough value to your target user or customer that is useable, technically feasible, and business-viable — the minimum viable product (MVP). Identifying this will come from prototyping your ideas, testing them with your target users or customers, and iterating to find the value.
Once you’ve achieved all of the above, the work doesn’t stop there! You’ll need to look at how you can continue to provide value to your customers as the market shifts and changes and other players come emerge with new services.
How to measure product-market fit
When it comes to measuring product-market fit, there is no one North Star metric. Rather, several metrics come into play at different parts of the journey.
You might consider measuring things like:
- Acquisition rate — You want users or customers to adopt your product at a high enough rate to show sustained growth
- Retention — Not only do you need to acquire users, but you need to keep them
- Engagement — Are enough of your users or customers using your product on regular basis and getting value from it?
- Revenue — Are enough of your users or customers choosing to pay for your product or service?
- Customer satisfaction — Are your users or customers getting value from your product? Is it easy to use?
- 40 percent rule — How would your users or customers feel if the product or service was taken away? If at least 40 percent of your users or customers indicate that they would be “very disappointed,” this is a good measure of product-market fit
- Advocacy — Are your users and customers actively recommending your product or service to others?
There is no magic number associated with any of these metrics. When you see consistent progress and success in all of the above, you can have confidence that you’re well on your way to achieving product-market fit.
Product-market fit examples
To really bring the idea of product-market fit to life, let’s take a look at some big-name examples: one where the company truly understood its market, value proposition, and how to execute its products and service, and another where the company failed to hit the mark.
Example of product-market fit success: Uber
Uber was founded in 2009 by Travis Kalanick and Garrett Camp as a next-generation ride sharing service. Today, it operates in 72 countries and in more than 10,000 cities worldwide.
Uber has since expanded its operation to include food delivery, couriers, package delivery, motorized scooters and bicycles, and more. The company is currently worth over $42 billion.
If we break down Uber’s approach to product-market fit by market and product, we can see how it started out.
Market
Uber was very specific about its target customer and identified a real need that no other company had solved in a meaningful way.
The target customer, initially, was professionals in American cities; obviously, it has scaled way beyond this.
The need was there because, int he late 2000s, it was often time-consuming and inconvenient to find a taxi — as unimaginable as that might seem today.
Product
Taking advantage of recent advances in technology and the advent of the first iPhones, Kalanick and Camp came up with an initial value proposition and feature set that had clear differentiators:
Value proposition/feature set:
- One-click hailing — “Pick up here in five minutes”
- Fast response time (easier than calling a cab)
- Luxury automobiles — Mercedes Sedans, for example
- Great drivers — “Rate your trip” feature
- High-tech solution — Geo-aware auto-dispatch
- Optimised fleet — Logistical LBS software
The company launched its first ride in 2010 and received initial major funding of $1.25 million shortly after.
Example of product-market fit failure: New Coke
Coca-Cola is one of world’s best-selling soft drinks, but in the late 1970s and early 1980s, rival Pepsi-Cola was gaining market share and consumer feedback was showing that people preferred the sweeter taste of their main competitor’s product.
In 1985, with over 190,000 blind taste tests performed and consumer research data in hand, Coca-Cola launched New Coke to compete with Pepsi and took its existing formula off the market entirely.
Researchers had failed to realize the emotional attachment that consumers had to the original Coca-Cola beverage and hadn’t asked how they would feel were the existing product to be taken away (recall the 40 percent rule). Loyal consumers were outraged; at the height of the furor, Coca-Cola was receiving 8,000 angry complaints a day.
Just 79 days after the initial launch of New Coke, the company announced the return of the original Coca-Cola formula and a rebranding of New Coke to Coke II, which was eventually abandoned in 2002.
Today, product managers around the world view New Coke as a very costly case study in launching the wrong product.
Best practices and key takeaways
Below are some tips and best practices to keep in mind when striving to achieve product-market fit:
- Speak to your target users or customers
- Start with a need or problem to solve, not the solution
- Ensure you have identified a problem worth solving — is there a big enough market and a gap to be filled?
- Be clear about what success looks like for product-market fit
- Don’t invest time and effort in scaling technology, sales and marketing until you are comfortable you have reached product-market fit
Finding product-market fit can be elusive, but clarifying your target customer/market, understanding their core needs, and identifying the right feature set and value proposition are a recipe for success.
The post What is product-market fit and how to measure it (with examples) appeared first on LogRocket Blog.
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